The Federal Reserve and the Financial Crisis
Lectures by Ben S. Bernanke
Princeton University Press
Reviewed by Karl Wolff
President Harry S. Truman had an oft-cited quote about economics, saying, “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.” Five years after the global economic meltdown, we’re still using the term Great Depression. Like victims of a terrorist bombing, we have finally regained consciousness, looked around at the rubble and carnage, and asked, “What happened?” In matters of international terror, the United States is attempting to get that under control. After the 2008 economic meltdown, we asked the same questions, but the field of economics remains mystifying, needlessly obscure, and ultimately boring. Case in point: Fed Chairman Alan Greenspan testifying before the Senate. The Upright Citizens Brigade TV show even made a joke out of it. All kidding aside, the best way to get out of a crisis is to find clear and concise answers. What’s the problem? How do we solve it?
In a series of four lectures delivered at George Washington University in March 2012, current Fed Chairman Ben S. Bernanke explained several important issues: what the Fed is, what the Fed does, its history, and its response to the financial crisis. Prior to his heading the Federal Reserve, Chairman Bernanke was an economics professor at New York University and Princeton. He published a volume of academic essays called Essays on the Great Depression.
Here’s a simple thought experiment: Explain what the Fed is and what it does in a short paragraph. “Um … interest rates and stuff? Printing money?” You’re half right. Chairman Bernanke explains that the Federal Reserve, created in 1913, operated as a government-backed central bank. Central banks have existed for centuries, acting as “lenders of last resort.” Prior to the Federal Reserve System, the United States experienced a chaotic economic situation. President Andrew Jackson fought the banks for reasons more obscure than the causes of the War of 1812. The United States also experienced economic booms and depressions with frequency and ferocity. In 1893, the year of Chicago’s Columbian Exposition, 500 banks collapsed. (In 1873 100 banks collapsed, in 1884 around 50, and in 1907 around 80 banks collapsed.) When these panics and collapses occurred, the United States usually depended on the charity of one J.P. Morgan.
The creation of the Federal Reserve wasn’t a panacea either. In 1951 it concluded negotiations with the Treasury, agreeing to set interest rates independently to achieve economic stability. (That is the Fed’s other function.) Throughout these four lectures Chairman Bernanke explains in down-to-earth language the roles of the Fed and why the housing collapse was far worse than previous bubble’s bursting. One troubling aspect, besides size (“Too big to fail”), was complexity. Another interrelated aspect was contagion. In plain English, the complex, occasionally fraudulent, investment practices involved not just the stock market, but banks, investment firms, and overseas institutions. Simply unraveling these mind-bogglingly complex trades that even the bankers didn’t fully understand.
Because of the Fed’s obscure role in everyday life and its alleged omnipotence, it has become grist for countless conspiracy theories (some virulently anti-Semitic). Chairman Bernanke is the first to confess the Fed’s limitations and mistakes in dealing with the financial crisis. One is reminded of the term “intelligence failure,” especially prior to 9/11. A practice that bedeviled American counter-terrorist efforts were an alphabet soup of various agencies, various agendas, and various bits of data no one would share. The economic picture is nearly identical and just as fractured. The Fed only represents one aspect of the financial picture. There is also legislative regulation (like the recent Frank-Dodd bill passed into law) and executive oversight (like the Council of Economic Advisers). The challenge remains to institute an agency that can oversee the entire macroeconomic picture, pool data, and wrangle the different personalities at the Fed, Treasury, and so forth. This has not yet been attained, but Bernanke is astute for realizing there is a lack that needs to be filled.
Following each lecture, there are a few pages of Chairman Bernanke fielding questions from students. They read like NPR interviews, which is a good thing, since Chairman Bernanke is adept at explaining complex economic issues to a lay audience.
The value of this book is in its concision (less than 130 pages), and its clarity. One can breeze through this book in a lazy weekend afternoon or buzz through it on a workday commute. Regardless of what one thinks of Chairman Bernanke, the Federal Reserve System, or American capitalism, this book does an eloquent job of informing the reader what really happened to cause the financial crisis. The American people are still arguing over the correct solutions to the problems (note the plural), but before one snipes and snarks at the political opposition, best read up on the topic. This is a good place to start.
Out of 10/8