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Economic and Market Commentary

Two Former Fed Leaders Decode Central Banks: Part 2

In this two-part series, former Fed chairman Dr. Ben Bernanke, who is now a senior advisor at PIMCO, and Dr. Richard Clarida, a former Fed vice chairman who now is PIMCO’s global economic advisor, share policymakers’ playbook for navigating global challenges. For other insights and our latest economic outlook visit: pimco.com/secular.

Text on screen: PIMCO

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Images on screen: The Federal Reserve building, Dr. Ben Bernanke and Richard Clarida speaking at press conference.

Voice-over: The Federal Reserve is known as the orchestrator of the world’s largest economy. In this 2-part series, you’ll hear a conversation between Former Fed chairman Dr. Ben Bernanke, who served during the global financial crisis and is now a senior advisor at PIMCO, and Dr. Richard Clarida, who was the Fed vice chairman during the early days of the Covid-19 pandemic and now is PIMCO’s global economic advisor. In this episode, they’ll reflect on their time at the Fed and share insights about PIMCO’s investment process.

Text on screen: How did the Fed navigate crisis during your tenure?

Images on screen: The Fed building

Bernanke: The global financial crisis was a very stressful two years.

Text on screen: Dr. Ben Bernanke, Former Fed Chairman and Senior Advisor to PIMCO

The Fed tried to deal with a financial system that was close to collapse globally. We did three things. We provided a lot of liquidity, cash against collateral, and not only for the banking system, which is what the Fed is supposed to do, but throughout the entire financial system and even some non-financial firms using various emergency powers. The second thing we did was we tried to prevent the collapse of major financial firms.

And ultimately we had to work with the treasury and the Congress to pass the TARP bill that gave us capital that we could put into the banks and help them stabilize. That was really important. And then, as Rich knows from another crisis, easy money can support an economy that needs help. And certainly the financial crisis put us into a deep recession. So the Fed cut interest rates to zero and began to undertake other kinds of policies to try to provide some support for an economy that was hit very hard by that crisis.

Text on screen: Dr. Richard Clarida, Former Fed Vice Chairman and Global Economic Advisor at PIMCO

Clarida: Well hit hard. The pandemic collapse. Ben, I come to calling it the pandemic collapse, not crisis. It was a public health crisis, but we very much and very self-consciously pulled out the Bernanke playbook. We cut rates to zero. We did a purchase program. We provided a lot of liquidity in some cases, literally opening the file cabinets and taking out the facilities that you put in place. The challenge we faced is in the US and globally, the entire economy was being shut down for public health reasons.

And you're thinking, how do we operate a financial system if there are no revenues coming in to make coupon payments or pay workers or make lease payments.

And so we had to go an additional step, which was to announce program to support the corporate bond market and municipal bond market. I'm very proud of the fact that, the Fed never wanted to be lender of first resort, we were the lender of last resort, those facilities were priced out of the money. There was very little take up because private markets opened, which was the intent. But a different crisis, but in many ways, we were able to benefit from what you did and then move into the announcing these programs that in the end, very little take up, which we viewed as a success.

Text on screen: What are among the most memorable aspects of your time at the Fed?

Images on screen: The Fed building

Bernanke: Well, financial crisis is not a very pleasant experience. There were a lot of stressful weekends and a lot of work.

Clarida: Before Asia, what was it?

Bernanke: Before Asia opens. Yeah. I was thinking of titling my memoirs before Asia opens because everything had to happen by a certain time on Sunday evening before the Asian markets opened. So that of course was very difficult. And then you had to have a fairly good ego because there was a huge amount of criticism coming from the public and from Congress. And, I got to hear that firsthand when I testified before Congress, which I did more than 80 times when I was chair.

So, there's a lot of stresses involved. The positive side, I think there are many positives, but one of them is that my background, as is Rich, is as academic. I was a professor for 23 years. And we have, the Fed has such a high quality of staff, PhD economists, who can provide real interesting perspectives on the issues that the Fed and policy makers have to confront.

And I always found that really interesting and I would often have conversations with staff members just about what they were working on as opposed to something about the next meeting.

Clarida: Similar. I guess I'll highlight a couple things. One thing about the fed of necessity is, because of what you do and where it fits into the economic and financial system, it can be a pretty lonely place. You can't go to cocktail, when people say, what do you, what'd you do at the office today?

But what that means, given how intense it was, and every day you are either making a decision or doing the analysis you'll need to make a decision that is not only setting monetary policy for the US but for the global economy.

So I found it to be a real bonding experience among the people I could talk to because we all sort of realized the only people we could really talk to about what was on our mind were our colleagues, because you can't really share it with too many others. The part I missed the least was the last half of my time as Vice-chair was in the pandemic and the Fed went very quickly in March of 2020 to work from home monetary policy.

I think it's remarkable what we got done, in fact in those days of March, the Fed staff had not gotten video conferencing to a level they felt comfortable with. So we did all of that crisis stuff, more or less like you all were doing it on conference calls. But I did miss the interaction with colleagues, the face-to-face the last year and a half.

Text on screen: How does PIMCO’s investment process and Secular Forum frame its macroeconomic views?

Images on screen: PIMCO forum

Bernanke: One thing I like about working with PIMCO is that its decision process in many ways does parallel the Federal Reserves approach. Because the goal is of the forums in particular is to try to create a story about how the economy is and how it's going to evolve over the next three to five years. And how the political aspects, geopolitical aspects affect that. And once there's a well-defined, and agreed upon sort of picture, outlook, together with all the risks and uncertainties that are around that, that provides the background for investment decisions.

And the Federal Reserve operates very much in the same way, the staff provide forecasts and alternative scenarios. And it's all discussed. And that's how policy is made. And one other thing which I think is important, PIMCO brings in outside, very good high quality, outside speakers who come in and give different perspectives. The Fed doesn't do that quite as formally, but  certainly the board and the FOMC meet with outside groups and others who bring a different perspective so that they can hear a different perhaps, opposing view before making a decision.

Clarida: Well, I would not disagree with that. I would point out one thing that Jay Powell and I did during my time there is we sort of formalized that we would have four, six times a year, we would have, we invited outside groups. Sometimes an academic group, sometimes focused on market experience. Needless to say the Fed was in listening mode. But the other thing I would complement your view on that is one thing that I enjoy, and of course it's good things since I'm charged with sort of overseeing the process, is PIMCO does both the cyclical four times a year. So looking ahead three to six months. And then does carve out one week a year to try to look ahead three to five years. And that goes all the way back 40 plus years ago. And obviously we take it quite seriously. I've really seen the value of having frequent quarterly meetings and then once a year carving out time to do the three to five years. So I think it's a good process. It served us well.

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In this two-part series, former Fed chairman Dr. Ben Bernanke, who is now a senior advisor at PIMCO, and Dr. Richard Clarida, a former Fed vice chairman who now is PIMCO’s global economic advisor, share policymakers’ playbook for navigating global challenges. For other insights and our latest economic outlook visit: pimco.com/secular.


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