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

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.

Comments

[Moon Kil Woong:]

The new Fed chiefs think of themselves as supermen which all others must pay homage to and aren't allowed to question them nor understand or judge them even according to accounting standards. We are little people unable to control or make our own destinies. How is this different than fudalism?

Aug 15 11:39 AM

[Michael Clark:]

Addiction to celebrity. People on tv are superior to the rest of us. Ben Bernanke is on tv. Therefore, Ben Bernanke must be superior to the rest of us.

We should have expected this. I remember John McPhee wrote a book in the 1970's, Rising From the Plains, and in it he spoke of the difference of traveling in Europe where the largest most impressive buildings in EVERY town he visited was a church, most from the middle ages, most built over many years -- and he compared that to American towns he visited where nearly all the largest buildings were banks.

I'm afraid it says something about the depth of our culture. (I, in fact, am quite optimistic that, like Rome, we will pass through our empire stage, re-emerging in the historical scene, after a period of obscuration -- Dark Ages -- as a new-born culture, much like Europe in 1200, looking ahead to a renaissance and all the stages of culture building that Europe and other pre-civilizations have passed through.

The God of the Jews (emblem of the Laws of Nature) is not a big fan of those self-appointed High Priests who oppress the poor.

Behold, I will send my messenger, and he shall prepare the way for me; and the Lord, whom ye seek, shall suddenly come to his temple, even the Angel of the Covenant, whom ye delight in; behold, he shall come, siath the Lord of Hosts. But who may abide the Day of His coming? And who shall stand when He appeareth? For He is like a refiner’s fire, and like fuller’s soap: and He shall sit as a refiner and purifier of silver; and He shall purify the Sons of Levi, and purge them as gold and silver, that they may offer unto the Lord an offering in righteousness. Then shall the offering of Judah and Jerusalem be pleasant unto the Lord, as in the days of old, and as in former years. And I will come near to you to judgment; and I will be a swift witness against the sorcerers, and against adulterers, and against perjurers, and against those that oppress wage-earners, widows, orphans, and who rob foreigners of their rights, and fear me not, saith the Lord of Hosts.

Aug 15 11:40 AM

[Pat Shuff:]

Whatever it took it's the gift that keeps on giving and the thought that counts. As Stalin quipped, if issuing notes were casted votes, what matters most is who's doing the counting. Tally-ho.

Facetiousness aside it can't an enviable experience to be thrust out there on a wing and a prayer, buffeting about in the rotor wash of unprecedented turbulent events, noticeably aging prematurely.

Aug 15 03:11 PM

[spqrusa:]

Please don't act surprised. The central bank model we follow today is part of the larger banking cartel that has controlled money supplies for a very long time. The last few centuries have been a battle over private money supply control versus elected official money supply control and fiat econometrics over gold standards. Now with all the world currencies floating in a fantasy fiat ocean - we are left to the whims of central bankers. I don't propose we return to a gold standard - it is not an accurate measure of wealth or productivity. I am sure we would feel better about having elected people control the money supply, but history proves that elected official control of the money supply is even more disastrous. Can you imaging Barney Frank in control of the money presses? That would give a whole new meaning to Franking privileges.

The reality is that we will all pay as the Fed and other central banks play fancy with the inflation figures and money supplies in order to keep the rotting edifice from toppling over. In effect, they will steal from our children and our pocket books to pay for gross malfeasance. But, this isn't the first time I've had to pay-up for someone else's failings. Nor is it unfair. We all win with cheap money availability, but we cry when we have to pay an inflation tax to sober-up our party. Long live the Fed.

Aug 15 03:34 PM

[storm999:]

Whatever Bernanke's role, Greenspan was in charge and led the fed in its belief that deregulated markets and self-regulation were best. It was Greenspan who said the Fed could not oversee derivatives contracts. Now, he has said he was wrong and the banks beggared themselves. Bernanke et al. also know this.

What concerns me is instead of reinstating Glass-Steagall and breaking up the big banks, they shuffle around ideas of how to created a super regulator to monitor these too big to fail insitutuions. It only took 8 years after the repeal of Glass-Steagall to wipe out our investment banking industry. If we don't put up firewalls, I think we will see another major universal banking crisis within ten years (assuming two years for complete recovery.) I say break 'em up.

Aug 15 04:56 PM

[CautiousInv...:]

The problems we are dealing with are the result of flawed monetary policies which allowed growth in the money supply to outpace economic activity. From December, 2000 to December, 2006 M2 expanded around 34% while, during the same period, GDP expnaded 43%.

Conventional measures of inflation did not detect inflationary imbalances simply because much of the excess liquidity was finding its way into domestic and global equities and the stock of housing. Neither Greenspan nor Bernanke could forsee the consequences of their policies even as the world was imploding.

