The Courage to Act: A Memoir of a Crisis and Its Aftermath.
By Ben S. Bernanke. 2015. W.W. Norton. Pp. 610.
$35.00 hardcover, $20.73 ebook.
Ben Bernanke's The Courage to Act is the fourth memoir written by one of the key officials who dealt with the 2007-09 financial crisis, following those written by Henry Paulson, Sheila Bair, and Timothy Geithner. Bernanke's role as Federal Reserve Chair, and his background as a monetary scholar who specialized in the study of the financial aspects of the Great Depression, makes this the volume of this group that has the largest inherent interest to a readership of economists.
The book starts with a recounting of Bernanke's upbringing as a member of an observant Jewish family operating a pharmacy in a small town in South Carolina, including the now-familiar story of his failure at the National Spelling Bee. I was a bit surprised to learn that Bernanke, a notorious baseball fan (the photographs in the book include him with major-league players in a dugout and a picture of the "card" the Federal Reserve staff gave him on his departure), did not attend a big-league game until his teens. He recounts his departure from this sheltered upbringing to college life at Harvard in the tumultuous early 1970s and then to graduate school at MIT. His account of how macroeconomics in those times was affected by the persistence of high inflation and the emergence of rational expectations (which he calls New Classical Economics) agrees with my memories of those days [admission: I've known him for more than 40 years].
He describes how in his own work as a professor at Stanford and Princeton he tried to understand the interaction of financial developments and the evolution of the real economy, using the Great Depression as the main test case. In the 1990s, he was one of the leading proponents of "inflation targeting"--the proposition that Central Banks would be most effective in controlling both inflation and real output if they announced a specific inflation target, clearly communicating their progress to that goal, and the means by which they would achieve it.
Bernanke became a Federal Reserve Governor in 2002. In his account of his initial time as a Governor he provides an illuminating description of the "maestro," Alan Greenspan, then at the height of his prestige. Bernanke's interest in collegial, systematic policymaking would seem at odds with Greenspan's more individualistic approach, but he gives a sympathetic, even admiring, description of Greenspan (it's certainly conceivable that walking in Greenspan's shoes as Chair may have tempered the recollections of that period). He also discusses his celebrated 2002 speech on the risks of deflation--the one which got him dubbed "Helicopter Ben."
Bernanke quickly reviews his brief stint as CEA Chair and then turns to his tenure as Federal Reserve Chair. He runs down the unusual developments in financial markets in that period, especially the explosion in subprime mortgage lending, and discusses the constraints financial regulators were, or believed they were, operating under in addressing the situation. There is a very effective rendition of the issues involved in the discussions between Federal Reserve Governor Edward Gramlich and Greenspan on the topic of subprime lending and consumer protection.
Upon becoming Federal Reserve Chair in early 2006, Bernanke's aim was apparently to embed Greenspan's accomplishments (most importantly, the well-calibrated response of policy to movements in prices and output and the substantial increase in FOMC communications) into the formal structure of the FOMC and to expand on them. In particular, he wished to lessen the focus of policy on the Chair, and turn it to the Committee at large, all within a framework advised by inflation targeting. During his tenure, the FOMC expanded the frequency and depth of public disclosure of information and forecasts, and Bernanke abandoned Greenspan's practice of starting the policy discussion round of FOMC meetings. Bernanke worked closely with Donald Kohn, who was Vice Chair of the Board in his first term, on these and many other matters.
These efforts, of course, were overshadowed by the financial crisis (the portion of the book labeled "The Crisis" goes from page 133 to 411). Bernanke does an excellent job of explaining that, contrary to a myth, the Federal Reserve was well aware that home prices could fall substantially, though the speed of the decline and its ramifications for overall activity were understated prior to the event. He acknowledges that the Federal Reserve was unaware that the complexity of asset-backed securities meant that the exposure of firms to mortgage defaults was opaque, creating an environment in which weakness in the asset-backed market would quickly threaten institutions and markets worldwide.
In discussing the events of the crisis, starting with the freeze-up in the interbank market in August 2007, Bernanke's account complements the earlier ones of Paulson and Geithner, with whom he worked most closely (along with Federal Reserve Governors Kohn and Kevin Warsh). Such events as the near-failure of Bear Steams (and the Federal Reserve's emergency loan to keep the firm alive long enough to arrange for its sale), and the Treasury's "conservatorship" of Fannie Mae and Freddy Mac are recounted. Bernanke also suggests some (mild) exasperation with fellow FOMC members who remained focused on inflation risks well into 2008, when the financial situation was teetering on the brink.
The fall of 2008 was the heart of the crisis, and Bernanke provides his insight into the failure of Lehman Brothers, the Federal Reserve's extraordinarily large bailout of AIG, the hurried passage of the TARP Act, and numbers of other events which normally would have normally loomed very large (such as the failures of IndyMac and WAMU, the merger of Wachovia and Wells Fargo, the flare-up over the New York Federal Reserve's decision to allow full buyouts of AIG's CDS positions) but now look a bit secondary. He does his best to describe the alphabet soup of emergency lending facilities established by the Federal Reserve in those days to maintain some necessary financial activity.
