“In Fed We Trust: Ben Bernanke’s War on the Great Panic” – A Book by David Wessel

A defining and vivid look at policymakers’ unprecedented response to the crisis. Wessel’s disconcerting conclusion: Out of necessity Bernanke is playing most of this by ear, loosely interpreting and appropriating arcane laws and creating new powers just to keep the system on its hinges. In Fed We Trust is persuasively told and richly reported. It is an absorbing read and will win awards and inspire copycats. Words: 665

In further edited excerpts from the original review* Roben Farzad (www.BusinessWeek.com) goes on to say:

The irony of there now being a halo above Ben Bernanke’s head is hardly lost on Wessel. The introverted academic was not the odds-on favorite to succeed Alan Greenspan. Yes, he parlayed his near-perfect SAT scores into economics degrees from Harvard and MIT, but to finance that pedigree he waited tables at a kitschy Mexican-themed truck stop in South Carolina. Bernanke made himself an expert on the Great Depression and in 1996 became chair of economics at Princeton, where he recruited Paul Krugman. In 2002, Bush & Co. tapped the soft-spoken scholar to work for the central bank; four years later he had replaced Fed Chairman Greenspan, often referred to as the world’s most powerful man. But Bernanke, writes Wessel, “didn’t think a Fed chairman should be a rock star. He wanted to avoid the cult that had attached to Greenspan, the perception that the chairman is the Fed. An economy shouldn’t rely so much on the instincts of a single man, he thought….”

But that’s the lopsided situation Bernanke inherited—and would have to perpetuate. As Wessel shows, Bernanke’s predecessor vastly underestimated the effects of keeping interest rates as low as he did for as long as he did (from 6.5% in 2001 to a 45-year low of 1% as late as June 2004). That easy money, we now know, fueled an epic housing and credit bubble whose bursting took down the global economy within two years of Bernanke’s ascension. In 2008, Bernanke had to log a string of all-nighters—and devote record sums—to contain the rolling meltdowns at Bear Stearns, AIG (AIG), Merrill Lynch (BAC), and beyond.

Between 2006 and the end of 2008, notes Wessel, the Bernanke Fed went from having $860 billion in supersafe loans and securities on its books to $2.2 trillion, much of it far riskier fare. By March 2009, the Fed was ready to commit an additional $1 trillion to its mop-up efforts. By then Greenspan, who got an $8.5 million advance for his book The Age of Turbulence, was well into his revisionism tour, asserting that it wasn’t his role to preemptively deflate asset bubbles. Wessel duly dubs one of his key chapters “Age of Delusion: What Greenspan Wrought.”

So much for overreliance on the instincts of a single man. Indeed, as Bernanke learned in the dark days of September 2008, a strong, central economic figure was exactly what the system needed. Wessel lays out why the failure of Lehman Brothers—perhaps the defining blunder of the crisis—was hardly preordained.

For starters, eight investment banks were willing to tag-team with the Fed to rescue the firm. Bernanke, writes Wessel, thought that letting Lehman die was “idiocy.” Even so, he wouldn’t go to bat for a bailout without the support of Treasury Secretary Hank Paulson, the former Goldman Sachs (GS) boss who “never thought much of Lehman.” So, responsibility set adrift, they let the bank go under, and the aftermath has cost multiples of the amount needed to save it.

In other words, Wessel illustrates how Bernanke might have used the superpowers he had acquired—however reluctantly—a little sooner.

*http://www.businessweek.com/magazine/content/09_33/b4143062874291.htm

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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