Customer Reviews

In Fed We Trust: Ben Bernanke's War on the Great Panic

5 star:		(23)
4 star:		(13)
3 star:		(10)
2 star:		(4)
1 star:		(7)

 

 

I am an academic economist doing research on the financial crisis. I read Wessel's book for details about the interventions by the Fed and Treasury in 2008 that I might not have encountered elsewhere. I was not expecting an academic treatise, and my negative review is not in any way related to the journalistic approach taken by the author.

Wessel is the economics editor at the Wall Street Journal and appears to have had a great deal of access to Bernanke and Geithner. His insider's perspective unfortunately produced very little insight. You can learn (p.115 AND p.192) that Bernanke used a "Polycom" speakerphone, but not that Hank Paulson and Richard Fuld were bitter rivals.

On a more substantive level, the book continually updates a "dashboard" with the Dow Jones average and the market cap of Citigroup. The success of each intervention is judged by the reaction of the stock market, generally within the day, to the policy. Does Wessel not remember that the Dow hit an all time high in October 2007, six months after subprime problems had emerged at Bear Stearns?

There is almost no discussion of the complex, leveraged financial instruments (e.g. CDOs and CDS) that amplified the crisis and made traditional monetary policy ineffective. A more thorough account would have also explored the regulatory failure of the Fed and federal government prior to the crisis.

On balance, the book is too narrow for someone just trying to go beyond the headlines and too superficial for those looking ahead to the next crisis.

This book is about how Ben Bernanke / The Fed battled against "The Great Panic" that besieged us. It reads like a fairly dry history of what transpired - kind of like a summary of what we've been watching on CNBC the last 2 years. Somehow Wessel took one of the most exciting moments in our current lives and made it almost bland and somewhat boring. Sure, there are some juicy facts but only after you get through more than half of the book. Overall, there is not much revealed that's earth-shattering if you kept abreast of what happened during this time. The book is at times choppy in motion and repetitive in content. I found that the first half of the book was a waste of my time -- the set-up the author felt necessary could have been presented much more succinctly. Example: there is a section within Bernanke's biographical chapter that details a prank he played on President Bush one day by coordinating the whole economic staff, along with even Dick Cheney, to wear tan socks as an inside joke among Bernanke and Bush. There are other strange off-topic insertions, like the curious offering that Donald Kohn, Fed Vice-Chair, lived in his son's basement for a while and that he used to ride his bike to work, parking his bike in the Fed garage that was reserved for its governors' cars. And that he liked to run up and down the stairs of the Fed building. Uh, huh.

The first inclination you have when you pick up this book is to dive in deep and fast to find out what went on in the minds of Bernanke, Paulson, and Geithner, among others. There must have been some amazing discussions, fraught with fear but Wessel never quite captures this for the reader to experience. Instead of providing a window into these men's thoughts / thought processes during this pivotal, riveting time, the book doesn't go far beyond merely reciting the actions they took, with some quotes from these men, scattered in as almost afterthoughts. [The footnote style is arguably incomplete with respect to some quotes.]

Overall disappointing. Wessels' cursory conclusions end up sounding rudimentary - likely attributable to what was probably a rush to publish and capitalize on the current curiosity-- which is understandable. But, there is still more to this subject. As of today's FOMC meeting, the Fed still hasn't started to unwind its actions. So, the book seems to be a bit early. Wessel even mentions that Hank Paulson is in the process of penning his own account of the economic crisis. Maybe Paulson will take us deeper into the minds of the big players during this frightful period, even if it is through his eyes, and not a third party's.

David Wessel says the Fed was bad when it didn't act or warn despite knowing calamity was at hand. He says their money-aggressiveness saved the financial sector, its leaders and preserved the bonus system. Salaries at the Fed are quite high and it is on a major hiring spree. This is the story of how power players quickly used trillions of public dollars to pay both winners and losers of the Great Derivatives Game.

According to Wessel, the raison d'être of the Fed is to regulate credit, to oversee fiat money - that if money were only Gold and Silver coin, we wouldn't have a central bank. The Fed uses Federal Reserve Notes as a substitute and that is the first key to understanding its power. That's how central banks got started, beginning in 17th century Britain.

We get historical background - the significance of the Panic of 1907 as well as The Great Depression in creating the Federal Reserve as it used to be. Then the book gets interesting starting when chairman Alan Greenspan became a celebrity and decisions were made that eventually helped lead to The Great Panic, with additional actors playing important roles.