The two items of the greatest potential general interest that Bernanke discusses about that period are the Lehman failure and relations with the FDIC. Bernanke reiterates--a point he made at NABE's annual meeting in October 2008--that in the Federal Reserve's view, any loans that would have been extended to facilitate a bailout of Lehman would have been counter to the Federal Reserve Act (the Federal Reserve is not legally allowed to knowingly assume credit risk), and with the absence of any power at that time for the Treasury to invest in or lend to the firm, and no private sector purchaser available, the firm was doomed. Bernanke does admit that in Congressional testimony shortly after Lehman's failure, he and Paulson rather deliberately waffled about whether the government had the "power" to save Lehman. Some press has picked up on this admission. It's hard to see why these actions should be viewed as disturbing --Bernanke and Paulson were, at the time, frantically seeking the passage of the TARP bill, which did give the Treasury the power to make such investments. Without that power, there was the ever present risk of continued failures like Lehman's (Bernanke points out that the loans to AIG were, to the Federal Reserve's satisfaction, secured by the company's equity; but AIG was unusual because of the value of its conventional insurance operations). Open admission to Congress that the government could not prevent such failures could have spurred creditors to withdraw funds from troubled firms, heightening the risk of more failures.
Bernanke provides a lucid discussion of the differences the Federal Reserve and Treasury had during the crisis with Sheila Bair of the FDIC about the specific ways guarantees might be provided to banks, and the specific actions taken in the resolution of troubled and failed banks. Bernanke makes a case, similar to that offered by Geithner, that the Federal Reserve at times saw Bair and the FDIC as narrowly focused on the agency's traditional tasks and less so on protecting the financial system as a whole. Although there will naturally be focus on the comments about Bair, Bernanke also makes critical observations about some members of Congress (suffice to say that on his trips to Cooperstown there's one Hall of Fame plaque he probably does not linger at) and even some members of the FOMC. Bernanke also gives his account, little different than that provided elsewhere, of the celebrated October 13, 2008 meeting at the Treasury Department at which the Treasury provided TARP capital injections into all the largest financial firms.
The discussion of the crisis ends with the FOMC's bringing the Federal Funds rate to near zero in late 2008, the transition to the Obama administration, which included Geithner's move from the New York Federal Reserve Bank to the Treasury, and the execution of the "stress tests" in early 2009, which is now seen by many as the definitive end to the feverish stage. What was left, though, was the deep recession. Bernanke recounts in the last part of the volume the events from 2009 to 2014: the fiscal stimulus, his reappointment as Federal Reserve Chair, and the evolution of the FOMC's forward commitment strategy (promises to keep rates extraordinarily low) and the successive LSAP (Large Scale Asset Purchase--what is commonly known as "Quantitative Easing" or "QE") programs. Bernanke believes that "QE3"--the program of purchasing $85 billion of securities every month until the economy gained better traction--played a major role in solidifying the economic recovery. There is a considerable discussion of the Dodd-Frank Bill: its formulation, passage, and implications (Bernanke makes numbers of favorable comments about former Representative Frank, whom he sometimes refers to as "Barney"). Finally, Bernanke describes, more or less as an observer, the 2013 controversy over the possibility that President Obama would tap Lawrence Summers as his successor, rather than Janet Yellen, the President's ultimate choice.
The book should read well to those familiar with economics and finance. Perhaps at times Bernanke gets a bit into the weeds about names and acronyms for programs and the technicalities of some markets and policies, but he leavens these discussions with personal touches and occasional dry humor. (At times, upon introducing a figure to the narrative, there is a reference to the individual's sense of humor. Bernanke's own humor is so dry one is left wondering whether the description of Stanley Fischer, upon his appointment as Vice Chair of the Board, as "venerable," has some hidden implication!). Wisely, he largely (but not totally) limits mention of staff names to the very highest officials, thus probably reducing the number of hurt feelings in the group; but he clearly is greatly appreciative of staff efforts at all levels. Bernanke, at the end, remains somewhat dumbfounded that there were officials looking toward narrow short-term partisan gains rather than to the greater interest of the nation as a whole (he emphatically does not include Presidents Bush and Obama in this group and praises them for their actions in the crisis) and notes that he has changed his political affiliation to independent.
The volume is not a complete recounting of the crisis: Alan Blinder's After the Music Stopped: the Financial Crisis, the Response, and the Work Ahead is more comprehensive about the long-term developments in the financial sector that set the stage for the crisis, and to my mind it still stands as the definitive single-volume work. Also, it would be interesting to have seen any systematic rethinking Bernanke may now have about the benefits of an inflation-targeting framework of the type he had advocated. In that regard, at least two Central Banks--Sweden's and Norway's --that had been releasing "Inflation Reports" now label the documents "Monetary Policy Reports," suggesting that widening the focus from inflation a bit seems wise; and Central Banks are increasing their attention on financial stability and regulatory issues, as strikingly illustrated by the Bank of England's regaining the authority it lost as recently as 1997. These minor points aside, the book will remain an essential guide to the Federal Reserve's actions in the crisis and since, and is a must read for all economists wishing to gain more insight into those times.
Ramapo College of New Jersey
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|Date:||Jan 1, 2016|
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