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Ben Bernanke - hero or traitor?
Book review: The Federal Reserve and the Financial CrisisUS Federal Reserve chief Ben Bernanke justifies his policy of money printing on a colossal scale. But only time will how successful he was, says Matthew Partridge.
Few central bankers have generated headlines like Ben Bernanke, who has headed the Federal Reserve, the US central bank, since 2006. Two years ago, Texas governor Rick Perry attacked his policies as "almost treacherous or treasonous". But he also has plenty of fans who believe that his actions in the wake of the financial crisis saved the US from a repeat of the Great Depression.
Time magazine even made him their Person of the Year in 2009. Until now, Bernanke has limited his pronouncements to public speeches, but this book is his attempt to reach a wider audience.
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The book is divided into four parts, each corresponding to specific lectures in a short series that he gave at George Washington University last year. The first two focus on explaining how the Federal Reserve works, the reasons why it was created in 1913 and its operations, particularly after World War II. The rest deals with what the Federal Reserve did during the crisis and Bernanke's views on the main risks and challenges that remain for him and his successors.
Given that Bernanke taught economics at Stanford, Princetown and New York universities, it's hard to find flaws with his analysis in the first two sections of the book. He firmly believes that the Federal Reserve has made a major contribution to American economic stability and, while it has its critics on both the left and the right, no one has yet come up with a credible alternative model.
Few people would dispute that its tough monetary stance during the 1980s, for example, helped, alongside falling energy prices, to end double-digit inflation. His analysis is helped by the fact that he writes in a clear and coherent way, making complicated monetary concepts pretty easy to grasp.
The second half of the book is much more contentious. He accepts that too many poor loans were made during the housing bubble in the 1990s and 2000s. But he also thinks the main problem when the crisis struck was a lack of confidence in banking liquidity (short-term cash flow, in effect), not a lack of solvency (the willingness and ability to actually repay a loan).
So, he argues that the Fed's liquidity injections did prevent the banking system from collapsing. But, as he admits, a central bank should normally demand good collateral and only lend at penal rates of interest. The consequences of throwing these rules out of the window are far from clear.
Bernanke justifies the Fed's massive interest rate cuts and quantitative easing by arguing that the Fed also had to act to rescue the economy. Overall, I'd say the jury is out on whether he succeeded or merely postponed the day of reckoning, while storing up bigger trouble when his policies are reversed.
The Federal Reserve and the Financial Crisis: Lectures by Ben S Bernanke. Princeton University Press, £13.95.
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