29 Nov A Review of Ben Bernanke’s A Courage to Act
It took Ben Bernanke six hundred pages to cover his eight years as the Chair of the Federal Reserve, whereas it took Alan Greenspan a few pages less to cover his twenty years in the same position. Such was the nature of the eight years that Bernanke oversaw the Federal Reserve, eight years that will certainly be prevalent in history. The 2007-2009 financial crisis is an event that I have decided to study obsessively, planning my own book on the subject in the near future. The motivation of my obsession is multi-faceted: I lived through it and believe it to be, besides 9/11, the key historical event of my adult life (thus far); it served at the very center of my career both literally and incidentally; and I believe the narratives that get recorded from it in history will have much to say about future economics and even future culture. The chairman of the Federal Reserve who sat at the command center during the crisis wrote this work to validate the decisions the Fed made in navigating through it, which is certainly his prerogative. A few comments on this attempt at validation are in order.
The book was good, but not great; compelling, but not fascinating; interesting, but not remarkable. I would put it below Paulson’s memoir in terms of overall quality and content, but above Geithner’s work (to rate the books of the three major policymakers at the helm during the financial crisis). More people want to know what to make of Bernanke and his policy prescriptions than will want to know what to make of his book. The book will be a good place to start in understanding just how sincere Bernanke is when he articulates what he believes the Federal Reserve should have done during the financial crisis, and what he believes they should have done afterwards. It should be no surprise to my readers that I have certain points of significant contention with the chairman, but what I do not have is an ounce of doubt about his motives or sincerity. Bernanke may be wrong in his economic worldview at points and he may be wrong in certain decisions he made, but you will not get me to say that he is anything other than a sincere advocate of a heartfelt belief system, one he believes best served and serves the American economy. For Bernanke, that is one of heavy central bank intervention, where monetary policy can and should be a top tool for addressing cyclical and structural economic challenges we face. Where I disagree with Bernanke, I never feel the need to impugn his motive or assign a conspiratorial or sinister agenda to what he and his Fed colleagues have done. The insanity of so many critics of Bernanke has completely emasculated the legitimate criticisms that ought to be articulated. I aim to avoid those errors.
I can not speculate as to how history will remember Ben Bernanke. I believe something about their post-crisis activities that apparently he does not, which is that it is too early to tell. His thesis is that Fed messaging is a powerful policy tool (communicating to the markets what the Fed intends to do and not do is itself efficacious in creating desired results), and that asset purchases (what the world has come to call quantitative easing) was a highly effective tool for keeping interest rates down in a time that rates needed to be kept down to facilitate economic growth. He wisely establishes the policy goal of QE as being specific to holding down interest rates, and not to increase the money supply (the accusation many of his critics hurled). He takes for granted rather than establishes, though, that QE’s effectiveness in driving down rates across the yield curve would come without an offsetting risk or downside. This is the most disappointing part of the book – that he is so dismissive of fears others have brought up (that QE could incent unwise risk-taking), when he surely knows that the Fed has not come close to yet exiting the hyper-accommodatve policies they began in 2008. In other words, the good things that have happpened since 2009 – a drop in the unemployment rate, a modest increase in GDP growth, an improvement in capital markets, a recovery in housing, etc. – are all because of the Fed’s zero interest rate policy and asset purchases, and should hangover effects surface in the future, or a further crisis ensue while the Fed is still in a period of accommodation, they will surely be able to thread the needle out of it. The book could not be expected to prove such a thing for such a thing is by definition unprovable. To assert that the weak, tepid recovery we have seen post-2008 would have been weaker without Fed intervention is the essence of a non-falsifiable assertion. And to claim that in the future there will be no damaging withdrawals when the patient comes off the drugs is rank forecasting.
What the intelligent part of the analyst and economist community knows is this: We have no basis for being overly dogmatic or overly confident in either a positive or negative forecast as to how all of this will play out, because there is just plain no precedent for anything like this. We have no historical guide. We do not know how this will end. Those Fed apologists predicting omniscient manuevering by the Fed do so from hope, not empirical rationale. Those Fed critics sure that disaster A or disaster B loom around the corner as a direct result of Fed action also do not know. I would have preferred to see Bernanke acknowledge the unprecedented nature of the actions the Fed has taken, and the fact that the final verdict of the post-crisis approach has not yet come in. Indeed, since the current Federal Funds rate as of the time the book was published is still at the exact same level it was at the depths of the crisis (um, 0%), perhaps it is too early to run a victory lap.
With that said, I didn’t read the book and find a lot I wanted to criticize in his treatment of the actual crisis itself. I don’t know why he casually omitted the entire segment of the Fed trying to force John Mack to sell Morgan Stanley for a song to JP Morgan, but besides that, the coverage of the Lehman collapse, the AIG bailout, and the significant drama of September and October 2008 was of no particular offense to me. There will always be some who fault the Fed for NOT bailing out Lehman, and there will always be some who fault the Fed for actually bailing out AIG. Bernanke performed admirably during September and October of 2008, because there was virtually no good policy prescription on the planet, and he maintained a philosophy that leadership would mean ignoring critics and living to fight another day. I am far more critical of the 2000-2007 Fed (which mostly included Bernanke) and the 2010-2015 Fed (which also included Bernanke), then I am the 2008-2009 Fed. If that makes me an apologist (it doesn’t), I’ll live with it; if it makes me a bomb-thrower, I’ll with that too.
My actual assessment of Ben Bernanke’s work at the Fed is that we won’t know how to fully gauge it for several years. As an economist, I wish he had actually engaged the opposing positions that he gave very little attention to in the book. He casually mentions why the gold standard is no longer an effective monetary policy, why nominal GDP targeting wouldn’t work, and why the Taylor Rule wouldn’t do what it portends to do. As an advocate of rules-based monetary policy, I would have rather seen Chairman Bernanke engage those arguments than dedicate so many pages to a rationale for asset purchases.
The book has a fair amount of self-congratulating moralizing – and I suppose that shouldn’t be a surprise – but a man of Bernanke’s intelligencce and achievements would have written a better book in this reviewer’s opinion had he humbly acknowledged the unknowns around aggressive monetary policy, and used the book to position the debate for his side of the argument – a debate that is surely nowhere near settled.