The book indirectly leads to the conclusion that the Fed is the major beneficiary of the crisis, gaining powers to pour liquidity on the fire selectivity. Wessel calls the Fed the Fourth Branch of Government and warns it's not directly accountable to voters.

Wessel enumerates the people who created and benefited from what he calls "The Great Panic." He cites the Fed a 3-pronged contribution: keeping interest rates too low for too long; not using its regulatory powers; and Greenspan successfully advocating the view that markets self-regulate. He contends Greenspan believed the rich and powerful would keep the financial game going because they held such a strong interest in it. Greenspan later said in a type of admission that his world view was wrong.

The book gives the chronological order of the Fed's response to The Great Panic: it rescued Bear, not Lehman for lack of a Plan B when there was no buyer, the AIG fiasco and everything else. Wessel says the Fed, with its huge staff of PhD economists and insider connections, didn't understand AIG. Perhaps it is too disturbing to contemplate whether the Fed understood AIG's situation.

AIG had been doing unregulated derivative deals with major investment firms. Early in the previous administration, Congress drove through a law that forbade government to regulate derivatives. Before then, regulatory agencies weren't regulating derivatives, but the the financial industry feared the possibility of regulation. Then the derivatives game exploded, going from billions to hundreds of trillions - an absurd situation that made some people very rich, very quickly. Warren Buffett famously called derivatives "weapons of mass destruction." One might expect this to someday blow up, but public funds were not then expected to backstop those that couldn't pay up.

AIG derivatives traders wrote and sold losing derivatives. These derivatives matured years later. In return for taking the wrong side of the bet, they received cash up-front. Goldman Sachs and many investment banks from around the world bought into the scheme, which promised enormous returns that one could never get in a normal investment, but they had to pay AIG a fee for each contract.

AIG took the windfall cash receipts and paid them out as huge multi-million dollar bonuses. At the same time, the ratings agencies had no problem with AIG. We are told the Fed failed to understand that AIG would not have the money and that it would be of a magnitude beyond anything any corporation on earth could pay. Wessel seems overly diplomatic in his approach.

Due to the size of the matter and the possibility that government would not be able to contain the panic unless it took the position that it would not enforce unregulated derivative contracts, the Fed provided trillions quickly and without transparency. Taxpayer money immediately got routed through AIG and paid out to Goldman Sachs and others.

Time was of the essence and political leadership was lacking. The Fed moved decisively when the country was most exposed with a disengaged President at the end of his second term.

The book explains the political position of the Fed and Ben Bernanke, and the near inevitability of increased power residing in the Fed (Obama's plan) or conversely increasing transparency (Ron Paul's bill). The Fed is fighting against transparency. It even hired a former Enron employee as its lobbyist to Congress.

In Fed We Trust provides this lesson on how the Fed should respond to deflationary crises (panics): To save the country, you must save the existing financial system. To save the financial system, you can't help but bailout those sharing responsibility for the problem and you even utilize them to help fix the problem. It's unfair but Wessel warns against populist sentiments. Then you put better regulation in place. Further, you maintain foreign confidence in the Fed with special attention to China. This points to Ben Bernanke remaining in place to show continuity in both the Fed and the White House.

Surely Wessel has a point about not going overboard with populist sentiments. And we can't argue with the fact that without the Fed's supernumerary powers, our collapse could have become an immediate Depression unless the government had chosen not to enforce unregulated derivative contracts.

Quite apparently, something is terribly wrong. To end up debating how much power the Fed should have in the face of the favoritism it has shown demonstrates how far the nation has been knocked off course. Citizens need only visit a bank for a mortgage or business loan to verify that we are no beneficiaries of Fed largess. Soon there will be additional taxes to pay.

Bernanke is the hero of this story. It reads well and with a lot of quotes/paraphrases peppered throughout. This is a book about the personalities - usually government side - of the crisis and how Bernanke played the lead and central role. In a sense it is a complement to the more focused accounts such as the New Yorker piece 21 September 2009, Eight Days, or the October 2009 piece from Esquire, The Deal of the Century. Even Matt Taibbi's Rolling Stone updates can also be added into the mix to even the scales (good core comments even if sensational). And for historical perspective, despite being a little slow, Martin Meyer's The Fed is a good supplement.

