This book is based upon four lectures Dr. Bernanke gave in March 2012 describing the history of the Federal Reserve, its mistakes during the Great Depression, its response to the 2008 Crisis and its post-Crisis strategy. It is must reading for investors who are not Federal Reserve junkies. It provides a concise and understandable description of the Fed and its operations as well as a very helpful window into Chairman Bernanke's thinking and strategy as we move forward. A basic understanding of the Fed's objectives and strategies for achieving them is essential for the intelligent investor and this book helps an investor achieve that objective.
Bernanke stresses the dual objections of the Fed - financial stability and economic growth with price stability. He explains clearly how the Fed has used its policy tools - acting as lender of last resort and setting interest rates - to further these objectives. He justifies the Fed's actions as being well within the traditional role of Central Banks citing Bagehot's description of the Central Banks' lender of last resort function. I think that Bernanke sees a trend line of long-term 3 percent real GDP growth as normal and probably will not be satisfied (and therefore will not raise rates) until we return to that trend line. He seems to have a strong belief that the housing market is critical to the economy and that any recovery has to involve a major uptick in that sector.
The Chairman Bernanke we meet in this book is not the "Helicopter Ben" we read about in the popular press. I think that the book and the lectures are designed to demonstrate that the Fed's policies are "conservative" and well within its mandate and precedent. He justifies the Fed's actions as being well within established precedent and argues that "as a literal fact, the Fed is not printing money to acquire...securities" because the amount of currency in circulation is not affected by the Fed's actions. A more complete description of the purchase process and the significance of the "reserve balances" would be helpful but it might also lead some readers to conclude that, while money wasn't being physically "printed", it was being electronically created in a financially equivalent manner.
I believe that Chairman Bernanke is a dedicated and extraordinarily talented public servant whose actions will be vindicated when the economic history of our era is written. His actions have played a big part in saving us from a much deeper recession and a much more damaging crisis than we experienced. That said, the book raises several troubling questions.
Chairman Bernanke emphasizes that the QE programs are designed to force down long-term interest rates in order largely to restart the housing industry, which he sees as key to a recovery. But as I have written in an article about mortgage REITs, mortgages in the United States have an unusual "one way street" aspect, which creates risk for investors (the borrower can refinance without penalty if rates go down but the borrower can sit on the low rate for 30 years if the rates go up). By artificially forcing down long rates - especially on 30-year fixed rate mortgages - Bernanke may be creating a class of assets and securities doomed to depreciate in value enormously as rates go back up. His predecessor, Alan Greenspan, seemed to favor adjustable rate mortgages (ARMs) as a solution but Bernanke attacks most ARMS as involving "bad mortgage practices" (in fairness, he does not include ARMs which provide for principal payments starting on day one in the description of bad mortgage practices). At any rate, Fed policy is creating a new class of "winners" (those who can get fixed rate 30-year mortgages) and may create a new class of losers (anyone who invests, directly or indirectly, in such mortgages). More attention to this issue would have been helpful but it is a mercifully short book (129 pages), which is refreshing these days and such discussion is probably best left for a longer piece.
Even more troubling, however, is the treatment of the "bank run" phenomenon. Bernanke describes this problem clearly (with reference to "It's a Wonderful Life") and correctly identifies it as a key element in the Crisis. What he does not really do is to present a long-term solution or an assurance that it will not recur. Money market funds almost went bust in 2008 and were saved by extraordinary governmental intervention. Their failure would have paralyzed the commercial paper market and would have ground commerce to a halt and preventing this debacle was absolutely necessary. But their failure would have done something else. It would have created at least a generation of investors who would never put money in money market funds again and would have led to the creation of alternate and more robust alternatives - perhaps, analogous funds which would be able to "bust the buck," perhaps investment vehicles which would permit sponsors to restrict withdrawals under certain circumstances. I am not sure that we have put in place the measures necessary to head off another set of "runs" and when the financial system gets "the runs" we could have another crisis on our hands. Again, it is a short book and this topic can probably be explored elsewhere. It should definitely not be neglected.
This is a very worthwhile read and a very helpful review of Fed policy and strategy. As noted above, I am a "Bernanke fan" and I am probably biased. But I think that this book should also be read by skeptics and critics of current Fed policy so that they can be sure that they understand what they are opposing. More importantly for many of us, it is very valuable in providing insight into the future direction of Federal Reserve activity which, in turn, has an enormous impact upon various investment strategies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