With this track record and much hubris and arrgogance, Bernanke is attempting fix the problem with what inspired the problem. Rather than allowing than allowing structural flaws in the economy unwind, Bernanke........after doing a number of things right.......is flooding the system with liquidity which has helped equities but which will not correct problems that are structural in nature such as the desire of consumers to save more and low capacity utilization.

Monetary policy is being driven by election cycles and is not in synch with economic cycles.

Aug 15 05:15 PM

[Ray Lopez:]

"The judgment on the efforts of Bernanke, Wessel contends, will come as the current situation works itself out. "

Good book review. Worthless book. The author, a WSJ journalist, does not take a stand as to whether, as John Taylor, W. Lee Hoskins, and other conservative economists suspect, the economy would have righted itself even if Bernanke had done 'nothing' (or rather, just ad hoc solutions as in Bear Stearns).

The author should have taken a stand--a radical stand IMO--and predicted something thought provoking. Otherwise he is just reporting events, and as such this is old news, or, he is just agreeing with the status quo that Bernanke is correct in his prescription.

Aug 15 05:20 PM

[Michael Clark:]

You think the first thing they would do is reinstate Glass-Stegall. Are they blind? Are they stupid? Don't they believe in cause and effect?

I agree. Break them up. Any company that's big enough to be a threat to our democracy (through financial size and influence and effect of potential failure or through the ability to coop the entire government through bribery and campaign contribution) has to be chopped down to size. We do it in our gardens all the time. It's called pruning. The goal in gardening is to regulate the plants so they are beautiful, orderly, and produce the best products for us. The goal is not to let every plant be free to grow wherever it wants and to allow the steeliest and most aggressive plants to overrun the garden (in the name of the free garden system). Cut them down to size; and manage the size of the plants. Pull up the poison plants by the roots -- they are weeds and they down give anything back but trouble.


On Aug 15 04:56 PM storm999 wrote:

> Whatever Bernanke's role, Greenspan was in charge and led the fed
> in its belief that deregulated markets and self-regulation were best.
> It was Greenspan who said the Fed could not oversee derivatives contracts.
> Now, he has said he was wrong and the banks beggared themselves.
> Bernanke et al. also know this.
>
> What concerns me is instead of reinstating Glass-Steagall and breaking
> up the big banks, they shuffle around ideas of how to created a super
> regulator to monitor these too big to fail insitutuions. It only
> took 8 years after the repeal of Glass-Steagall to wipe out our investment
> banking industry. If we don't put up firewalls, I think we will
> see another major universal banking crisis within ten years (assuming
> two years for complete recovery.) I say break 'em up.

Aug 16 01:21 AM

[Ferdinand E...:]

I had to shake my head when Alan Greenspan was appointed to the Fed. As far as I knew the only thing he had going for him was that he had been a good jazz musician and a Republican. He knows some economics, though probably not enough to fit in Bernanke's watch pocket.

Bernanke is a star, which means that he understands the kind and extent of macro theory needed to be a top central banker, especially in these ugly times. That might be the problem with him, because he knows enough to help the present government pull the country out of the trouble that George W. got us into.

As far as I'm concerned he's doing great. And he'll have to do great, because cap-and-trade is economic nonsense, and I am afraid - terrified actually - that the president is moving too fast on this health care thing.

Aug 16 09:14 AM

[kmf:]

Right on. The Banks have such power today that Bernanke and Geithner are being fought tooth and nail on any changes that would help the "too big to fail" problem. We should not allow any institution to form or exist that is "too big to fail".



On Aug 15 04:56 PM storm999 wrote:

> Whatever Bernanke's role, Greenspan was in charge and led the fed
> in its belief that deregulated markets and self-regulation were best.
> It was Greenspan who said the Fed could not oversee derivatives contracts.
> Now, he has said he was wrong and the banks beggared themselves.
> Bernanke et al. also know this.
>
> What concerns me is instead of reinstating Glass-Steagall and breaking
> up the big banks, they shuffle around ideas of how to created a super
> regulator to monitor these too big to fail insitutuions. It only
> took 8 years after the repeal of Glass-Steagall to wipe out our investment
> banking industry. If we don't put up firewalls, I think we will
> see another major universal banking crisis within ten years (assuming
> two years for complete recovery.) I say break 'em up.

Aug 16 09:34 AM

[American in...:]

Bernanke's actions prevented the collapse of the global financial system. That's not an exaggeration.

He studies on the importance of net worth in determining the abilty to borrow and the impact of deflation on the real debt burden during the 1930s made him the ideal candidate to handle this crisis.

Aug 16 10:21 AM

[secmaven:]

And what happens if politics rules and Ben is replaced by Larry come January 1st?