If this is a fast, easy and enjoyable read, it is also one-sided in how it recreates many key events, often taking the side of the officials dealing with the blow-ups, and not showing much of what was going on over at the corporates. This is a book about key personalities and brings together great quotes and chronologies around meetings. It is not about the institutions. Something is missing on the institutions, if this is going to be a balanced account.

Yet also what it does not do with many of the personalities is find too many faults with other than the fall guy for everyone... If Paulson is shown up for his investment banker, short attention span mentality, then the Geithners of the story are left to be seen crisis solving without showing how some of their original Grand Canyon size oversights allowed the mess to balloon in the first place.

***

I did enjoy reading the book, though, following my disappointment reading Ben Bernanke's Fed: The Federal Reserve After Greenspan...And my other recent disappointments going back to Greenspan's biography, as well so many other Fed category books.

The book does achieve a lot, despite the drawbacks. David Wessel has done a good job weaving the key government side characters (and there notably at least 2-3 of the four musketeers, Bernanke, Geithner, Warsh and Kohn). Greenspan is discussed just enough (ie, not too much to waste our time re-hashing old material).

But I will fault the writer for key omissions - even if he was focusing on doing a good job on the core personalities for the book. There is just about nothing on Goldman...There are a few small case studies such as on Citi's failed attempt to get Wachovia. But on the Citi case study, we only get about a four page description. We don't get any insight into the crisis at Citi and dealing with Citi's blackhole balance sheet, which surely was one of the larger scenes of the crime, and thus the crisis (and a company that was saved instead of one that fell apart... we really don't get a picture here...and of course Rubin and others, especially given Rubin's purported long term role in getting Geithner in as a player....For more related stories, the range goes from stories such as The Washington Post, 25 November 2008, Familiar Trio at Heart of Citi Bailout...to Pro Publica, 14 January 2009, How Citigroup Unraveled Under Geithner's Watch).

Of course, we do get a customary description on key blow-ups Bear and Lehman, and a little on AIG (and yet..., where is the discussion on Bernanke and others, and the decision process on paying 100% on dollar to banks - SocGen, Deutsche, Goldman and others - holding certain AIG products that in any normal situation would at the very least warrant a significant haircut!).

We really do need to shift to the Esquire piece on JP Morgan's tussle with Barclays on handling Post-Lehman issues, and also the New Yorker piece on the Lehman breakdown...

The last section of the book also falls off quickly. There are a few very recent updates from mid-09 as the book likely went to press, which is misleading because we are expecting some higher level of detail for events in 1Q09, which just aren't there...

If I had to bet, a lot more Fed and Washington people were talked to for the book than Wall Street people. We also need a Martin Mayer (author of The Fed, 2001) approach or others to updating the Fed's pirouettes with more historical perspective. If we don't get more objective presentations from authors - we will have to keep reading blogs and occasional feature pieces like the Rolling Stone, New Yorker or Esquire accounts...

A good book for the color gained on key events. But the rose colored glasses have a strong tint and narrow vision.

IN FED WE TRUST, by David Wessel, in the third exceptional book I have read about the recent financial crisis. Unlike TOO BIG TO FAIL and STREET FIGHTERS, IN FED is a more analytical, non-chronological, intensely thoughtful analysis of events leading up to the crisis as well as the crisis itself. We also learn a good deal not only about Bernanke but his predecessor, Alan Greenspan, as well.

In addition, we learn a lot more about Timothy Geithner and Hank Paulson, the other two fascinating characters in this near-calamity.

Wessel is excellent at explaining the intricacies of the complicated, innovative--but ultimately poisonous--instruments that were partially to blame for the meltdown, as well as in translating "FedSpeak" so that the reader understands concepts like the Fed's discount window, how interest rates reverberate throughout the economy, and how there were fundamental changes in the very structure of our financial system that were difficult even for bankers, economists and the best-educated politicians to decipher. What the Chairman of the Fed doesn't say is sometimes as important as what he does say. Bernanke is under the microscope, and this book explains what kinds of pressures are involved in his job.

What I most appreciate about this book is that it does not endeavor to demonize any of the major participants. Wessel is for the most part sympathetic to the efforts and intentions of the major players, although he definitely pulls no punches when pointing out where mistakes were made. And there were plenty, to be sure. He eunerates them in considerable detail (including stupendous goofs by Greenspan).

