Monday, December 21, 2009

In Federal Reserve We Trust -- too much?

David Wessel had a ring side seat on the credit and housing boom and the subsequent financial bust while working as a reporter and economics editor for the Wall Street Journal. He's got a book length account of it all out as In Fed We Trust. The subtitles tell more about the volume: "Ben Bernanke's War on the Great Panic" and "How the Federal Reserve Became the Fourth Branch of Government."

Like the other journalistic books on the crash that I've been reading (links at end of post), Wessel makes intrinsically drab subjects like balance sheet acrobatics into gripping stories by treating the individuals involved as complex characters, sometimes myopic, sometimes heroic. In this one, the scholarly Federal Reserve Chairman, Ben Bernanke, is The Man, doing "whatever it takes" to save the financial system from its own excesses. All the leading figures, Bernanke, Secretary of the Treasury Henry Paulson, and New York Federal Reserve President Tim Geithner come off as hard working, well-meaning public servants. (This is true of most books in this genre; come on writers, there must have been some stupid ones and some grasping ones.)

Sometimes Wessel's metaphors that make the subject approachable verge on too cute. Here's a sample:

The Federal Open Market Commission had a passing resemblance to high school. There were the cool guys, the jocks and the geeks. Bernanke, Don Kohn, Tim Geithner, and Kevin Warsh fell into the first category, the cool ones. The jocks were regional Fed bank presidents determined to show their manhood by talking tough about inflation and economic rectitude... . The geeks included monetary policy scholars who shared Bernanke's view of the world. ... And then there were the wannabes ...

Perhaps I recoil from this style of description because I might stumble into it myself on a bad day. I guess I should again credit Wessel for making these men whose work is so remote from what most of us do a little more human.

But however human they are, something awful happened under their tutelage of the economy. I find it notable that Wessel's language for his overarching subject is "Great Panic" -- not Great Recession or Depression 2.0 as some have suggested. Because his subject is the Fed, Wessel's subjects seem far too oblivious to the fact that a failing Lehman Brothers investment operation mattered a heck of a lot more to the 401k investor who lost a nest egg than to the millionaires who ran the company -- and who are the social counterparts of Wessel's characters. In recent months, the same figures seem to being trying to tell the country that the crisis (a panic?) is over, while for most of us, the worst is actually right now with over 10 percent unemployment and no real vision of how an economy that works poorly for the majority can start humming again.

Wessel knows his picture is missing something. He concludes with this take on the contradiction:

Fed officials and sympathetic academics frame the question reasonably but narrowly: How well did Bernanke and his fellow Musketeers do, given the information and authority they had at the time? To nearly everyone else, outcomes matter, not intentions. It may be said with substantial accuracy, that after some initial hesitation, Ben Bernanke and his team did all they could to defeat the Great Panic. But if the ultimate result is years of painfully slow economic growth and widespread unemployment, they will be judged by many Americans to have failed. Earning an A for effort is not enough.

There's one of those high school metaphors again.

This is a good book, an accessible account of events that most of us figure we can't understand. I'd rank it less enlightening than Gillian Tett's Fools Gold, but easier to read. Right now I'm ripping through Andrew Ross Sorkin's Too Big to Fail, so readers here can expect more commentary on the financial-follies-journalism genre.

Previous posts in this series examine Justin Fox's Myth of the Rational Market, and Liaquat Ahamad's history, Lords of Finance.


Kay Dennison said...

Why do you think Ron Paul of Texas introduced an "Audit the Fed" bill? It has passed the house and is now in the Senate. The Fed has never been audited. I think it's high time that happens.

Jr Deputy Accountant said...

When I first read a review of Wessel's book, I thought it was one more "Ben Bernanke is a hero" fluff piece meant to coddle the masses and almost immediately dismissed it.

But then I actually read the book and I have to say I wasn't disappointed at all. It's still a bit of a fluff piece but overall it was well done.

In regards to Kay's comment, that is incorrect. The Federal Reserve is audited by the GAO and each regional bank publishes an annual report just like any other publicly traded company. You can even request the reports via their individual websites. So that piece of misinformation needs to stop as it actually harms Dr Paul's movement to perform a FULL and COMPREHENSIVE audit of the Fed.

So you want to audit the Fed but why?

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