When central bankers and economists gathered for their annual retreat at Jackson Hole, Wyo., one year ago, they had no idea they were about to come face to face with the worst financial crisis in decades.
"What we could not fully appreciate when we last gathered here was that the economic and policy environment was about to become vastly more difficult," Federal Reserve chairman Ben Bernanke said in remarks prepared for the Kansas City Fed's annual conclave summit in Jackson Hole, which began today.
In the weeks and months after last year's meeting, massive firms came close to collapse and markets plummeted as the worst financial crisis since the Great Depression began.
"The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge," Bernanke said. "As severe as the economic impact has been, however, the outcome could have been decidedly worse."
In a retrospective speech summarizing the events of the past year, Bernanke said U.S. and international policy-makers succeeded in responding with enough speed and force to arrest a classic type of panic that had begun to spread like wildfire.
"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk," he said. "We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted."
Bernanke also recalled some of the challenges that the Fed faced during the crisis.
One such challenge was the collapse of the investment bank Lehman Brothers, whose failure Bernanke calls "unavoidable." Another challenge was the meltdown suffered by the massive insurance company AIG, whose "abrupt collapse likely would have intensified the crisis substantially further." The insurance giant eventually received a record $182 billion in taxpayer bailout money.
From the $700 billion government bailout program to this spring's stress tests to actions taken by governments and central banks abroad, Bernanke touts the effects of this year's international policy response to the crisis. "Imminent collapse," he said, was avoided.
Today, "fears of collapse have receded substantially," he noted. "After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good."
But he warned, "Notwithstanding this noteworthy progress, critical challenges remain: strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses continue to experience considerable difficulty gaining access to credit. Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."
To fully overcome these challenges, recovery measures must be sustained, Bernanke reiterated. And to avoid future crises as severe as the present one, the Fed chief once again called for a new financial regulatory reform framework.
"I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives," he concluded.