As a reader, I came away the feeling this was a very balanced, thoughtful and fair book. It also avoids the tawdly sensationalism and hysterical finger-pointing that pockmarks some of the other analyses of what occurred. Nor does it feel rushed, the way Gasparino's SELLOUT feels, or that there is some intense axe to grind, as disturbs some other potentially valuable works on this subject. Unlike some other books, this one seems focused rather than sprawling, cohesive rather than needled together with thread to meet a publishing deadline.

This is an excellent book that strikes a nearly perfect balance between analysis and exposition. What it may lack in immediacy, it more than makes up for in depth.

It is an unfortunate sign of how enervated the Mainstream Media outlets have become that Wessel, in all probability, actually believes he is acting as a sort of iconoclast and that the title of the book is some sort of cutting irony. In reality, it is an exercise in abject sycophancy. Wessel's point is that while the Fed may have goofed, these are all honest and exceptionally gifted individuals running the show and that the real danger here lies in allowing the current troubles bring about a populist groundswell that would put the Geithners and Bernankes of this world (to say nothing of hyper-criminal Hank Paulson) under scrutiny, out of power, or (would that t were possible) in jail. This is transparent establishmentarian damage-control masquerading as criticism. It is truly sad that most commentators are even worse, allowing Wessel to believe that his meager shrinking quibbles constitute a bold and dignified protest. It is also sad that his establishmentarian rear-covering seems to come so instinctively that he has forgotten that he is doing it. Read this book only as an illustration of the self-preservation instinct of social elites.

Wessel wrote a panegyric and a paean to the "four musketeers" (Bernanke, Warsh, Geithner and Korn) led by Bernanke to do "whatever it takes" to rescue the economy from disaster. Bernanke, having diligently studied the causes of the Great Depression, did not want to repeat the severe error made by the Fed after '29, which, according to Friedman et al., converted what would have been a self-correcting recession, near depression, into a decade-long Great Depression by reducing the money supply and not rescuing the banks.

By all indications, Wessel had very good access to the people whose actions he is describing. If one writes a panegyric, this is almost always the case. There are plenty of appropriate, even delightful, quotes though the end noting is confusing and, with missing notes, totally inadequate for academic standards. The strength of his book is due to having had access as an insider would in spite of the fact that he shows some undergraduate values and sentiments in his characterizations of the major stars. Partially due to having had good access to the main stars, the book has a limited and narrow focus, namely the four musketeers coming to the rescue.

Wessel makes the case that the Fed has become the fourth branch of the government, presumably due to the current economic crisis. This needs qualification, since historically the Fed, though it was created as an independent agency not directly touchable by the politicians, has long ago lost its independence and can't act independently of the federal government if the federal budget deficit has exploded into the hundreds of billions in the last few decades, in particular during boom years, when even Keynes would not advocate a deficit! Once there is such a large deficit, the Fed has to react to conditions created in the economy by the deficits and, therefore, for all practical purposes has been a fourth branch for many decades.
Wessel provides a good summary of the background of the evolution of the Fed following the 1907 Panic and compares the panic with the economic crisis of 2008---and this is quite well done on pg. 32 with Sec. of the Treas. Cortelyou summoning J. P. Morgan v. Paulson summoning the CEOs of the nine largest banks.

He focuses on those who wanted more centralized control over the Fed v. those who resisted but he does not mentioned that Col. House, from Dallas, according to some economic historians, lobbied to have a district bank in his hometown for self-serving and unjustified reasons. More important, the bosses of J.P. Morgan, by the twenties, showed dangerous evidence of deserting analyzing the market and adjusting their policies according to market forces when they simply asked their assistants to go to the Fed and get them the latest money supply figures which then, in turn, were used as a basis for policy decisions---a questionable unintended result of having the Fed which has had enormous negative consequences ever since, in particular in the background of the current crisis. Parasitism emerges here which has been a major element ever since in the relations between corporations and the Fed and came to a high point before the current crisis and continues, unfortunately.

Before Wessel deals in chpt. 4 with Bernanke, he covers Greenspan in chpt. 3. He quite correctly says that Greenspan, an expert on house prices, knew that Americans treated their homes as ATMs. Also, Greenspan never expected house prices to decline and never used his powers to restrain subprime lending, though Wessel does not say that Greenspan actually encouraged the subprime mess and bragged about new methods of risk transfer and risk dispersion (read we pay the cost). While Wessel refers to subprime mortgage broker Mozilo of Countrywide he neglects Greenspan's friend Arnall of Ameriquest.

