Crash Course


Review of The Courage to Act: A Memoir of Crisis and its Aftermath, by Ben Bernanke

New York: W. W. Norton & Company, 2015

Ben Bernanke is a controversial figure who headed a controversial institution during a controversial period. His memoir about his leadership of the Federal Reserve during the 2007-2009 financial crisis and the recession that followed helps explain the reasons for these overlapping loci of controversy while making little progress toward resolving any of them. As an initial matter, both the length of the book, a dense 579 pages, and the tone, which is clear but far less lively than other books covering the same events, are likely to diminish the number of readers who make it to the not-so-exciting finish. Moreover, while a close read of the entire book will ultimately reward both the novice and the expert and many will feel a newfound appreciation for the wisdom Bernanke brought to the challenges that he faced, few readers will make it to the end without experiencing some waves of disappointment with its protagonist.

The casual reader will benefit from the thoroughness of Bernanke’s account and his tireless desire to educate. The book spans Bernanke’s entire time in government, from 2003 when he was appointed to serve as a member of the Federal Reserve’s Board of Governors until he completed his second term as Chairman of that body in 2014. This scope enabled Bernanke, in life and in the book, to enjoy an active role in every stage of the crisis, from the period in which few appreciated the systemic risk that was building up in the financial system through the Fed’s efforts to help restart the economy. The casual reader will further benefit from the fact that Bernanke spent most of his adult life as a professor. This has seemingly led him to treat an array of settings like classrooms: he often approached testimony before Congress as an opportunity to educate legislators and, increasingly over the course of his chairmanship, he used interviews and op-eds as opportunities to explain to the public what the Fed was doing and why.

Bernanke’s willingness to explain what the Federal Reserve was doing and why is a strength of Bernanke’s embrace of “educating” as part of his role. The evolution of Bernanke’s approach to communication also brings to life the way that he grew in his effectiveness as a policymaker during his time in Washington. While Bernanke is not particularly reflective on this front, watching him evolve is one of the joys of reading the full volume. The Ben Bernanke who earned himself the long-lived nickname “Helicopter Ben” in 2002, when, as he recounts, he ignored advice from his media relations officer to “delete the helicopter-drop metaphor,” reasoning that “everyone knows Milton Friedman said it,” is not the same Ben Bernanke who, in 2009, walked the streets of his hometown of Dillon, South Carolina with a crew from 60 Minutes because he recognized that it was important for him “to talk to America directly” (p. 164 (italics added); p, 416). The first instance reveals someone accustomed to the ivory tower with little sense of his audience. In contrast, by 2009, he has grown into a leader who recognizes that the Federal Reserve’s independence depends on its legitimacy, and that communication is critical to maintaining public faith in the institution. Watching his successor, Janet Yellen, stumble on this front despite her similar stance in favor of openness is a reminder of how challenging it can be to maintain a healthy level of transparency when heading an institution as maligned as the Federal Reserve and of just how effective he became.

Unfortunately, Bernanke’s tendency to play the role of educator does not always serve him well. In treating the public and their elected representatives as students, he can assume a paternalistic stance in which he presumes that he knows better than they do what is in the country’s best interest. The notion that those communications ought to be two-way conversations in which he too is listening seems lost on him. Even more unfortunate, Bernanke’s eagerness to educate is not coupled with a robust desire to assume the second role of the academic—the one focused on research and learning. Bernanke at times accompanies his explanations of why he made the decisions that he did with new qualifications or reflections, but he refuses to confess to any meaningful error even with the benefit of hindsight. Given the extraordinary circumstances and high degree of uncertainty he faced, it would be hard to fault him for making mistakes. But his decision to use more pages defending the decisions he made than reflecting on them is disappointing. One set of disagreements that Bernanke insists on replaying to his detriment arises from tensions with Sheila Bair, Chair of the Federal Deposit Insurance Corporation (FDIC). The prickliness of the relationships between Bair and the FDIC, on one hand, and Federal Reserve and Treasury officials, on the other, will be familiar territory for many readers. And from Bernanke’s initial description of Bair as a “turf-conscious” “prairie populist” who “could be … hard to work with,” he does little to hide that personal dynamics intermingled with other issues in contributing to the string of disagreements they faced over the course of the crisis (p. 151).

His depiction of these squabbles paints him in an unflattering light because much of his frustration, to the extent it is justified, is more appropriately targeted at the role Bair was required to fulfill rather than with the efficacy with which she filled it. As Bernanke acknowledges, the FDIC operates subject to a statutory mandate to resolve troubled banks in a way that minimizes the cost borne by the insurance fund, subject to a systemic risk exception that can be triggered only by agreement among the top officials of the FDIC and the Fed, and the Treasury Secretary. Congress passed this mandate following the savings and loan debacle to address the long history of bank regulators engaging in forbearance and taking other actions that protect banks at the expense of the public fisc. Bernanke also recounts numerous instances when Bair is willing to invoke the systemic risk exception and expose the insurance fund to heightened risk in order to help the financial system recover. Nonetheless, Bernanke seems exasperated each time Bair uses her authority to favor bank acquisitions that are structured to protect the insurance fund (and taxpayers), as she does quite effectively in connection with JP Morgan’s acquisition of Washington Mutual and Wells Fargo’s acquisition of Wachovia.

