Fed Chairman Ben Bernanke's Take On The Economy

Friday's unemployment number was a troubling surprise -up from 9.6 percent to 9.8 percent. The economists who decide such things say the recession ended in 2009.

But this is the worst recovery the nation has ever seen. Ben Bernanke is concerned. As chairman of the Federal Reserve, Bernanke has enormous power over the world economy. And he has used that power in ways that the world has never seen.

During the panic of 2008, he committed trillions of dollars to rescue the financial system. And the Fed dropped interest rates nearly to zero.

Now, in a new move that has become controversial, Bernanke intends to commit another $600 billion to hold down interest rates.

Chairmen of the Fed rarely do interviews. But this week, Bernanke feels he has to speak out because he believes his critics may not understand how much trouble the economy is in. We wanted to know whether we're headed for another recession, whether Congress should extend the Bush tax cuts.

But first we wanted to talk about unemployment which has been at 9.5 percent or more for 16 months.

Scott Pelley: We lost about eight million jobs from the peak. And I wonder how many years you think it will be before we get all those jobs back?

Bernanke: Well, you're absolutely right. Between the peak and the end of last year, we lost eight and a half million jobs. We've only gotten about a million of them back so far. And that doesn't even account the new people coming into the labor force. At the rate we're going, it could be four, five years before we are back to a more normal unemployment rate. Somewhere in the vicinity of say five or six percent.

Four or five years. And Bernanke told "60 Minutes" something else that makes that even more painful.

Bernanke: The other aspect of the unemployment rate that really concerns me is that more than 40 percent of the unemployed have been unemployed for six months or more. And that's unusually high. And people who are unemployed for such a long time, their skills erode. Their attachment to the labor force diminishes and it may be a very, very long time before they find themselves back in a normal working position.

Bernanke was appointed in 2006 by President Bush and reappointed by President Obama. He grew up in Dillon, S.C., the son of a drugstore owner. He studied economics at Harvard and MIT and chaired the economics department at Princeton.

Pelley met Bernanke Tuesday (Nov. 30) in the Thompson Library on the campus of The Ohio State University. He was in Columbus on one of his frequent trips to hear how people are coping with the economy.

Earlier in the day he heard from the CEOs of Ford and IBM but also from small business owners who told him they were having trouble getting financing from banks.

Pelley: The major banks are racking up profits in the billions. Wall Street bonuses are climbing back up to where they were. And yet, lending to small businesses actually declined in the third quarter. Why is that?

Bernanke: A lot of small businesses are not seeking credit, because, you know, because their business is not doing well, because the economy is slow. Others are not qualifying for credit, maybe because the value of their property has gone down. But some also can't meet the terms and conditions that banks are setting.

Pelley: Is this a case of banks that were eager to take risks that ruin the economy being now unwilling to take risks to support the recovery?

Bernanke: We want them to take risks, but not excessive risks. We want to go for a happy medium. And I think banks are back in the business of lending. But they have not yet come back to the level of confidence that, or overconfidence, that they had prior to the crisis we want to have an appropriate balance.

Bernanke's first interview ever as Fed chairman came in 2009 shortly after the panic.

It was then that he gave "60 Minutes" and Scott Pelley a rare opportunity to see the Federal Reserve headquarters in Washington, D.C.

Last month, Bernanke announced the Fed's intent to buy $600 billion in U.S. Treasury securities, which is supposed to have the effect of lowering rates on long term loans for things like cars and homes.

Bernanke wanted to emphasize that these are the Fed's own reserves. It's not tax money. It does not add to the federal deficit.

Pelley: What did you see that caused you to pull the trigger on the $600 billion, at this point?

Bernanke: It has to do with two aspects. The first is unemployment. The other concern I should mention is that inflation is very, very low, which you think is a good thing and normally is a good thing. But we're getting awfully close to the range where prices would actually start falling.

Pelley: Falling prices lead to falling wages. It lets the steam out of the economy. And you start spiraling downward.

Bernanke: Exactly. Exactly.

That's deflation and that's what happened in the Great Depression.

Pelley: How great a danger is that now?

Bernanke: I would say, at this point, because the Fed is acting, I would say the risk is pretty low. But if the Fed did not act, then given how much inflation has come down since the beginning of the recession, I think it would be a more serious concern.

Critics of Bernanke's Federal Reserve have the opposite worry: they say the $600 billion and holding down interest rates could overheat the recovering economy, causing prices to rise out of control.

Pelley: Some people think the $600 billion is a terrible idea.

Bernanke: Well, I know some people think that but what they are doing is they're looking at some of the risks and uncertainties with doing this policy action but what I think they're not doing is looking at the risk of not acting.

Pelley: Many people believe that could be highly inflationary. That it's a dangerous thing to try.

Bernanke: Well, this fear of inflation, I think is way overstated. We've looked at it very, very carefully. We've analyzed it every which way. One myth that's out there is that what we're doing is printing money. We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way. What we're doing is lowing interest rates by buying Treasury securities. And by lowering interest rates, we hope to stimulate the economy to grow faster. So, the trick is to find the appropriate moment when to begin to unwind this policy. And that's what we're gonna do.

Pelley: Is keeping inflation in check less of a priority for the Federal Reserve now?

Bernanke: No, absolutely not. What we're trying to do is achieve a balance. We've been very, very clear that we will not allow inflation to rise above two percent or less.

Pelley: Can you act quickly enough to prevent inflation from getting out of control?

Bernanke: We could raise interest rates in 15 minutes if we have to. So, there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation, at the appropriate time. Now, that time is not now.

Pelley: You have what degree of confidence in your ability to control this?