In later chapters, Wessel recounts the Gramlich-Greenspan disputes, the Taylor and Poole criticisms of Fed policy, the fact that the Bear Stearns problem prompted the Fed to create the TSLF, the Term Securities Lending Facility to exchange toxic stuff briefly for U.S. securities as well as, among other major developments, the use of Sec. 13(3) of the Fed Act citing "unusual and exigent" circumstances to bail out financial institutions, which historically was beyond the scope of the Fed's mandate. Wessel, on page 156 admits that "incestuousness" was obvious in Fed-Wall Street circles and that a kind of crony capitalism existed and that the duty of the Fed to be the guardian of the public interest, at times, was replaced by being more an advocate than overseer of Wall Street. Well, this is putting it rather mildly.

Having written a panegyric book, Wessel also praises Mishkin, among others, though none of his four musketeers and certainly not Bernanke himself, were known to have anticipated or warned of the economic crisis but actually in various actions or neglects contributed and helped caused it. They are culpable.

Mishkin, in fact, applauded the Icelandic economy though it was even more involved in irresponsible actions than the U.K. and suffered the most. Moreover, Wessel describes Bernanke as admiring King the head of the Bank of England which also allowed similar mischief in the London stock market as on Wall Street. In other words, those who correctly predicted and warned of the coming crisis are absent in this book and they include Hyman Mirsky, Allen Meltzer, Axel Weber, among others, and the BIS which Wessel sort of seems to fault unfairly as he does Europeans in general to whom he assigns far too much culpability either directly or indirectly. Surely, he knows about the massive fraud in the rating games.

Which leaves us with the crux of the issue. This book has lots of attractive information and give details about TALF (Term Asset- backed Securities Loan Facility) and the transformation of the Fed into its expanding role to be the bank not of last resort for commercial banks but the first resort, of sorts, for almost everything.

In this exploding role, Wessel should have told us far more than he did that this primarily benefits Wall Street and does most emphatically not benefit the people who bear the cost. In this sense, William Poole, whom Wessel faults unfairly, was right on the mark when he said in a speech at Truman State University just before he retired as head of the St. Louis District Bank, that the Fed should not just serve 5 percent of the people at the neglect of the other 95 percent, who, I may add, bear the ever increasing cost of living in an expanding slumerica that has the accumulated debris and shambles strewn from coast to coast of Wall Street's mischief and the Fed's faulty actions. Finally, Wessel's assumes, without any proof, that rescuing (and, maybe stimulating) the economy through Fed action is possible. Ultimately, this cannot be done. What can and is being done is to disperse the cost onto everyone and into the future.

I'm surprised at the many negative reviews this book has received. Granted, it is not the place to go if you are looking for details on how CDOs were constructed or the legal ramifications of financial firms setting up SIVs. That is not what Wessel set out to do. His intention was to provide a readable account of Fed decision making during the crisis. On this count, I think he does by far the best job that I know of. This book was first published nearly two years ago as I write this review and still no one else has managed to provide a better-informed account of what the Fed was doing during this critical period. Wessel clearly had access to Bernanke and company to a greater extent than any other journalist. So, if you are looking for a narrative of why and how Bernanke made the decisions he did during the financial crisis, ignore the negative reviews and read this book.

There are any number of insider anecdotes in this book that would make it well worth reading for those looking for supplementary information on what Mr. Wessell calls the Great Panic. However, I couldn't recommend it as a first, or certainly only, read on the financial events of the last couple of years, and I doubt the author intended it to be so. So that's fine. However, it is dry in parts, and the chronological focus on Bernanke/Paulson/Geithner sometimes leads to disassociation from the larger picture. And while the author does go out of his way to explain certain technical details, some of the concepts are inherently difficult for a book of this nature. Mr. Wessell is insightful on the Lehman bankruptcy, interesting on how Bear escaped, seemingly well-informed on the Wachovia sale, and IMO a bit weak on the scope of the AIG mess. He also goes somewhat easy on Fannie/Freddie and particularly their congressional allies, but, to be fair, the focus is on the Fed and Treasury. Whether this book is essential or not probably depends on your level of interest in how close we came to meltdown.

This book is fine as long as you're interested in a blow-by-blow account of the latest financial crisis and how major decision-makers dealt with it. What you won't find is much in the way of in-depth, or even shallow, background or analysis. This book would be well supplemented by another book (I'm sure several are in the pipeline by other authors) that provides such background and analysis.