Book Review
Ben Bernanke
Bernanke’s Book Is Useful Primer On Fed’s Efforts to Save Economy by John Shaw
A
t the end of January 2014, Ben Bernanke will step down as chairman of the Federal Reserve Board. Bernanke’s eight-year tenure as the head of America’s central bank has been hugely consequential and unexpectedly controversial. Neither the consequence nor the controversy was anticipated when the scholarly Bernanke assumed the chairmanship of the Fed on Feb. 1, 2006, following the nearly two-decade tenure of Alan Greenspan. Few suspected that Bernanke would face a crushing financial crisis and would be compelled to create a raft of new programs to prevent the American economy — and even the world economy — from unraveling. And few would dispute that the 2008 financial meltdown fundamentally shaped Bernanke’s tenure at the Fed, which controls the nation’s money supply. Bernanke’s book explains what he did and why during this remarkable time. “The Federal Reserve and the Financial Crisis” is based on a series of lectures Bernanke delivered in the spring of 2012 at the George Washington University. It is a clear exposition of his views about the financial crisis and the challenges that America’s central bank still faces. Bernanke has been an aggressive and innovative central banker. He is regarded by some as a dangerous revolutionary and by others as the savior of American capitalism. He was named Time magazine’s “Person of the Year” in 2009 and is frequently heralded on Wall Street and in financial markets around the world as a cool crisis manager and a strikingly creative Fed chief. However, some Republicans in Congress are sharply critical of Bernanke, likening his easy money policies to a narcotic the American economy has become addicted to. The passion he’s inspired among his critics is intriguing given the mild-mannered Bernanke’s rather staid (albeit impressive) intellectual background. Born in Georgia, raised in South Carolina, and educated at Harvard and the Massachusetts Institute of Technology, Bernanke came to the Fed with sterling academic credentials. He has taught at Stanford University, New York University, MIT and Princeton University. He took a leave from Princeton in 2002 to become a member of the Fed’s Board of Governors and served there until 2005, when he was appointed chairman of the Council of Economic Advisers by President George W. Bush. When Bernanke accepted the chairmanship, there was widespread speculation that he was auditioning to succeed Greenspan, whose reign at the Fed was winding down. Bush did appoint Bernanke and he has served memorably as America’s preeminent central banker. As one might expect from a former chairman of Princeton’s Economic Department and a renowned scholar of the Great Depression, Bernanke explains central banking and the financial crisis he confronted in a clear, deliberate way. Each of the book’s four sections is based on a lecture that Bernanke delivered at George Washington. He carefully builds a foundation that describes central banking, the 2008 financial crisis, the subsequent recession and the gradual recovery of the American economy. There are few rhetorical flourishes and no name-dropping or juicy accounts of policy debates. He strives to describe the January 2014
Photo: Princeton University Press
Bernanke said he reflected on the Fed’s policy failures during the Great Depression as he formulated his actions to the financial crisis in 2008 and 2009. He was determined to stabilize the banking system and push interest rates down to near zero. financial and economic crisis in concise, jargon-free language. In the first section of the book, Bernanke discusses the role of central banking and the early history of the Federal Reserve. He argues that a central bank has two central responsibilities. First, it’s mandated to achieve macroeconomic stability with sound economic growth and low inflation. The main tool to achieve this is with monetary policy, usually through adjustments in the federal funds rate, which is the overnight rate the Fed charges banks to lend them money. Low interest rates are designed to spur growth while higher interest rates slow growth and contain inflation.The second role of a central bank is to maintain financial stability by the provision of liquidity through short-term credit to financial institutions. This is a central bank’s “lender of last resort” responsibility.
Central banks, Bernanke notes, have been around for a long time. Sweden set up its central bank in 1668 while the Bank of England was established in 1694.The United States is, of course, a much younger nation and its central bank is a relative infant. The Federal Reserve was born out of financial panics in the United States in the late 19th and early 20th centuries. In the aftermath of a serious economic crisis in 1907, Congress contemplated whether an American central bank was needed. It commissioned what turned out to be a 23-volume study about central banking practices but no immediate action was taken. Finally, after intense lobbying by President Woodrow Wilson, Congress passed the Federal Reserve Act of 1913, which created the Federal Reserve to serve as a lender of last resort, ease financial panics, and manage the nation’s gold standard.The law created a seven-member Board of Governors in Washington led by the Fed chairman, and it also set up 12 regional bank districts, each of which elected its own president. According to Bernanke, the Fed had an uncertain role in its first decades because the United States was on a gold standard.This is a monetary system in which the value of the currency is fixed in terms of gold and sharply limits policy discretion. The Great Depression, which extended from 1929 to 1941, was a shattering event in the United States and President Franklin D. Roosevelt created a raft of initiatives to respond to it. But the Fed was not very helpful; in an initial attempt to preserve the gold standard, it kept interest rates high.This made a bad situation worse and by the end of the 1930s, unemployment remained stubbornly high at about 13 percent. Bernanke argues that Roosevelt made plenty of mistakes but was innovative and aggressive. Unfortunately the Fed at that time was neither, and its policies hampered recovery from the Depression. In the second section of the book, Bernanke describes American economic policy from World War II until the first signs of the financial crisis in 2006. During this time, two Federal Reserve chairmen were towering figures: Paul Volcker and Alan Greenspan. Volcker was appointed Fed chairman by President Jimmy Carter in 1979 with the near singular mission of wringing skyrocketing inflation out of the economy. When Volcker began his tenure at the Fed, the consumer price index was nearing an astonishing 13 percent. Volcker dramatically tightened monetary policy, increasing key interest rates to nearly 20 percent. Between 1980 and 1983, Volcker drove inflation down from 13 percent to 3 percent, but his policies also triggered a serious recession. Despite the disruption and economic hardship caused by tight monetary policy, high interest rates and the resultant recession, Volcker is still credited with rescuing the U.S. economy during a perilous time. President Ronald Reagan appointed Greenspan to succeed Volcker as Fed chairman in 1987. He served until 2006 and his tenure has been called the Great Moderation. The American economy grew steadily, job growth was robust, and inflation was low. Some in Congress touted Greenspan as the greatest central banker in history. After the housing bust and financial crash, though, Greenspan’s decision-making, particularly when it came to financial deregulation, came under harsher scrutiny.
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