Ben Bernanke’s new book is a must-read, which is to say it will be read only by those of us who must, of whom there are more than a few, which is the only possible explanation for our friends at Norton’s having had the chutzpah to hang a $35 price tag on it.
It is called The Courage to Act, and it follows Scott Walker’s Unintimidated and Robert Gates’s Duty in the unseemly tradition of self-important (and important) men writing books more or less titled Me and My Virtue. Ulysses S. Grant killed more men than cancer and saved the Republic from internal treachery while on a 40-year whiskey bender, and he called his personal memoirs “The Personal Memoirs of Ulysses S. Grant.” That was a work of art. The text of Mr. Bernanke’s memoir consists of 579 pages of score-settling and occasionally insipid self-justification featuring sentences such as “The OTS, AIG’s nominal regulator, showed little concern about the riskiness or opacity of AIG FP.” It is dreadful stuff, and you really should not read it unless you are somehow obliged to or are being paid.
About that title: How much courage did it actually take for Ben Bernanke, chairman of the Federal Reserve during the great financial crisis of 2008–09, to act? All of his peers wanted him to act. The president wanted him to act. Congress wanted him to act. The country wanted him to act. Many of those interested parties ended up not being entirely keen on the actions he took — namely the bailouts — but the cry for somebody to do something was, let us recall, quite general, from the New York Times to National Review. Bernanke’s courage in overseeing the diversion of billions of dollars of public funds to financial institutions in order to keep them from collapsing under the weight of their own error has not much been in question. The debate has been about the prudence of his actions. In retrospect, the actions he took (and the ones he failed to take) must in the light of the evidence be judged insufficient or erroneous.
Without relitigating the Troubled Asset Relief Program and ancillary actions born of the same impulse, we may admit that conservative bailout accommodationists were correct when they argued (in these pages and elsewhere) that as a practical matter in 2008 we did not face a choice between a Bush-Bernanke bailout and a strictly libertarian “let markets work” approach, but rather a choice between a Bush-Bernanke bailout and a Pelosi-Reid bailout, or possibly a Pelosi-Reid-Obama bailout some months later. We are, vexatious as it is to write the words, probably lucky that George W. Bush had the courage to act knowing the likely political consequences of sending a get-well card to Wall Street with $1.2 trillion tucked into it. Let us recall that the Senate was at that time under the management of Harry Reid, Richard Durbin, and Chuck Schumer, and that Barack Obama was waiting in the wings. Bernanke is a man of intellect and probity, and there were ideas considerably worse floating around at the time than his efforts, extraordinary as they were, to bring some stability to the financial markets.
The problem is, he failed.
The large, systemically significant financial firms today are larger than they were in the lead-up to the financial crisis (“Even Too Bigger to Fail,” as Businessweek put it) and the Dodd-Frank reform bill, larded (through the efforts of Elizabeth Warren) with progressive priorities unrelated to the issue of systemic risk, has not moved the country toward a more effective approach to financial complexity. The time bombs that are Fannie Mae and Freddie Mac were not defused: Fannie Mae’s assets now stand at $3.25 trillion, and Bernanke’s colleagues at the St. Louis Fed in 2010 hosted a presentation on government-sponsored enterprises (GSEs) titled — this isn’t subtle — “Guaranteed to Fail.”
Bernanke knows this, because he was there when Treasury Secretary Hank Paulson proposed a sweeping simplification of our approach to financial regulation. The Obama administration rejected that in favor of the incrementalism and regulatory metastasis of Dodd-Frank, and Bernanke more or less went along with it. He discusses these issues at some length in a chapter titled “Building a New Financial System,” which is of course what we did not do. He calls Dodd-Frank “a remarkable accomplishment” in the course of proving to the reader just how unremarkable it is. But Bernanke seems to have had something of a change of heart; he was plainly wounded by conservative and Republican criticism of his efforts, and he bemoans the fickleness of “Jekyll and Hyde” politicians. He describes Ron Paul and Bernie Sanders as exhibiting “a refreshing purity . . . unaffected by real-world complexities.” He is quite gentle with such sacred cattle as Barack Obama and Elizabeth Warren.
Bernanke is a scholar of the Great Depression, and the Fed’s failures in that crisis haunt him. As Milton Friedman and Anna Schwartz argued in A Monetary History of the United States, the Fed helped turn a simple stock-market crash (which is to say, the deflation of an asset bubble) into the Great Depression by failing to perform its function as lender of last resort; as banks failed, the Fed stood mutely by and did more or less nothing, which resulted in a sudden constriction in the money supply. Recession became depression. Speaking at a birthday party for Professor Friedman, Bernanke said: “Regarding the Great Depression — you’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” Much mischief came out of the Great Depression, and the worst of it (after all the human misery) is the belief that free markets are inherently unstable and require political discipline. The same erroneous lesson has been drawn from the financial crisis.
What Bernanke and others of his confession fail to realize is that in a sufficiently complex economic environment, regulation makes markets less predictable rather than more predictable. A great deal of structured finance exists solely or mainly as a reaction to regulation. Hank Paulson’s vision of a simplified regulatory approach based on a Hayekian model of consistent and generally applied principles presented us with an opportunity to move in the direction of transparency and predictability; instead, we got — well, I met a Wall Street lawyer a few years back who boasted that he was going to christen his new yacht the Dodd-Frank.
Bernanke, then, isn’t so much a general fighting the last war but one fighting the war before that — the one that Fed chairman Eugene Meyer lost back in the 1930s. Preventing a total collapse in the credit markets was the right thing to do, but the way in which it was done introduced a large element of new uncertainty into the markets. Bernanke does not seem to have much of an appreciation for his precedent-setting. We have public-sector pension plans that are underfunded by trillions of dollars, and when they come around to Uncle Stupid looking for a bailout, they are going to cite the Wall Street precedent. There is about $1 trillion in outstanding U.S. credit-card debt, much of it securitized and sitting on the balance sheets of financial institutions. There is an even larger pile of student-loan debt, accompanied by a half-witted political movement that encourages defaulting on these loans as part of a campaign to have them discharged entirely. These, too, are potentially systemic risks — and they have been exacerbated by the ad-hocracy of Bernanke’s tenure — but they are not very much on the mind of the former Fed chairman.
There are some entertaining insights in his book. Bernanke recounts going into a meeting with congressional bosses, Judd Gregg wearing a tuxedo and Barney Frank looking like he’d just rolled out of bed. When Bernanke informed the assembled worthies that the Fed was going to lend AIG some $85 billion in the hopes of forestalling further disruption, Representative Frank demanded to know where the Fed was going to get that kind of cash. Bernanke explained — to the chairman of the House Financial Services Committee — that the Fed had about $800 billion at its disposal. This came as news to the chairman of the House Financial Services Committee. That’s the kind of leadership we have, and have had.
“The Fed’s understanding and conduct of monetary policy itself changed considerably during my chairmanship,” Bernanke writes. “The Fed and other central banks demonstrated that monetary policy can still support economic growth even after short-term rates fall close to zero. The tools we developed, including large-scale securities purchases and communication about the expected path of monetary policy, likely will go back on the shelf when the economy returns to normal.” That isn’t very likely, in fact. Emergency powers are rarely if ever relinquished quickly, easily, or indeed voluntarily. Politicians like power and, thanks in no small part to the efforts of Bernanke, the chairman of the Fed is very much a politician. How and when and to what ends those new tools will be used is unknown and unknowable, and that, too, is Bernanke’s legacy: His management of the last financial crisis may very well have planted the seed of the next.