The Courage to Act
The Fed chair's own account; read against Leonard and Greider.
Summary
Ben Bernanke chaired the Federal Reserve from 2006 to 2014 and wrote this account of the financial crisis and its aftermath from inside the institution. It combines memoir with an explanation of what the Federal Reserve did and why.
The crisis narrative covers the deterioration in mortgage markets through 2007, the Bear Stearns rescue in March 2008, the decision not to rescue Lehman Brothers in September, the AIG intervention days later, the commercial paper and money market fund guarantees, the Troubled Asset Relief Program, and the stress tests of 2009 that Bernanke considers the turning point in restoring confidence. He then covers the unconventional policy of the following years: the asset purchase programmes, forward guidance, and the internal and external opposition to both.
On Lehman, Bernanke maintains the position he has held consistently: the Federal Reserve lacked legal authority to lend because Lehman had insufficient collateral and no buyer existed, so the failure was unavoidable rather than chosen. Laurence Ball's later work disputes this in detail, and readers should read both. Bernanke also draws on his academic work on the Depression, arguing that the credit channel and the failure of financial intermediation, rather than monetary contraction alone, transmit financial crises to the real economy. The book is a participant's defence, well informed and self-serving in the ways such accounts always are.
Key takeaways 7
- Bernanke maintains that the Federal Reserve lacked legal authority to lend to Lehman because it had insufficient collateral and no acquirer.
- The 2009 stress tests restored confidence because they produced credible institution-specific numbers that markets could act on.
- Bernanke's academic work on the Depression argues that the breakdown of credit intermediation transmits financial crises to the real economy.
- Asset purchases work through portfolio rebalancing and through signalling future policy rather than through bank reserves.
- The Federal Reserve acted as lender of last resort to markets rather than only to banks, which required using emergency authorities extensively.
- Bernanke argues that the political cost of the rescues was unavoidable because the alternative was a far larger economic collapse.
- Forward guidance is monetary policy conducted through expectations when the policy rate cannot fall further.
Who should read it
Investors and policymakers who want the crisis account and the theory of unconventional monetary policy from the person who directed both.
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