The world is, of course, in anything but ordinary economic times, and that's why we are fortunate to have In Fed We Trust: Ben Bernanke's War on the Great Panic, an exciting and readable guide to it all.
Federal Reserve Chairman Ben S. Bernanke was the central player in the government's efforts to salvage the financial system from 2007 to 2009, and this book gives readers a seat inside many of the rooms where he and his colleagues made key decisions.
Bernanke is an ideological paradox. He is a solidly free-market Republican economist who was appointed by President Bush but is also an expert on the Great Depression and was adamant about using the powers available to the Fed to avoid a recurrence of that calamity. The result was an effort to steer policy toward a middle course that rejected the hands-off approach favored by conservatives as well as even more interventionist policies supported by those on the left side of the ideological divide.
Before describing the current crisis, David Wessel, the economics editor at The Wall Street Journal, provides a thorough history of recent fiscal and monetary policy and places the current crisis into context.
When comparing what happened in the last few years with the most recent widespread economic dislocation, the 1987 market crash, Wessel writes that "the Great Panic was much bigger-in price tag, in geographic scale, and in duration. And so was the Fed's response. What Bernanke's Fed did was necessary. Inaction at such a time of pervasive economic peril would have been devastating. But the Great Panic challenged the ideology of capitalism: economies do best when markets, not governments, decide who gets credit and who does not.''
Wessel focuses his book on the four decision makers he calls "The Four Musketeers": Bernanke, Fed Vice Chairman Donald Kohn, Fed Governor Kevin Warsh and New York Federal Reserve President (and current Treasury Secretary) Timothy Geithner.
The author gives mixed grades to all four, as well as to Bush's Treasury Secretary Henry Paulson, but he comes down hardest on Paulson. At times Paulson, a former CEO of Goldman Sachs, was the most reluctant of the key players to get the government to intervene in the economy. Wessel contends that this led to some disastrous decisions, including allowing Lehman Brothers to bankrupt, which did much to diminish the confidence of the markets.
He recounts a conversation among several of the principal players in which Paulson complained about being called "Mr. Bailout'' after pumping government money into Bear Stearns and said he wouldn't do it again with Lehman Brothers.
This prompted Geithner to lose his cool and tell Paulson, "The amount of public money you're going to have to spend is going up, more than you would have otherwise! Your statement is way out of line.''
Wessel notes that Bernanke, Geithner and others could have helped Lehman without Paulson's agreement but were "extremely reluctant'' to do so.
Also, Paulson's often awkward public presence caused him to frequently step on his own message
and did little to instill public confidence.
Among the scariest (though not terribly surprising) revelations was the absence of President Bush's involvement in most of the decisions. He and his staff basically outsourced the problem to Paulson et al who often informed the White House after decisions were made.
Overall, the book is a valuable primer on the substance of economic policy and on the politics of decision making in this important area. Wessel combines rigorous scholarship, great shoe-leather reporting and an ability to tell a great story. Even his occasional tangents into arcane aspects of the subject are accessible to the average reader.
The relatively good performance of most credit unions during the economic crisis is corroborated by the fact that they make only a cameo appearance in this comprehensive look at the subject. When Fed Governor Warsh was named to his post in 2006, White House ethics advisers recommended he get the mortgage for his $2.3 million Georgetown townhouse from the White House Federal Credit Union to avoid any appearance of favoritism from lenders over which the Fed has jurisdiction.
Anecdotes such as this, combined with great analysis and reporting, make In Fed We Trust an important and enjoyable guide to recent economic events.