The highs and lows of Randall Kroszner’s life at the Fed | Video

"I wish I could say, 'everything's solved now!'" Randall Kroszner reflects on the decisions made during Ben Bernanke's darkest hour

November 18, 2014

Hard to believe that it was just a few years ago that the US faced economic meltdown. One of thek key decision makers at the time was Randall Kroszner; he speaks to World Finance about the decisions they made, the loss of Lehman Brothers, and the one thing nobody saw coming.

Hard to believe that we were, just a few years ago, facing an economic meltdown in the United States. Now one of the people at the helm, making the big decisions, joins me now – ex-Governor of the Federal Reserve, Randall Kroszner.

Word Finance: Do you think that all of the right decisions were made by Bernanke at the time?

Randall Kroszner: Well, I was one of the fellow Governors, along with the Chairman, making these decisions – so you’re not going to get an unbiased view from me. So we obviously tried to do our best in very difficult circumstances. I think the emergency liquidity policies that we undertook, the various lending programmes, the international swap agreements that helped to prevent meltdown in other countries around the world, that had very strong demand for dollars but didn’t have them – I think those are very helpful in one, fighting off deflation which is something that central banks can do if they’re active about it, but sometimes they’re not as focused on it. And two – avoiding more broadly a kind of repeat of the great depression. The unemployment rate in the US went up by 10 percent during this crisis – during the 1930s it was over 20 percent. So I think we did a lot of things that helped to prevent the crisis from being nearly as bad as it was back in the 1930s.

Word Finance: Now, if you could go back – what would you change?

Randall Kroszner: So one of the things that we didn’t have enough insight into were some of the interconnections in the economy. And so we were focused on regulating banks and focused on banking institutions. Other regulators were focused on other types of institutions. And there wasn’t enough information exchanged between them to see the interconnections, to see those vulnerabilities, those fault lines and weaknesses.
I wish we could have had more foresight to say, well rather than us just look at our institutions and you just look at your institutions, let’s look at the interconnections and relationships between them – and that’s really where the weaknesses were. 

Word Finance: Do you think that there was a bit of naivety in terms of impact the housing crisis played towards the toppling effect of the US system?

Randall Kroszner: So one of the things we were doing was international comparisons, to see how the US housing market was doing relative to other countries. Because obviously housing prices were moving up reasonably rapidly. But we, as well as the IMF, did some of these comparisons and the US I think was even in the top five of the countries seeing housing price increases.
That gave us a false sense of confidence that the US was not an outlier. The challenge was that there was a risk factor in housing around the world and it wasn’t just us in the US, but people in Spain, people in many other countries didn’t see that there were these challenges there also.

Word Finance: Should we be mourning the loss of the Lehman brothers or is the US really better off without it?

Randall Kroszner: Well certainly the Federation, as well as other regulators and supervisors, were trying to find a merger partner for Lehman Brothers – and that didn’t work. There were some challenges with the UK Government and being able to implement a takeover by Barclays, and so we were left that weekend dealing with Morgan Stanley, Goldman Sachs, Merrill Lynch and then there was no merger partner for Lehman Brothers.

The key challenge was what would be the consequences for the markets more broadly? And this goes back to the other answer that I gave you – the consequence was in the money market funds, which we didn’t see because we didn’t regulate those funds. People weren’t looking to see if there was a concentration of Lehman Brothers debt obligations in one particular money market fund, that fund got into trouble and then that triggered trouble throughout that industry. And so if we had been able to see those interconnections more clearly earlier, we might have been able to prevent Lehman Brothers demise from causing such problems throughout the system.

Although I think Lehman Brothers was really much more of a symptom rather than a cause. I mean even if something could have been done to put a band-aid on Lehman Brothers – the vulnerabilities were there in the system. They needed to be addressed much more fundamentally and something like the Troubled Asset Repurchase Programme, the TARP Program, which injected capital into the financial system, was crucial – and without that it would have been very difficult to stabilise the system. We might have seen another institution, perhaps a larger institution, get into trouble.

Word Finance: Do you think the right banks were bailed out?

Randall Kroszner: So we were dealing with the challenges as they were coming, and certainly they were coming quite rapidly, and thinking from a system point of view what would be the best to stabilise the system. Because by doing that we could prevent a meltdown, a repeat of the great depression that would have led to a 20 percent unemployment rate, housing prices falling by 60 or 70 percent rather than only 20 or 30 percent. So we were trying our best trying to try and deal with the challenges as they came along.

Word Finance: We’re now a few years out since this crisis happened. Did you ever expect the US economy to be where it is today?

Randall Kroszner: When I left the Federation in early 2009 I don’t think anyone sitting around the Federal Open Market Committee table, making decisions about interest rates, would have thought that in 2014 the debate was – well when in 2015 would interest rates rise – that they would be so long in coming up. We brought rates down to roughly zero at the end of 2008, and that six or seven years later interest rates would still be at zero – I don’t think anyone really foresaw that.

World Finance: So how are you feeling in terms of progress – where do you think the US stands to go a year from now?

Randall Kroszner: So I think it was very important that the Federation did what it did to prevent a repeat of the great depression. But central banks can do the necessary job to prevent the deflation, or in other periods to prevent high inflation – but they aren’t sufficient for getting the economy going.

Fiscal uncertainly is something that weighs heavily on businesses uncertain of what their taxes are going to look like over time, uncertainly on regulation – a lot of uncertainties surrounding the President’s business healthcare program. And so I think that’s been slowing us down. If we can deal with some of these issues, I think that will help to put us on a more solid foundation.

I wish I could say everything’s solved now – but it’s a little bit too early to tell whether the elections are going to solve problems. But we do seem to be making progress in the labour market – we do seem to be making progress more generally with production. But we need to restore confidence in investment to get productivity to grow, to get wages to grow and really come back more strongly.