- - Monday, April 22, 2013

THE FEDERAL RESERVE AND THE FINANCIAL CRISIS
By Ben S. Bernanke
Princeton University Press, $19.95, 144 pages

If you’re seeking a comprehensive, fairly non-technical narrative on the 2008 financial crisis albeit one from hardly a passive observer here’s a decent place to start.

In March 2012, Fed Chairman Ben S. Bernanke delivered a series of four lectures and, along with questions and answers from students at George Washington University, bound them into volume form, “The Federal Reserve and the Financial Crisis.” His first two lectures trace the history of the Fed from its founding in 1913 illuminating its purpose as lender of last resort with reference to the bank run endured by Jimmy Stewart in “It’s a Wonderful Life” through post-World War II recovery, high inflation of the 1970s and the Great Moderation of the 1980s through mid-2000s. He repeatedly praises Franklin Roosevelt who he concedes made multiple stumbles for creating deposit insurance and nixing the gold standard, crediting these moves with ending the Great Depression.

These initial lectures by the self-described “Depression buff” read like a Wikipedia entry for “Federal Reserve Bank” and include interesting historical episodes, such as Alexander Hamilton’s failed attempt to create a central bank, and construction workers and farmers sending chunks of wooden two-by-fours to then-Fed Chairman Paul Volcker to protest his high interest- rate policies, which drove up prices in the late ‘70s and early ‘80s.

Lectures three and four focus on the 2008 financial crisis and the subsequent regulatory environment. Mr. Bernanke is an impressive economic historian, though the objectivity of his detached narrative is disputed by the likes of economics professor Jeffrey Hummel of San Jose State University, who wonders why Mr. Bernanke’s discussions of the Fed’s other missions (regulate monetary policy and regulate financial institutions) don’t give better context on the effects of the drastic increase in money supply under Mr. Bernanke’s helmsmanship.

Mr. Bernanke, a Republican and Bush appointee held over by President Obama, emphasizes the importance of the Fed remaining politically independent and touts his unprecedented transparency relative to his predecessors (i.e., holding the first news conference by a Fed chairman, repeated testimony before Congress, etc.) as a means of spreading central bank edicts quickly and clearly. He made no mention of stumbles early in his first term that sent mixed signals over the future direction of interest rates.

A low-key technocrat compared with his cocktail-circuiting predecessor, Alan Greenspan, Mr. Bernanke repeatedly lays out his philosophy for staying grounded when grappling with enormous challenges, saying, “A little humility never hurts.”

If they’re not familiar with Mr. Bernanke’s life story, the Ron Paul crowd eschewing current easy-money policy may be surprised to read the chairman’s homages to libertarian darling Milton Friedman, whom he praises for rejecting President Nixon’s price controls and “prophetically” denouncing the theory that keeping inflation at unnatural highs would reduce unemployment.

Mr. Bernanke maintains that after the dot-com bust, Greenspan-era low-rate monetary policy money did not induce the housing bubble, citing international examples of the United Kingdom’s housing-price spike despite its tighter monetary policy and disparate outcomes based on the same monetary policy (e.g., Spain saw dramatic housing spikes, while Germany was utterly flat, even though both nations were under the common currency). Yet the usually confident economist hedges his assertion, citing the veracity of this claim is highly disputed. In a revealing blunder, he says regulators assumed that plunging housing prices would have no more effect on the broader economy than a drop in tech stocks, which, by comparison, were relatively isolated.

When asked by a student whether Clinton- and Bush-era dictates seeking to expand homeownership contributed to the housing bubble, Mr. Bernanke pointed out that most of the worst loans were made by private-sector lenders and sold for private-sector securitization rather than originating or passing through Fannie Mae and Freddie Mac. Yet this answer obscures the incentives and penalties motivating the private sector to begin with.

Rather, Mr. Bernanke blames the 2008 financial crisis on households and businesses incurring excessive debt, banks’ poor risk management and excessive reliance on short-term funding, exotic financial instruments and derivatives. He argues that the government failed because of poor financial regulatory oversight and inadequate communication among agencies. Yet the chairman also glosses over the potential damage to American competitiveness wrought by the massive regulatory expansion under Dodd-Frank.

All told, this is a useful and highly approachable take on the history of central banking and the recent financial crisis. It’s worth a read, if only to get a first-person narrative from one of the most important figures in global capital markets.

Carrie Sheffield, a former editorial writer for The Washington Times, is a freelance writer in Manhattan.