Calling it Straight on the Federal Reserve

The economic crisis has brought the standard emotion over the Federal Reserve to entirely new levels. I mean, if you thought people were opinionated about the central bank before the implosion of 2008, we are now in a whole new stratosphere. What is fascinating when analyzing the toxicity that exists over this issue is the extraordinarily non-partisan nature of it. Full blown anarchists like the Austrian economic camp believe the Federal Reserve to be far, far more evil than they do Al Qaida. Left wing collectivists are convinced that the Fed exists to be an eternal bailout for bankers with no consideration for their low income constituents. Conservative right wingers (such as yours truly) are mystified at the manner in which the Fed executes policy, eggregiously making self-fulfilling prophecies out of boom and bust cycles. The Fed has their critics in all corners. What I was hoping for out of In Fed We Trust by David Wessel is some sort of objective and thorough look at the Federal Reserve that could filter out a lot of the more cartoonish commentary. What we got was a very good and well-reasoned book that serves as a sort of play-by-play on the Fed’s actions throughout the crisis. What we did not get, however, was a deeper ideological look at the role the Federal Reserve ought to play in monetary policy.

Clearly Wessel has better access to the central bank than the author of most of the other books on the economic implosion have thus far had. Sorkin’s highly enjoyable Too Big to Fail hardly mentioned Bernanke, yet had remarkable access to the Treasury Department actors. Wessel, though, did a wonderful job getting inside the Fed, capturing meetings and specific conversations throughout the crisis from the major central bank characters (Bernanke, Warsh, Kohn, Yeller, Geithner, etc.). His underlying point is not too profound: Bernanke was a highly regarded academic whose major scholastic focus was the Great Depression, and this background and context set the stage for Bernanke’s entire mangement of the economic crisis.

Critics and supporters alike acknowledge this. Of course, many believe that Bernanke understands the Depression wrongly so therefore was guaranteed to get this wrong as well. But the fact that Bernanke believed desperate actions were required – some of the same desperate actions that Bernanke feels the Fed of the 1930’s was wrong to defer – is indisputable. The author backs off from making his own assertions about whether or not Bernanke was wrong (in what he ended up doing), but he does seem very willing to make the rather obvious claims that much of what Bernanke was responding to were self-caused problems. No serious commentator about the 2008 crisis will downplay the role that Greenspan’s easy money policy of 2001-2004 played in priming the bubble pump that eventually blew up. But more specific to the 2007-2008 policy era, Bernanke did not see the systemic risk that the housing crisis was creating in the financial markets, and worse, until the nuclear explosion of September 2008, the Fed treated the matter like it was a crisis of liquidity, rather than a crisis of solvency. As John Taylor has shown us, it was this pivotal policy error that led to so much pain later and forced such dramatic action by the Fed later on in the process.

I plan for my own treatment of this crisis to more thoroughly analyze what the Fed did right and what the Fed did wrong throughout this mess. Wessel was not looking to provide such commentary. But suffice it to say, Bernanke thought he had to do whatever it takes and he went on to do so. History will judge some of these actions very critically, I am sure. And in fairness, history will judge some of the decisions more favorably. But what is most interesting about the present landscape is that it is forcing ideological conversations we have not had in the last 100 years about the role that the Fed ought to play in our society (if any). My own belief (contra my Austrian friends) is that there is a theoretical role for a central bank, though I would prefer no Federal Reserve at all to one with this “dual mandate” that Congress has presently put upon them (the dual mandate is that the Fed be responsible for price stability, and full employment; since so far they have never come close to creating either one, you have to wonder if either the mandate itself is flawed or there is some deeper fundamental flaw). I believe the Fed needs to focus on nothing whatsover other than price stability (i.e. a strong dollar and low inflation), but there is no doubt that the politicization of this institution has made that very, very difficult.

Readers wanting a final solution to the ills plaguing the Fed will not get it in this book, but they will get a wonderful analysis about a fascinating man (Ben Bernanke) and the ideological commitments that guided him (and still guide him) through the most extraordinary economic events of the last 75 years.