The former chair has penned a lucid account of the crisis and its aftermath
BEN BERNANKE is known for his cool head and thoughtful persona. Towards the end of his stint as chairman of the Federal Reserve, which ran from 2006 to 2014, President Obama described him as the “epitome of calm”. It is little surprise, then, that Mr Bernanke’s narrative of his time in office is a lucid, analytical affair, lacking some of the pulsating drama of previous accounts of the financial crisis. Instead, the book provides a robust defence of the Fed’s response to the crisis. Mr Bernanke clearly sees himself as someone who did what was necessary to save the economy from disaster, in the face of a barrage of unwarranted criticism. This book is, at base, a response to his critics.
When markets began to gum up in late 2007, Mr Bernanke, a student of the Depression, knew the importance of keeping credit flowing. Bank failures in the 1930s had wreaked havoc on the real economy. At a minimum, the Fed would need to follow the dictum of Walter Bagehot, a 19th-century editor of The Economist: lend freely, to solvent institutions, at a penalty interest rate against good collateral.
This principle lay behind Mr Bernanke’s early response to the crisis, which included an alphabet soup of lending programmes to channel funds to banks. Mr Bernanke is rightly proud of these interventions, which helped moderate the crisis and eventually turned a profit for the taxpayer. But as things got worse, Mr Bernanke had to show boldness beyond Bagehot, particularly by using crisis powers to support two over-the-weekend rescues: those of Bear Stears, by J.P. Morgan, and of AIG, an insurance firm, by the taxpayer.
The dramatic bail-outs were politically toxic, especially when AIG later announced bumper bonuses for its staff. Mr Bernanke says he shared the public’s emotions and “seethed” at reckless AIG executives. But the purpose of the Fed is to take actions that are necessary but unpopular, he says, and a bail-out was in the interests of ordinary Americans.
After the crisis, Mr Bernanke oversaw a paradigm shift in monetary policy. With interest rates stuck at zero, the Fed embarked on three rounds of quantitative easing, the purchase of financial securities with newly created money. When it comes to monetary policy, though, the real theme of the book is communication. Mr Bernanke made the Fed more transparent. In 2012 he fulfilled a long-term ambition of setting an explicit inflation target; he also introduced regular Fed press conferences. He appeared twice on “60 Minutes”, a television programme, to explain Fed policies. “Monetary policy is 98% talk and 2% action”, he argues. As the Fed tried to rev up the economy after the crisis, it came to rely on “forward guidance”—in effect, a signal that the Fed intended to keep policy looser for longer than markets might otherwise have expected.
Yet the reader is left wondering whether the Bernanke Fed—which acted so decisively to support banks—was behind the curve on monetary policy, despite the novelty of QE. In retrospect, the decision to leave the federal funds rate at 2% in September 2008, immediately after the collapse of Lehman Brothers, was “certainly a mistake”, he writes. Mr Bernanke seemed to have an easier time persuading his committee that bail-outs were necessary to prevent catastrophe than that loose policy was necessary once disaster occurred.
Most of the criticism Mr Bernanke faced during his tenure, though, was from hawks who hated QE. At times, this became personal: in 2012 Rick Perry, then a candidate for the presidency, claimed that Texans would treat the Fed chairman “pretty ugly” as a result of his money-printing (amusingly, Mr Bernanke recalls that he went to Texas and was, in fact, well-received).
The book convincingly deconstructs the hawks’ arguments. QE did not cause runaway inflation and America has outpaced austere Europe, which has run tighter policy. What of the claim that loose policy hurts savers? Low returns are the inevitable result of a weak economy; higher rates only make that problem worse.
One interesting aspect of the book is the growing distance between Mr Bernanke and the Republicans. He laments their hawkishness, resistance to bank rescues and occasional advocacy of discredited monetary systems like the gold standard. Their obsession with spending cuts at the end of his tenure risked damaging the economy, he says. He wanted Congress to focus on long-run fiscal challenges while supporting the economy in the near-term.
The book’s biggest revelation is that when testifying before Congress immediately after Lehman’s collapse, Mr Bernanke hid his belief that the government had been powerless to save the bank. In the midst of a crisis, he and Mr Paulson did not want to acknowledge the limits to their power, for fear of spooking markets. This, he says, has left an incorrect impression that letting Lehman fail was a choice.
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