Book Review: In Fed We Trust

In his 2009 book, In Fed We Trust: Ben Bernanke’s War on the Great Panic, David Wessel, an economics editor for the Wall Street Journal, encapsulates one of the most pivotal times in our country’s history and the history of the global economy.   Not only does he offer the reader a fly-on-the-wall perspective during some of the most frenzied closed-door meetings between chief economic actors like Ben Bernanke, Timothy Geithner, and Henry Paulson, he also illuminates the historical context of the Federal Reserve and its role in the U.S. economy since its inception in 1913.  Most importantly however, Wessel intently focuses on Ben Bernanke’s role as the Chairman of the Federal Reserve during the Great Panic, and how his expertise on the Great Depression of the 1930s inspires his “whatever it takes” policy to prevent it from ever happening again.

Before the Great Panic, the Federal Reserve was considered to be a “lender of last resort,” which usually entailed lending to sturdy commercial banks at times of high speculation when customers wanted to pull their money out.  But by 2008, the Federal Reserve became what Wessel labels “the pawnbroker of last resort,” lending heavily to investment banks, insurance companies, auto finance companies, etc. that all went bust.  But how could it get this bad?  Why would Ben Bernanke be forced to extend the Federal Reserve far beyond its traditional role?  Wessel partially blames Alan Greenspan, the Chairman of the Federal Reserve from 1987-2006.  During his term, interest rates were kept too low for too long.  With such low interest rates, investors took greater risks in order to receive higher returns.  Yet these risky bets were placed on the flawed assumption that the economy would be stable in the long run, and in regards to the housing market, housing prices would never fall.  That would eventually prove to be false, and the housing bubble would burst.

Of course, Bernanke was faced with some tough decisions, but being an expert on the Great Depression, Bernanke knew what not to do: stand idly by.  According to Bernanke, the Depression of the 1930s was largely the Fed’s fault, and under his watch, he would ensure that that would not be the case. He would do “whatever it takes.”  Wessel emphasizes that the Fed had to exceedingly extend its powers to curb the threat of another full-blown depression.  In March 2008, the Fed saved Bear Stearns to the tune of $30 billion, the first time the Fed ever directly gave money to a failing firm.  Yet it wouldn’t do so with Lehman Brothers.  The Fed certainly had the power and resources to bail out Lehman Brothers, but neither Ben Bernanke, nor Secretary of the Treasury Henry Paulson were content to do so due to the poor image it would portray, seeing they just used $30 billion of tax-payer money to bail out Bear Stearns.  The Fed however would continue to reach even further, bailing out A.I.G. and welcoming a Congressional stimulus package of $700 billion. 

Though Bernanke’s unheralded response to the Great Panic prevented the U.S. economy from outright catastrophe, it has certainly burgeoned undesirable attention to the Federal Reserve’s ability to act as what some call “the fourth branch of government.”  Much of the derision towards the Feds actions can be attributed to how their policies were delivered.  Geithner called this "getting the substance and the theater right."  How a policy is framed is just as important as the policy itself, and because Bernanke, Paulson, and Geithner failed to offer a clear explanation of the policies they were enacting, it left people uncertain about the power the Fed held.  Rather than critique the amount power and leverage the Fed used to prevent a repeat of the Great Depression, critics should focus their worries on the Fed’s shortcomings prior to the Great Panic.  The worst loans that created the credit bubble were subject to little or no federal regulation.  Wessel agrees that the Fed’s inability to see the Great Panic coming is worrisome, but he lauds Bernanke’s response.  He ends his book with some food for thought.  What if Ben Bernanke had not resolved to do “whatever it takes” to prevent a second Great Depression? Would we be worse off?  I myself think we would be worse off had it not been for the Fed stepping in.  What does concern me however is the amount of excess liquidity due to the bailouts.  As we’ve discussed in previous classes, high inflation spells disaster for an economy facing a recession.