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

• Author: Poole, William
• Position: Book review

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

David Wessel

New York: Crown/Random House, 2009, 323 pp.

David Wessel is a fine journalist; In Fed We Trust is a fine book. It belongs on the shelf of every student of the 2007-09 financial crisis. It is, as well, a good read for recreational observers of the economic scene. Wessel focuses on Fed Chairman Ben S. Bernanke, but he discusses the role of all the other key players as well. The biographical information on Bernanke is interesting, as are Wessel's comments on the policy approaches and personalities of the other policymakers.

Future research will deepen our understanding of the crisis, its course, and the responses of the Federal Reserve and Treasury Department. A researcher in the future will want to have the book close at hand as a reference source. Wessel's first and last chapters are reflective and insightfully so. Those with a professional interest in the financial crisis will also want to read The Road Ahead for the Fed, edited by John D. Ciorciari and John B. Taylor (2009). This book of 12 essays was put together in the first quarter of 2009 and published July 17, 2009. The essays reflect thinking about the Fed's handling of the crisis while markets were still in considerable turmoil. The two books were written about the same time--In Fed We Trust went on sale August 4, 2009.

My principal reflection on the book, besides my admiration, is that Wessel does not adequately question whether the Fed's bold, new, and very large credit programs were in fact effective, Targeted lend programs, such as Fed purchases of commercial paper issued by nonbanks, was a complete departure from past practice, except for some small programs in the 1930s. I would not have expected Wessel to present research to address the issue, but he should have raised the question: How different would the course of the crisis have been if the Fed had increased the monetary base the old-fashioned way--that is, entirely by lending through the discount window and purchasing government securities?

Wessel seems dismissive of the criticisms of Bernanke's approach within the Fed. Rather than outlining the nature of the disputes, Wessel refers to "'the resentment of flyover-state Fed bank presidents toward the power of Washington and New York" (p. 244). Later he writes, "Targeted lending meant deciding in which markets the Fed would be intervening, a practice that ran up against the hard-line ideologies of some regional presidents" (p. 254). But these criticisms cannot be so easily dismissed. Despite Fed denials, targeted lending is a form of credit allocation, and the issues are not primarily ideological.

One issue is whether Fed .allocation of credit was more effective in dealing with the crisis than market allocation. A second issue is whether Congress will accept the Fed's choices and its decisions with regard to such matters as disclosure of the identity of firms receiving assistance. As of this writing, in December 2009, these issues are very alive in Congress and may lead to important legislation changing the structure of the Federal Reserve System. These same concerns are apparent in the essays in the Ciorciari-Taylor volume.

If the Fed had purchased Treasury securities instead of providing targeted credit, what would those receiving the cash have done with it? They could not in the aggregate have parked the cash in Treasuries, because the volume of outstanding Treasuries was fixed. Indeed, if the Fed had been buying Treasuries to the same degree it expanded its balance sheet through targeted lending (in excess of $1 trillion between mid-September and mid-December 2008), availability of Treasuries in the market would have been that much lower. Some of the holders of cash following sales of Treasuries to...