Anatomy of a Meltdown

The Courage to Act: A Memoir of a Crisis and Its Aftermath BY Ben S. Bernanke. W. W. Norton & Company. Hardcover, 624 pages. $35.

Former Federal Reserve chairman Ben Bernanke’s new book feels more like the first of many acts than an authoritative memoir. And the main body of the narrative remains, so far as financial history is concerned, very much a work in progress.

Still, notwithstanding its provisional character, there’s no denying that The Courage to Act is a useful document. Bernanke was arguably the most powerful economic official in the world during the worst global financial crisis since the Great Depression. His direct account of that event, staid though it can be, is invaluable—both for the official record and for understanding how his thinking shifted during an eventful eight-year tenure atop the Fed.

The memoir begins with an amusing glimpse into the notoriously shy and guarded Bernanke’s personal life, cataloguing his journey from a small-town boyhood in South Carolina through the Ivy League academic ranks and on to what he describes as his unlikely elevation to the head of the nation’s central bank. “I had studied monetary policy for years,” writes Bernanke, who as a longtime Princeton economics professor specialized in the study of the monetary causes of the Great Depression. “I had never expected to be part of the institution and contributing to policy decisions.” As he traces the odyssey leading to the inner sanctums of Washington power, Bernanke conquers his constitutional reserve long enough for the reader to get a feel for the folksy demeanor and obsessive baseball fandom that have endeared him within wonkish economic-policy circles.

Yet this personal touch is less in evidence as the book progresses. Bernanke slips all too easily into inside-baseball macroeconomic jargon in his blow-by-blow policy chronology, and while this might be interesting to investors, scholars, and journalists who lived through the crisis, it fails to offer enough insight to make this a broadly compelling historical account.

“I proposed that we leave the federal funds rate unchanged, while hedging our bets a little by continuing to acknowledge in our statement that ‘some inflation risks remained,’” he writes of one key policy call in 2006, early on in his tenure as Fed chairman. Not exactly fly-on-the-wall material—especially considering that full transcripts of meetings for that year were released in 2011. The book contains too many such passages.

In Bernanke’s version of events, his reticence seems more than simply personal; the omissions from his narrative prove, at times, to be more telling than the stories he shares. This is particularly true when it comes to the prospect of increased financial regulation—a chronic blind spot of Bernanke’s as chairman and, not coincidentally, a shortcoming typical of the conventional economic models favored by the nation’s other senior economic policy makers.

As he recounts how he sized up the challenges presented by the Fed post, Bernanke explains that, like many scholarly economists, he relished the chance to see his key intellectual concerns at play in real-world-policy settings. “I was interested in all of the work of the Board, including the regulation and supervision of banks. The big attraction, however, was the chance to be involved in U.S. monetary policy,” he admits.

An intensive focus on monetary matters dominates The Courage to Act, as it did Bernanke’s chairmanship. To take one striking example, Bernanke never talks about criminality or fraud when it comes to the financial crisis, despite ample legal evidence—and countless Justice Department settlements—indicating that banks consistently pushed the boundaries of legality and often went well beyond them. (He did get a lot of attention recently for saying, in an interview with USA Today published the day of the book’s release, that there should have been more prosecutions.)

Yet the ongoing manipulation of key benchmark interest rates—which falls within the direct purview of the Fed—does not get a mention in the book. Neither do illegal foreclosures, the lack of transparency on Wall Street, banks’ concentrated political power, the revolving-door nexus of Wall Street and the regulatory world, or even the global banking system’s increasing vulnerability to financial crises (think Greece, China, Japan, Russia, Brazil, Turkey—and that’s just in the past year).

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Bernanke does accept some blame for having missed the signs of looming financial disaster on his watch. But he stops well shy of a mea culpa. He says he was merely echoing the conventional wisdom of the time: that the housing bubble wouldn’t burst spectacularly and that, even if it did, the economic damage would be limited.

In the great Washington tradition of blandly asserted deniability, Bernanke also rather fatalistically insists that the overlapping jurisdictions of multiple agencies—the Fed, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and others—all but ensured that no single body had ultimate responsibility for monitoring the entire financial system.

