In Fed We Trust: Ben Bernanke's War on the Great Panic, by David Wessel

by: John M. Mason

The book, “In Fed We Trust: Ben Bernanke’s War on the Great Panic” by David Wessel, is a well-written, easy to read book by a very knowledgeable author, the economics editor of the Wall Street Journal, with a devastating theme.

The title tells it all!

In theological terms, according to the title, we have substituted the Federal Reserve for God and we now worship the high priest of the Fed, Ben Bernanke. We have made Ben Bernanke into an idol, or, in the words of the theologian Paul Tillich, Ben Bernanke has become our “ultimate concern”.

The narrative Wessel presents is the transformation of Ben Bernanke from academic star interested in establishing monetary rules, specifically an inflation rule, as a guideline for economic policy, into a cult figure that dominates the scene. It is the transformation of a person who wanted to get away from the “Rock Star” cult status that was achieved by Alan Greenspan and re-establish a Federal Reserve that was based on firm economic analysis.

What happened?

With all the personnel changes that came to Washington, D. C. with the Obama administration, one face remained in place: that of Ben Bernanke. What does Wessel make of this?

“In fact, the only top-tier economic actor whose job title hadn’t changed was Bernanke himself. But, Bernanke had changed in one very visible way. The man who arrived at the Fed determined to be the un-Greenspan was going beyond anything Greenspan ever did to raise his public profile and establish himself as the symbol and voice of the Fed.”

Bernanke, as described by Wessel, marched in step with Greenspan during his three years as a Governor of the Federal Reserve from 2002 into 2005. He feared deflation when Greenspan feared deflation, he supported excessively low interest rates in the 2002-2005 period when Greenspan advocated very low interest rates, and he said that the Fed could do nothing about the credit bubble and the credit inflation that was fueled by the Fed at this time, just like Greenspan.

Bernanke also provided an intellectual foundation to the positions taken by Greenspan, something that Greenspan could not do for himself. Greenspan achieved his imposing position because of his style of debate. Greenspan really worked from no real economic model or conceptual scheme. But he was very detail orientated and would focus on some arcane piece of information and dominate others because of the fact that these other people had not noticed the importance of this piece of information. This, of course, meant that they were not on top of things and could not build up an argument to contradict him.

Bernanke provided substance. And the articles and speeches he wrote during this time are referred to over and over again.

However, Bernanke followed Greenspan into the Chairmanship. Bernanke wanted to establish a monetary rule, inflation targeting, into the Fed’s way of operating. Although Bernanke was an academic specialist in the study of the Great Depression, the policy concerns he dealt with his whole professional career had to do with how central banks controlled inflation, since inflation was, everywhere in every place at every time, a monetary phenomenon.

Bernanke faced another enemy: he got what Wessel calls “The Great Panic”. Bernanke got to deal with the financial collapse and economic recession that began in 2007. How did he (and the other players on the scene, especially Hank Paulson and Tim Geithner) react to this opportunity?

They reacted badly. Wessel tells story after story leading up until September 2008 in which he ends the story with words like: “It was a good idea; it wouldn’t prove sufficient;” or, “That, too, would prove a widely overoptimistic assessment.” In essence, before September 2008, Bernanke (and the other players on the scene, especially Hank Paulson and Tim Geithner) were behind the curve. That is, they missed the show responding with too little, too late to do much good.

I am not concentrating on the individual situations dealt with in this history of the Great Panic. Wessel only uses these incidents to reinforce his story. The bottom line is that no one, Bernanke, Paulson, Geithner, or anyone else, had any real idea or real plan of what to do in the circumstances in which they found themselves. Everything they did was arbitrary.

And what did they end up doing? They ended up throwing just about everything, including the kitchen sink, at the problem. How did this change things? Well, Wessel divides things into before September 2008 and after September 2008. Before, the “team” was behind the curve; after they were not going to be caught short. The mantra Wessel uses over and over again through the last part of the book is “Whatever it takes!” That is, if an error is to be made, it is going to be on the side of doing too much rather than doing too little. Wessel repeats this mantra at least 25 times as he discusses the “After September” responses of the “team”.

Through this all, Bernanke reached “cult status” as the leader of the “temple.” With no plan, it all became personality.

Has Bernanke (and others) been successful in the efforts?

Wessel is not ready to commit yet. When the Rock-Star Alan Greenspan left the Fed, he retired with almost the whole world in awe of him. He was a savior. Yet, the growing assessment is that through his leadership at the Fed, Greenspan created the conditions for the Great Panic that was to follow. Greenspan, not having a plan, left chaos.

The judgment on the efforts of Bernanke, Wessel contends, will come as the current situation works itself out. The scary thing is that Bernanke has replaced Greenspan on the pedestal. Bernanke, whether he wanted it or not, has gone “beyond anything Greenspan ever did to raise his public profile and establish himself as the symbol and voice of the Fed.” The final chapter has not been written.

The concern is that there is no exit plan. Will Bernanke’s legacy be the same as Greenspan’s: Chaos?

This book reminded me of one of the things the people who founded this country wanted to achieve. They wanted to build a country that was ruled by law and not ruled by men. In more modern terms we can say that they wanted a country that focused upon process and not upon the discretion of individuals. To me, Wessel’s message is that over the last 22 years, leaders in our country, the Chairmen of the Federal Reserve’s Board of Governors, have operated on an ad hoc basis and in so doing have created a fourth branch of this government, a branch ruled by arbitrary decree.

Maybe those in Congress and elsewhere should review some of the concerns raised by Wessel when it comes to giving the Fed more power when re-writing the map of the regulatory structure.