Aug 16 10:45 AM

[John Lounsbury:]

Prof. Banks - - -

A economics professor acquaintance of mine, now deceased, had a nickname for Greenspan when he was appointed in the '80s: "Greenhorn". My professor friend told me Greenspan was a narrowly focused ideologue who had limited understanding of economic principles. He said we had gone from the best Fed chairman ever (Volcker) to one he predicted would be the worst. For the ensuing 17 years I dismissed this opinion. My professor friend died in late 1997. I recall that earlier that year he had told me he still felt Greenspan didn't know what he was doing.

My professor friend was a specialist in Money and Banking. There was a reason why I didn't pay more attention, though. As with all sons, fatherly advice and opinion is undervalued - my professor friend was my father, Raymond H. Lounsbury.


On Aug 16 09:14 AM Ferdinand E. Banks wrote:

> I had to shake my head when Alan Greenspan was appointed to the Fed.
> As far as I knew the only thing he had going for him was that he
> had been a good jazz musician and a Republican. He knows some economics,
> though probably not enough to fit in Bernanke's watch pocket.
>
> Bernanke is a star, which means that he understands the kind and
> extent of macro theory needed to be a top central banker, especially
> in these ugly times. That might be the problem with him, because
> he knows enough to help the present government pull the country out
> of the trouble that George W. got us into.
>
> As far as I'm concerned he's doing great. And he'll have to do great,
> because cap-and-trade is economic nonsense, and I am afraid - terrified
> actually - that the president is moving too fast on this health care
> thing.

Aug 16 02:06 PM

[flow5:]

Bernanke is a genius. In contradistincion to the pundits, Bernanke targeted inflation. That's the Fed's mandate, inflation (not employment). And any monetarist would say that he did a splendid job.

Aug 16 02:14 PM

[inexperienced:]

I don't know,what part of toxic don't these people understand?
The Fed's an evil cancer it should be cut off.

Aug 16 04:15 PM

[Big Bubbette:]

Anyone ever play button, button who has the button? Reinstate the Glass-Steagall Act, get rid of mark to market and pass HR 1207 to audit the Federal Reserve. It is time to talk to the man behind the curtain.


"Why Mark-To-Market Accounting Rules Must Die

We have been accused of beating a dead horse when it comes to our support for either suspension of, or targeted relief from, market-to-market accounting.

And we suppose after writing thousands of words, producing videos and giving speeches about the issue, some might be tempted to let it go. But we can't do that, especially when the government continues to spend trillions of dollars and is coming very close to bank nationalization.

This is a real shame. Suspending mark-to-market accounting could fix major problems at no cost. Unfortunately, many people dismiss this issue without really understanding its impact on the economy.

We are economists, not accountants or bank analysts. We really don't think a debate about how big the housing bubble was, or whether a certain bank is viable or not, is worthwhile when it comes to accounting rules. That misses the point. Mark-to-market accounting rules affect the economy and amplify financial market problems.

The history seems clear. Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.

Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.

Two things are absolutely essential when fixing financial market problems: time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away.

Because these accounting rules force banks to write off losses before they even happen, we lose time. This happens because markets are forward looking. For example, the price of many securitized mortgage pools is well below their value, based on cash flows. In other words, the market is pricing in more losses than have actually, or may ever, occur. The accounting rules force banks to take artificial hits to capital without reference to the actual performance of loans.

And this affects growth. By wiping out capital, so-called "fair value" accounting rules undermine the banking system, increase the odds of asset fire sales and make markets even less liquid. As this happened in 2008, investment banks failed, and the government proposed bailouts. This drove prices down even further, which hurt the economy. And now as growth suffers, bad loans multiply. It's a vicious downward spiral.

In the 1980s and 1990s, there were at least as many, and probably more, bad loans in the banking system as a share of the economy. The difference was that there was no mark-to-market accounting. This gave banks time to work through the problems. At the same time, the U.S. cut marginal tax rates and raised interest rates, which helped lift economic growth. Time and growth allowed those major banking problems to be absorbed, even though roughly 3,000 banks failed, without creating an economic catastrophe.

In Japan, during the 1990s, the government allowed banks to operate without ever recognizing bad loans, which certainly bought time. However, Japan increased taxes and ran an excessively tight monetary policy, which undermined growth. This created an economic disaster. The real problem with Japan was not zombie banks; it was that there was no growth. After all, foreign banks were allowed to lend in Japan and were not in bad shape like the Japanese banks. They stayed away from Japan because the economy was not vibrant.

A final example: In the 1930s, because mark-to-market accounting existed, we limited the amount of time available to fix problems. At the same time, the U.S. raised taxes, increased spending and economic interference, and became protectionist. This hurt growth. The reason the Great Depression was so bad is that we took away time and growth.