Bernanke says he quietly but unsuccessfully favored a model that would have essentially handed all banking-regulation authority to the Fed, despite its widely reported precrisis failures. He was pushing back against ideas like Senate Banking Committee chairman Chris Dodd’s plan to strip the Fed of its regulatory authority entirely. “The Fed already possessed the bulk of the government’s expertise and experience needed to serve as the financial stability regulator,” Bernanke contends.

That expertise had not helped the Fed foresee the crisis, much less prevent it. But once the scope of the meltdown finally dawned on Bernanke, he was in some ways the perfect man for the job. His research on the Great Depression, as well as on Japan’s troubles with economic stagnation and deflation—a vicious cycle of falling prices, wages, and business activity—gave him an ample tool kit, albeit a still largely untested one, with which to approach the problems.

Indeed, Bernanke had given an inadvertently prescient speech in 2002 titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” In it, he argued that central banks were not powerless to stimulate economic growth and employment, as had been widely presumed, in the event that official interest rates fell to zero. Instead, the Fed could purchase a range of government bonds to put downward pressure on longer-term interest rates, boosting other financial and credit markets in the process. The increased lending would help revive economic activity.

And buy bonds he did. Starting in late 2008, the Fed began purchasing Treasury and mortgage bonds in earnest, in a series of “quantitative easing” programs designed to bring the financial system back to life and bolster a sputtering economic recovery. The final tally of buying, which took place in three rounds, wound up totaling in excess of $4.5 trillion, more than five times the Fed’s precrisis bond portfolio. During an emergency teleconference of the policy-setting Federal Open Market Committee on January 21, 2008, Bernanke didn’t mince words. “At this point we are facing, potentially, a broad-based crisis,” he told his colleagues. “We can no longer temporize. We have to address this crisis. We have to try to get it under control. If we can’t do that, then we are just going to lose control of the whole situation.” Yet despite forceful moves to secure the banking system, including the decision to keep official rates at zero for nearly seven years, the performance of the US economy continues to frustrate the Fed’s optimism about the future in almost systematic fashion.

Bernanke, who now works as an adviser for the hedge fund Citadel and for Pimco, a giant bond fund based in California, might have hoped for a better set of economic indicators to greet the release of The Courage to Act. To his credit, the unemployment rate has fallen sharply to 5.1 percent, a far cry from its recession peak of 10 percent. However, there is evidence of underlying weakness in employment, including low workforce participation, a stubborn lack of wage growth, and high long-term joblessness. The economy’s growth rate remains lackluster, suggesting the expansion is still sluggish some six years after it began. True, the US economy looks stronger than many of its overseas counterparts, but that’s not saying much, given a global outlook that continues to deteriorate and threatens to once again shake US growth.

The status quo is particularly worrying in the already lagging realm of financial regulation. The sense that Wall Street has gone back to business as usual is pervasive among investors and the public. Bernanke admits there was little appetite for regulation within the agencies charged with writing and enforcing the rules: “[Alan] Greenspan and senior Fed attorneys were reluctant as a matter of principle to aggressively use” the new authority they had acquired to stop “unfair or deceptive” lending practices during the housing boom, he writes.

Washington’s persistent aversion to adopting tougher rules for finance could leave the country distinctly unprepared for another market shock. A recent Boston Fed conference found, discouragingly, that the current tools available to regulators to prevent and fight financial crises would likely fail. That’s hardly a ringing endorsement of years of hard-fought reform—or of Bernanke’s legacy. Nor is this glum appraisal out of line with Bernanke’s own confessed agnosticism about more robust regulatory enforcement. “Philosophically, I did not view myself as either strongly pro- or anti-regulation,” he writes. “As an economist, I instinctively trusted the markets.”

The nation’s chief regulator is more emphatic about his general allegiances in the rarefied circles of financial power. One especially fond memory, of the Bank for International Settlements (BIS), is instructive: “We repaired to the BIS dining room for long, frank conversations over gourmet four-course dinners (each course with its own wine). For generations, the world’s central bankers have formed a sort of club, of which I was now a member.”

Pedro Nicolaci da Costa is an editorial fellow at the Peterson Institute for International Economics. He has been writing about economics since 2001, and covered the Fed extensively before, during, and after the 2008 financial crisis.