"The lesson of history is that you do not get a sustained economic recovery as long as the financial system is in crisis," Bernanke. "We've seen some progress in the financial markets, absolutely. But until we get that stabilized and working normally, we're not gonna see recovery. But we do have a plan. We're working on it. And I do think that we will get it stabilized, and we'll see the recession coming to an end probably this year. We'll see recovery beginning next year. And it will pick up steam over time."
Bernanke's crisis started in 2007 with the mortgage meltdown; lenders began to fail. Bernanke cut interest rates repeatedly. In 2008, the Fed stopped the collapse of Bear Stearns by arranging a sale to another firm.
But then came the end of Wall Street as we knew it. Mortgage giants Fannie Mae and Freddie Mac were seized by the government. On Sept. 14, Merrill Lynch was sold in distress. The next day, the 158-year-old investment bank Lehman Brothers failed
"You didn't rescue Lehman Brothers. It set off a worldwide panic when it went bankrupt. And I wonder, looking back, whether you think that was a mistake," Pelley asked.
"There were many people who said, 'Let 'em fail.' You know, 'It's not a problem. The markets will take care of it.' And I think I knew better than that. And Lehman proved that you cannot let a large internationally active firm fail in the middle of a financial crisis. Now was it a mistake? It wasn't a mistake for the following reason: we didn't have the option, we didn't have the tools. All the Federal Reserve can do is make loans against collateral," Bernanke replied.
The next day after Lehman failed, Bernanke and the Fed did loan $85 billion to American International Group (AIG), the global insurance giant that was also involved in backing risky mortgage investments. When asked why they saved AIG and not Lehman, Bernanke says, "unlike Lehman, the Fed could make the loans based on good collateral in AIG's portfolio."
Bernanke also added that the the AIG intervention caused him the most angst over everything that had to be done over the last 18 months. He said, that this "was the single one [event] that makes me the angriest, that gives me the most angst... Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system."
The Fed chairman stated that he had slammed the phone more than a few times when discussing AIG and he understands the anger Americans have over what happened. "It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but the stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy," Bernanke explained.
CBS' Pelley asked Bernanke how close we came to a total financial meltdown before Treasury Secretary Hank Paulson went to Capitol Hill to urge a massive bailout of the banking system.
"It was very close. It was very close. The Congress passed the bill that gave Treasury the right to put capital into the banks in the first week of October. And it was in the second week of October that the crisis reached its peak. If we had not had those powers, we could have had a much, much worse outcome. So it was a very dangerous situation," said Bernanke.
In terms of recovery, one sign that we're on the road to turning things around, Bernanke told Pelley, "... is when large bank is successful in raising private equity. Right now, all the private money is sitting on the sidelines saying, 'We don't know what these banks are worth. We don't know that they're stable.' And they're not willing to put their money into the banks."
Pelley ended his interview by asking Bernanke what message he has for the American people. Bernanke said:
"...First of all, that the Federal Reserve is here, and is gonna do everything possible to support this recovery. The second thing I would say is that we have to understand, though, that recovery is not gonna happen until the financial markets and the banks are stabilized. And we do have a plan, we have a program for that. But it's gonna take some patience."
"But the third and final thing I'd just like to say to the American People is that I have every confidence that this economy will recover, and recover in a strong and sustained way. The American people are among the most productive in the world. We have the best technologies. We have great universities. We have entrepreneurs. I just have every confidence that as we get through this crisis, that our economy will begin to grow again, and it will remain the most powerful and dynamic economy in the world."