Tuesday, November 3, 2009

In Fed We Trust: David Wessel

David Wessel is a journalist. Not an economic theorist, not a market participant, not a regulator or policy wonk. A journalist. In Fed We Trust is a piece of journalism, not of analysis. It is the story of everything the Fed did to combat the economic collapse over the last two years. Actions that led to the emergence of the Fed as the fourth branch of government as the sub-sub-title of the book calls it. But you would be disappointed if you go in expecting in-depth analysis of why Bernanke chose certain paths over others, or whether his actions were right or wrong based on everything that was known at that point, the prevailing view of macro-economists and regulators across the world. In Fed We Trust is a story of what Bernanke did, not why, or indeed whether it was the right thing to do. Which is both the book's big strength, and its most serious shortcoming.

The protagonist of this story is Ben Bernanke. Wessel paints us a great picture of the man, his origins, his worldview, and in particular, his heartfelt desire to be different from his predecessor. A desire to not be, as President Bush called Greenspan at the then-maestro's farewell party at the Fed, "a rock star". Wessel takes us on the journey of how Bernanke tried to bring his new vision into the Fed, how he stuck with it in the face of early setbacks, and how in the end, he looks more like the big G than he would ever have liked. Some of these early chapters, where Wessel introduces us to the personality of Greenspan, to Bernanke and to how different they really are, are among the most powerful parts of the book. In Fed We Trust is not a Bernanke greatest-hits album, but it certainly does treat him with considerable respect.

The story of In Fed We Trust starts in earnest in August 2007, with the mortgage bubble fizzling out, liquidity starting to dry up from capital markets worldwide, the Bernanke Fed making an early call to not take it very seriously, leaving interest rates untouched, and then BNP Paribas closing three of their funds for withdrawals due to their heavy mortgage exposure. From there, the book turns into a blow-by-blow account. Wessel follows every twist and turn in the market till the spring of 2009. He does so always from the point of view of the Fed. Not the President, not Congress, not even the Treasury department. Always the Fed.

With his Wall Street Journal credentials, Wessel has clearly had great access to sources inside the Fed and the Treasury. They generate some wonderfully memorable personal touches in the book. Like Bernanke getting overwhelmed by events of a particularly strenuous day and not having the energy to walk over to his hotel room, crashing instead in the couch in his office. Like how Paulson doesn't do email, and doesn't have a blackberry (He did phone calls. Frequently.) Like how Geithner uses the word 'dimension' as a verb, and how Fed presidents made jokes about that in his farewell party when he got nominated to be Treasury Secretary. Like how Bernanke, Paulson and Geithner were frustrated by FDIC Chairperson Shiela Bair, finding her 'stubborn and myopic' for her singular focus on the viability of the FDIC fund with little regard for questions about the broader American financial system. That said, on the really important behind-the-scenes questions, In Fed We Trust offers no new clues. For instance, on the question of what actually happened in Bank of America's 'shotgun marriage' with Merrill Lynch, Wessel offers us a recap of publicly available information and congressional testimony, but little inside color.

The overwhelming sense one gets, in reading In Fed We Trust, is that of a Federal Reserve chairman falling behind the curve early on, and never being able to catch up. Bernanke realizes after the first few months of the crisis that he has been less aggressive than he should have been. Starting then, he comes up with one bizarrely creative extension of the Fed's powers after another. Each seems like an unnecessarily large extension of the role of the Fed, a massive overkill, but every time, events overtake the measure so rapidly that it is back to the drawing board. The chaos of the times is epitomized for me by an anecdote from the earliest part of this crisis, the Bear Stearns collapse. After working late into the night to come up with viable options for Bear to avoid filing for bankruptcy the next morning, Geithner (then the President of the New York Fed) schedules a conference call for a few hours later, at 6 AM. But events don't wait even those few hours, and at 4:45, the team is back working the phones, trying to keep Bear alive. Brutal stuff.

And in the midst of this chaos, there is farce. Like the tale of Fed board member Rick Mishkin during the Bear drama:

Mishkin and his wife had plans to see Sunday in the Park with George in New York on Sunday afternoon, and he went, anticipating that he would have to leave for a Fed board meeting. When the call came during the second act, Mishkin left the theater and took the call in his car, which he had parked nearby for this purpose.

This being New York, the driver of a passing car noticed him in the car and thought he'd spotted a choice parking space about to open up. He knocked on Mishkin's window.

"Go away!" Mishkin told him, gesticulating with one hand while holding his cell phone with the other. Eventually, the guy got the message. "We are bailing out Bear Stearns, and this guy is knocking on my damn window," he recalled. "It was like a Seinfeld episode."

So after reading In Fed We Trust, what do I feel about the Fed actions? What have I learnt? The sense I get is that of a group of really smart people working without a playbook. A series of fairly ad-hoc decisions being made with good intentions, but nothing in the way of a set of principles, a framework. I am not sure whether this is the shortcoming of the storyteller, or whether this is how the story itself played out. Based on Bernanke's own statements in the book, I tend to think the latter.

Is that ad-hoc, reactive, try-anything approach a good thing or a bad thing? Were there other alternatives? Would it have been better for Bernanke to stick with rigid ideologies (like 'market knows best') and let that ideology determine all actions he took? I am not qualified enough to know. But here is the sense I get from reading this book. Ben Bernanke is an extremely thoughtful and intellectual Fed chairman. He truly believed that we were on the verge of "Depression 2.0". He was late to grasp the magnitude of what he was dealing with. Once he saw how big it was, he pulled out all stops (and then some) to get the economy from crashing and burning. He worked his backside off, with little regard to personal fiefdom. But through it all, not subscribing to any specific brand of economic ideology, he never had the ideologue's certainty. That is what I get from the book.

And you know what? Maybe I am being naive about this, but I will take a thinker's doubts over an ideologue's certainty seven days a week.

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