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: fascinating and worthwhile but limited in scope
Summary: 3 Stars
Wessel wrote a panegyric and a paean to the "four musketeers" (Bernanke, Warsh, Geithner and Korn) led by Bernanke to do "whatever it takes" to rescue the economy from disaster. Bernanke, having diligently studied the causes of the Great Depression, did not want to repeat the severe error made by the Fed after '29, which, according to Friedman et al., converted what would have been a self-correcting recession, near depression, into a decade-long Great Depression by reducing the money supply and not rescuing the banks.
By all indications, Wessel had very good access to the people whose actions he is describing. If one writes a panegyric, this is almost always the case. There are plenty of appropriate, even delightful, quotes though the end noting is confusing and, with missing notes, totally inadequate for academic standards. The strength of his book is due to having had access as an insider would in spite of the fact that he shows some undergraduate values and sentiments in his characterizations of the major stars. Partially due to having had good access to the main stars, the book has a limited and narrow focus, namely the four musketeers coming to the rescue.
Wessel makes the case that the Fed has become the fourth branch of the government, presumably due to the current economic crisis. This needs qualification, since historically the Fed, though it was created as an independent agency not directly touchable by the politicians, has long ago lost its independence and can't act independently of the federal government if the federal budget deficit has exploded into the hundreds of billions in the last few decades, in particular during boom years, when even Keynes would not advocate a deficit! Once there is such a large deficit, the Fed has to react to conditions created in the economy by the deficits and, therefore, for all practical purposes has been a fourth branch for many decades.
Wessel provides a good summary of the background of the evolution of the Fed following the 1907 Panic and compares the panic with the economic crisis of 2008---and this is quite well done on pg. 32 with Sec. of the Treas. Cortelyou summoning J. P. Morgan v. Paulson summoning the CEOs of the nine largest banks.
He focuses on those who wanted more centralized control over the Fed v. those who resisted but he does not mentioned that Col. House, from Dallas, according to some economic historians, lobbied to have a district bank in his hometown for self-serving and unjustified reasons. More important, the bosses of J.P. Morgan, by the twenties, showed dangerous evidence of deserting analyzing the market and adjusting their policies according to market forces when they simply asked their assistants to go to the Fed and get them the latest money supply figures which then, in turn, were used as a basis for policy decisions---a questionable unintended result of having the Fed which has had enormous negative consequences ever since, in particular in the background of the current crisis. Parasitism emerges here which has been a major element ever since in the relations between corporations and the Fed and came to a high point before the current crisis and continues, unfortunately.
Before Wessel deals in chpt. 4 with Bernanke, he covers Greenspan in chpt. 3. He quite correctly says that Greenspan, an expert on house prices, knew that Americans treated their homes as ATMs. Also, Greenspan never expected house prices to decline and never used his powers to restrain subprime lending, though Wessel does not say that Greenspan actually encouraged the subprime mess and bragged about new methods of risk transfer and risk dispersion (read we pay the cost). While Wessel refers to subprime mortgage broker Mozilo of Countrywide he neglects Greenspan's friend Arnall of Ameriquest.
In later chapters, Wessel recounts the Gramlich-Greenspan disputes, the Taylor and Poole criticisms of Fed policy, the fact that the Bear Stearns problem prompted the Fed to create the TSLF, the Term Securities Lending Facility to exchange toxic stuff briefly for U.S. securities as well as, among other major developments, the use of Sec. 13(3) of the Fed Act citing "unusual and exigent" circumstances to bail out financial institutions, which historically was beyond the scope of the Fed's mandate. Wessel, on page 156 admits that "incestuousness" was obvious in Fed-Wall Street circles and that a kind of crony capitalism existed and that the duty of the Fed to be the guardian of the public interest, at times, was replaced by being more an advocate than overseer of Wall Street. Well, this is putting it rather mildly.
Having written a panegyric book, Wessel also praises Mishkin, among others, though none of his four musketeers and certainly not Bernanke himself, were known to have anticipated or warned of the economic crisis but actually in various actions or neglects contributed and helped caused it. They are culpable.
Mishkin, in fact, applauded the Icelandic economy though it was even more involved in irresponsible actions than the U.K. and suffered the most. Moreover, Wessel describes Bernanke as admiring King the head of the Bank of England which also allowed similar mischief in the London stock market as on Wall Street. In other words, those who correctly predicted and warned of the coming crisis are absent in this book and they include Hyman Mirsky, Allen Meltzer, Axel Weber, among others, and the BIS which Wessel sort of seems to fault unfairly as he does Europeans in general to whom he assigns far too much culpability either directly or indirectly. Surely, he knows about the massive fraud in the rating games.
Which leaves us with the crux of the issue. This book has lots of attractive information and give details about TALF (Term Asset- backed Securities Loan Facility) and the transformation of the Fed into its expanding role to be the bank not of last resort for commercial banks but the first resort, of sorts, for almost everything.
In this exploding role, Wessel should have told us far more than he did that this primarily benefits Wall Street and does most emphatically not benefit the people who bear the cost. In this sense, William Poole, whom Wessel faults unfairly, was right on the mark when he said in a speech at Truman State University just before he retired as head of the St. Louis District Bank, that the Fed should not just serve 5 percent of the people at the neglect of the other 95 percent, who, I may add, bear the ever increasing cost of living in an expanding slumerica that has the accumulated debris and shambles strewn from coast to coast of Wall Street's mischief and the Fed's faulty actions. Finally, Wessel's assumes, without any proof, that rescuing (and, maybe stimulating) the economy through Fed action is possible. Ultimately, this cannot be done. What can and is being done is to disperse the cost onto everyone and into the future.
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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