Anyone worried about repeating the errors of Japan in the 1990s or the U.S. in the 1930s should focus on the policies that impeded recovery. Suspending mark-to-market accounting is a cost-free way to buy time. It does not allow banks to sweep bad loans under the rug. Bad loans are still bad loans, and banks cannot hide from them. Not suspending it, while at the same time interfering in the economy with massive stimulus and bank nationalization, is a recipe to undermine both time and growth and therefore hurt the economy even more.

Brian S. Wesbury is chief economist, and Robert Stein senior economist, at First Trust Advisors in Lisle, Ill. They write a weekly column for Forbes."

www.forbes.com/2009/02...

"...That’s exactly right. American banks that have received billions in bailout funds, including Citigroup Inc, Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co, are considering buying toxic assets to be sold by rivals under the Treasury’s trillion dollar plan (and Bank of America - another big bailout recipient - is buying toxic assets as well).

The amount of toxic assets isn’t going to be meaningfully reduced - the assets will just be shuffled from one bailout buddy to another.

But the government is guaranteeing 85% of the value of the toxic assets.

So the taxpayers (who anteed up for the bailout funds which the banks are now using to purchase the assets) will again pick up the tab when the assets turn out to not be worth as much as the banks are paying for them.

But why would the banks overpay for the other guy’s toxic assets?...

If all of the big banks holding the lion’s share of toxic assets (about 5 banks, as discussed below) have a gentleman’s agreement to overpay for the other guy’s toxic assets, then they will end up in the same position as if they had all paid fair market value. You overpay for mine, I’ll overpay for yours . . .

But since they can then say that they naively overvalued the assets, the government will pay them back for their “losses”.

Get it?"

justgetthere.us/blog/a...

We the People get the debt, banks get bonuses.

Aug 16 05:02 PM

[Big Bubbette:]

We are finding that banks, such as B of A have placed liens on properties, but they are not doing anything to go to the foreclose sale. When you call the agency listed as handling the foreclosure sale we are told that the bank has suspended foreclosure on this property, check back in with them in four months or so. Given the post above it raises questions about what this policy means and why the banks are holding these properties. Some of it can be explained by the vast number of foreclosures, but I suspect that ultimately there are business reasons at the bottom of this policy.

Maybe someone with a better financial background can explain, but once foreclosed the banks must finally account for the loss at a real value. A cynic may say it is a timing issue so the banks can pass that 85% to the taxpayer.

Aug 16 05:37 PM

[BRUCE E. W.:]

Why is the reference growing daily to the Panic of the Great Depression? This is 2009 not 1920. It seems this is both a distraction and a device to legitimate monetary doctrines. Banks are going down like clockwork because these monetary policies have created helium baloons in a false economy and the now captured Fed continues to throw more fuel onto a raging fire. This is a result of strategies that started in 1970-80s with computational debt instruments that bundled junk into massive profiteering schemes which proliferated into a spoke wheel of market baloons and bubble inflated rafts for a Titanic driven economy. It becomes a cycle of crisis and restructuring under Chicago syndicate style economic policies and supply side real politik. Stop looking to 1920 and start looking over your shoulder to the more recent decade histories of corporate raiding and hostile sequences of acquisitions by default. These incindiary prctices at the oligarchic level of finance are serving a direct agenda of interests. The entire financial system has now , along with our economic asset foundations, been TURNED INTO ONE GIANT DERIVATIVE. Once you see that as the prototype and model you realize it is a massive hostile takeover strategy and private equity is into the Trenches while Big Entrenched money is simply stalking new prey. Good luck with your neoclassic analysis. We've all been duped by the people who believe they're the smartest people on the planet and are looking to rule the world. For them, the end justifies the means and they will certainly weather out the ongoing and upcoming economic storms in luxury and vain contempt for the rest of us. In fact, it will come to justify more "National Security" measures in place of Social Security and wasteful legacy entitlements LIKE YOUR RETIREMENT! Because "Something is Happening Here, but you don't know what it is...DO YOU...MR. JONES?"
Aug 16 09:57 am |Rating: 0 0

Aug 16 08:55 PM

[Fred Voetsch:]

"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."

This says it all. We have been building too high with little foundation and the pieces have long been in place for a catastrophe and we are only in the eye of the storm.

Aug 17 02:29 PM

[Brian Bober:]

Thanks for the book overview. Ten years ago I read a similar book that was written over 20 years ago called "Secrets of the Temple, How the Federal Reserve Runs the Country". It is a great book until about page 500 when it starts to turn a little too editorial for my tastes.

Your point - how can one man's opinions wield trillions of taxpayer dollars - seems so apparent that I'm baffled why so little is being done about it.

Aug 18 03:17 PM