In Fed We Trust: Ben Bernanke's War on the Great Panic
by David Wessel
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Book Summary Information
Author: David WesselEdition: Hardcover
Audio: English (Unknown); English (Original Language); English (Published)
Format: Deckle Edge
Published: 2009-08-04
ISBN: 0307459683
Number of pages: 336
Publisher: Crown Business
Book Reviews of In Fed We Trust: Ben Bernanke's War on the Great Panic
Book Review: Less Boring Than Dentistry
Summary: 5 Stars
Keynes once said that central bankers should strive to be as boring as dentists. In the past couple of years, central banking has certainly been less boring than dentistry. Observers and pundits were certainly not bored by Alan Greenspan, to whom George W. Bush bid farewell after his nineteen years of service by noting, quite accurately, that he was "the only central banker ever to achieve rock-star status". Neither Greenspan nor his successor Ben Bernanke were flamboyant characters, but they attracted a degree of public attention that underscore the importance of their role in the functioning of the US economy. And never was this role more important than during the great financial panic that forms the focus of David Wessel's book. As Bernanke commented, "We came very, very close to a financial meltdown, a situation in which many of the largest institutions in the world would have failed, where the financial system would have shut down, and in which the economy would have fallen into a much deeper and much longer and more protracted recession."
The book has a strong behind-the-scenes flavor. There are lots of personal details and anecdotes on the main characters, which help to understand how they reacted in an unprecedented time of crisis. The author had extensive access to high ranking officials, including Bernanke, Paulson and Geithner, and interviewed many lower-ranking individuals "whose carriers would not be advanced by the disclosure of their names", as he puts in the acknowledgements section. Many stories or comments were not intended for the record, and there are several exclusive renderings that will change the public's perception of the crisis. Here are some examples:
. Lehman Brothers could have been saved from bankruptcy on September 14, 2008, were it not for the stubbornness of the British Financial Services Authority. Paulson and Bernanke had found a British white knight as Barclays was ready to buy Lehman and to guarantee all of its liabilities. But stock-exchange listing rules required a shareholders vote and the FSA refused to grant a waiver. Barclays later bought pieces of Lehman at a much discounted price.
. The US financial regulator slept while the fate of Bear Sterns was being decided. Christopher Cox, the former California congressman who was chairman of the Securities and Exchange Committee and ostensibly Lehman's regulator, wasn't privy to the 4:45 conference call that Geithner convened to settle the fate of the investment bank. Hours later, a SEC staffer sent plaintive email messages to the Treasury and the Fed, begging someone who had been on the call to contact Cox and fill him in.
. Paulson convinced JPMorgan that it was paying too much, not too little, for Bear Sterns. JPMorgan's CEO was thinking of offering $4 or $5 for a share, but Paulson, who wanted Bear Sterns' shareholders to feel the pain, told him that his bidding price "sounded high" and talked him into reducing it to $2. The LA Galaxy soccer team signed David Beckham, the British soccer superstar, for a price higher than what JP paid for Bear.
There are some passages that I found baffling. When he was chairing the Council of Economic Advisers, Bernanke had a discussion with President Bush on oil prices. The president was complaining that "speculators" were driving up the price of oil and making markets more volatile, which is a commonly held view. However Bernanke quietly but firmly disagreed, telling the president that "every study he knew suggested that speculators dampen, not amplify, the volatility of oil prices". Considering Professor Bernanke's academic credentials, I would be tempted to believe him. But then economists should make greater efforts at explaining to the public and to politicians why oil prices vary so widely and what role market actors play in oil price formation.
Another surprising point, at least in retrospect, was the lack of international coordination on banking and financial issues that have a systemic impact beyond borders. Christine Lagarde, the French finance minister, learned about the collapse of Lehman in the press, like everybody else, and declared with much clearsightedness that the decision was "horrendous", "a genuine error". Conversely, the head of the French central bank didn't bother to call the US when it was discovered that a rogue trader at Société Générale had accumulated losses of $7 billion, sending big ripple effects on the markets when the positions were unwound. G7 meetings, where international coordination is supposed to take place, are seen by insiders as "mostly ritualized recitations of positions already expressed publicly". Paulson found these meetings tedious and unproductive, and generally used the word "G7" as a term of contempt. It was all the more surprising when a memo written by Bernanke to clarify his views became the focus of the discussion on the October meeting following the Lehman shock and found its way in the final G7 communiqué.
The book's message, as stated on the cover, is that the Federal Reserve has become the fourth branch of government, a branch where unelected officials can spend up to $800 billion without democratic oversight or accountability. But reading the chapters makes it clear that the Fed has to obey many rules and regulations, and that legal constraints often hampered its capacity to react to the crisis. The Federal Reserve Board's chairman and the presidents of the Federal Reserve Banks also have to testify regularly before Congress, and judging by the way they are grilled by the chairs of the Senate Banking Committee or the House Financial Services Committee, these hearings are serious matter. They are also for the record, whereas the minutes of the Federal Open Market Committee are released only after five years. Future historians will be able to use these records to paint a fuller picture of the financial panic of 2008-2009. But there is no doubt that they will also use David Wessel's book as a reference to understanding what really did happen behind the scenes.
Summary of In Fed We Trust: Ben Bernanke's War on the Great Panic
?Whatever it takes?That was Federal Reserve Chairman Ben Bernanke?s vow as the worst financial panic in more than fifty years gripped the world and he struggled to avoid the once unthinkable: a repeat of the Great Depression. Brilliant but temperamentally cautious, Bernanke researched and wrote about the causes of the Depression during his career as an academic. Then when thrust into a role as one of the most important people in the world, he was compelled to boldness by circumstances he never anticipated.
The president of the United States can respond instantly to a missile attack with America?s military might, but he cannot respond to a financial crisis with real money unless Congress acts. The Fed chairman can. Bernanke did. Under his leadership the Fed spearheaded the biggest government intervention in more than half a century and effectively became the fourth branch of government, with no direct accountability to the nation?s voters.
Believing that the economic catastrophe of the 1930s was largely the fault of a sluggish and wrongheaded Federal Reserve, Bernanke was determined not to repeat that epic mistake. In this penetrating look inside the most powerful economic institution in the world, David Wessel illuminates its opaque and undemocratic inner workings, while revealing how the Bernanke Fed led the desperate effort to prevent the world?s financial engine from grinding to a halt.
In piecing together the fullest, most authoritative, and alarming picture yet of this decisive moment in our nation?s history, In Fed We Trust answers the most critical questions. Among them:
? What did Bernanke and his team at the Fed know?and what took them by surprise? Which of their actions stretched?or even ripped through?the Fed?s legal authority? Which chilling numbers and indicators made them feel they had no choice?
? What were they thinking at pivotal moments during the race to sell Bear Stearns, the unsuccessful quest to save Lehman Brothers, and the virtual nationalization of AIG, Fannie Mae, and Freddie Mac? What were they saying to one another when, as Bernanke put it to Wessel: ?We came very close to Depression 2.0??
? How well did Bernanke, former treasury secretary Hank Paulson, and then New York Fed president Tim Geithner perform under intense pressure?
? How did the crisis prompt a reappraisal of the once-impregnable reputation of Alan Greenspan?
In Fed We Trust is a breathtaking and singularly perceptive look at a historic episode in American and global economic history.
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