Many of Bernanke’s concerns are justified. Requiring a bank’s uninsured creditors to take haircuts or changing transactions mid-course can have adverse effects on the stability of other banks, an effect that is particularly troubling during periods of widespread distress. Bernanke, however, undermines his own credibility by maintaining his exasperated tone even when admitting that she was right, as she was in identifying Washington Mutual as a problem bank despite protests from its primary regulator and in recognizing the importance of pushing banks to modify delinquent or underwater mortgages.

Another source of frustration for Bernanke, and one that is more justified, is Congress. Bernanke feels that the Federal Reserve was forced to do more than its fair share to help revive the economy after the crisis because Congress failed to pass adequate fiscal stimulus. He takes effective shots at extreme members of both parties and the political dynamics that are increasing their influence. The core of his explanation regarding why he shifted his affiliation from Republican to independent will likely resonate with many on both sides of the aisle: “I still considered myself a conservative…. But I had lost patience with Republicans’ susceptibility to the know-nothing-ism of the far right. I didn’t leave the Republican Party. I felt that the party left me” (p. 433). His concern about Congressional dysfunction and the damage that flows from that dysfunction, while not new insights, bring into relief the challenges facing the Federal Reserve.

While Bernanke’s complaints about Congress are more persuasive than his frustration with Bair, even here Bernanke damages his credibility. Most troubling is the disconnect between the story that he and other leading policymakers used to convince Congress to pass the Emergency Economic Stabilization Act of 2008 (EESA) and what they actually believed regarding how they intended to use the vast authority they were seeking when the Act passed. We see, far more vividly than has been depicted elsewhere, just how skeptical Bernanke and other Fed policymakers were about Paulson’s plan to buy troubled assets. We also see just how early Bernanke came to believe that injecting capital into banks—the route eventually taken—would be the best way to improve the health of the financial markets. And we learn that Paulson provided Bernanke early assurances EESA would allow Treasury to pursue capital injections if that proved to be the best approach. This makes perfect sense to any student of financial crises, as capital injections are a tried and true tool that have been used successfully in a number of other settings, while buying troubled assets lacked such a track record. Nonetheless, as the contemporaneous records show and Bernanke himself concedes, he and Paulson said nothing about this vision to the members of Congress from whom they were seeking the authority to spend $700 billion of taxpayer funds.

Bernanke’s handling of the situation thus once again inspires both respect and frustration. On one hand, Bernanke believed that the country was on the precipice of a major financial breakdown that would devastate the general economy in the absence of massive intervention. He also had good reason to be concerned about whether Congress would pass the needed legislation if he and others were more forthcoming about their internal deliberations. It’s also possible that he was concerned about how markets would react to a plan that politicians might characterize as an effort to nationalize all of the banks. These types of considerations may justify eventually giving the Treasury Department standing authority to deploy capital to resolve financial crises without going to Congress. On the other hand, EESA was required because no such authority existed at the time. Moreover, no such authority seems likely to be forthcoming in part because of the extreme public aversion to using government funds to save struggling financial institutions. Whether we like it or not, having a democracy means having a system that will sometimes result in a smaller pie because the majority of the population and their elected representatives view the distributional consequences of the actions required to create the large pie as unfair.

Even if well intentioned, asking Congress to authorize the expenditure of up to $700 billion of taxpayer money while misleading Congress about how that authority would be used is the type of action that feeds distrust of the Fed and other financial regulators. Bernanke’s retelling of this period is yet further evidence that as much as he grew in his willingness to speak directly to the public, he often did not see it as his responsibility to listen or respond to their preferences. There are good reasons for central bank independence as there are times that a country is well served when central bankers take a longer term, albeit politically unpopular, approach to policymaking. But that does mean that central bankers are doing something heroic every time they flout public sentiment.

As anyone who makes it to the end of Bernanke’s account will be able to attest, financial crises and the recessions that follow are marathons—not sprints—for central bankers. Just completing a marathon is an accomplishment that merits respect. That Bernanke not only finished, but brought leadership and wisdom to the process is an accomplishment that served this country, and a number of others as well. The economy might be significantly weaker than it currently is had anyone else been at the helm. Nonetheless, if Bernanke hoped that this memoir would seal his status as a “courageous” public servant who saved his country from the brink, he is likely to be disappointed. That Bernanke so often comes off as intelligent, informed, and capable leaves the reader all the more disappointed when, at other times, he is slow, out of sync, or defensive.

Posted on 16 November 2015

KATHRYN JUDGE is Associate Professor of Law and Milton Handler Fellow at Columbia Law School.