Bernanke: One hundred percent.

Pelley: Do you anticipate a scenario in which you would commit to more than $600 billion?

Bernanke: Oh, it's certainly possible. And again, it depends on the efficacy of the program. It depends on inflation. And finally it depends on how the economy looks.

Pelley: How would you rate the likelihood of dipping into recession again?

Bernanke: It doesn't seem likely that we'll have a double dip recession. And that's because, among other things, some of the most cyclical parts of the economy, like housing, for example, are already very weak. And they can't get much weaker. And so another decline is relatively unlikely. Now, that being said, I think a very high unemployment rate for a protracted period of time, which makes consumers, households less confident, more worried about the future, I think that's the primary source of risk that we might have another slowdown in the economy.

Pelley: You seem to be saying that the recovery that we're experiencing now is not self-sustaining.

Bernanke: It may not be. It's very close to the border. It takes about two and a half percent growth just to keep unemployment stable. And that's about what we're getting. We're not very far from the level where the economy is not self-sustaining.

The debate on Capitol Hill this week is over whether to extend the Bush tax cuts, which would likely increase the budget deficit.

Bernanke wouldn't answer that question directly, but he certainly made one thing clear: he told us cutting the budget deficit must be done he said but it shouldn't be done right now.

Bernanke: We need to pay close attention to the fact that we are recovering now. We don't want to take actions this year that will affect this year's spending and this year's taxes in a way that will hurt the recovery. That's important. But that doesn't stop us from thinking now about the long term structural budget deficit. We're looking at ten, 15, 20 years from now, a situation where almost the entire federal budget will be spent on Medicare, Medicaid, Social Security, and interest on the debt. There won't be any money left for the military or for any other services the government provides. We can only address those issues if we think about them now.

Bernanke makes a point of remaining silent on specific proposals that Congress might consider, so we were surprised when he did offer up a big idea for making the economy grow.

Bernanke: Cleaning up the tax code, for example. The tax code is very inefficient. Both the personal tax code and the corporate tax code. By closing loopholes and lowering rates, you could increase the efficiency of the tax code and create more incentives for people to invest.

Recently, Bernanke has been facing hostility from the most conservative members on Capitol Hill. Some are calling for reducing the Fed's role. But Bernanke understands that his job is not a popularity contest.

Pelley: How concerned are you about the calls that you're beginning to hear on Capitol Hill that would curb the Fed's independence?

Bernanke: Well, the Fed's independence is critical. The central bank needs to be able to make policy without short term political concerns. In order to do what's best for the economy. We do all of our analysis, we do all of our policy decisions based on what we think the economy needs. Not based on when the election is or what political conditions are.

Like many economists, Bernanke believes it was the Federal Reserve itself that instrumental in causing the Great Depression with its tightfisted monetary policies.

So, he did exactly the opposite. In the panic of 2008, the Fed put up $3.3 trillion. And just this past week, the Fed revealed who got emergency help.

It turns out there were 21,000 transactions - including loans and purchases - with financial firms including Citigroup, Morgan Stanley, Goldman Sachs, major industrials companies including GE, and even to foreign banks, including the Bank of England. Most all the loans have been paid back.

But it was a historic transfusion of cash in a global system that was bleeding to death. We asked Bernanke what would have happened if the Fed hadn't acted.

Pelley: What would unemployment be today?

Bernanke: Unemployment would be much, much higher. It might be something like it was in the Depression. Twenty-five percent. We saw what happened when one or two large financial firms came close to failure or to failure. Imagine if ten or 12 or 15 firms had failed, which is where we almost were in the fall of 2008. It would have brought down the entire global financial system and it would have had enormous implications, very long-lasting implications for the global economy, not just the U.S. economy.

But it's also true that the Fed was the regulatory watchdog of the largest banks when crazy lending led the world to crisis.

Pelley: Is there anything that you wish you'd done differently over these last two and a half years or so?

Bernanke: Well, I wish I'd been omniscient and seen the crisis coming, the way you asked me about, I didn't. But it was a very, very difficult situation. And the Federal Reserve responded very aggressively, very proactively.

Pelley: How did the Fed miss the looming financial crisis?

Bernanke: There were large portions of the financial system that were not adequately covered by the regulatory oversight. So, for example, AIG was not overseen by the Fed.

Pelley: The insurance company.

Bernanke: The insurance company that required the bailout, was not overseen by the Fed. It didn't really have any real oversight at that time. Neither did Lehman Brothers, the company that failed. Now, I'm not saying the Fed should not have seen some of these things. One of things that I most regret is that we weren't strong enough in putting in consumer protections to try to cut down on the subprime lending problem. That was an area where I think we could have done more.

Pelley: The gap between rich and poor in this country has never been greater. In fact, we have the biggest income disparity gap of any industrialized country in the world. And I wonder where you think that's taking America.

Bernanke: It's a very bad development. It's creating two societies. And it's based very much, I think, on educational differences. The unemployment rate we've been talking about. If you're a college graduate, unemployment is five percent. If you're a high school graduate, it's ten percent or more. It's a very big difference. It leads to an unequal society and a society which doesn't have the cohesion that we'd like to see.

Pelley: We have talked about how the next several years are gonna be tough years in this country. But I wonder what you think about the ten-year time horizon. Fifteen years. How do things look to you long term?

Bernanke: Long term, I have a lot of confidence in the United States. We have an excellent record in terms of innovation. We have great universities that are involved in technological change and progress. We have an entrepreneurial culture, much more than almost any other country. So, I think that in the longer term the United States will retain its leading position in the world. But again, we gotta get there. And we have some very difficult challenges over the next few years.

Produced by Henry Schuster