Of the many accounts of the financial crisis of 2007-09, this is by far the longest, best and most detailed from an American policymaker at the centre of the earthquake. Unlike many instant memoirs, it will be of great use to future historians and scholars. Ben Bernanke was Chairman of the Federal Reserve Board through the crisis and its aftermath, leaving office in early 2014. His book is written in a straightforward style that reflects his ability to explain complex events in a way that is easy to follow. There are no fireworks nor unexpected revelations, but that is not Bernanke’s style. More importantly, it is an honest account.
Bernanke writes well and movingly about his upbringing in Dillon, South Carolina, his Jewish family and his passage from academic life to the international financial stage. As an academic, Bernanke carried out important and insightful research into the role of credit in shaping the ups and downs of the business cycle, and became an expert on the history of the Great Depression and the wave of bank failures that were one of its principal causes.
Before the crisis, Bernanke set out to create a more consensual style and atmosphere on the Federal Open Market Committee (the FOMC, the US equivalent of the Bank of England’s Monetary Policy Committee). He changed the procedures of its meetings to emphasise the collaborative nature of their discussions. Much of this quiet work bore fruit in the deliberations of the FOMC, although once the crisis hit Bernanke found it no easier than any other central bank governor to persuade a personality-conscious media that decisions were taken collectively. His major achievement in the field of monetary policy was, at long last, to convince his colleagues that the Fed should, in effect, adopt an inflation target of 2 per cent (the same as other major central banks). But it took him until 2012 to get there.
Our two careers intersected at several points—at Massachusetts Institute of Technology in the early 1980s, when we shared adjoining offices; in the 1990s when Bernanke, as an academic, and I, at the Bank of England, were promoting the cause of inflation targeting; and again in the 2000s on the international central banking circuit when we became colleagues as governors of our respective central banks. But only when reading this memoir did I realise that his freshman year at Harvard was my first year there as a graduate student. On his arrival at Harvard from Dillon, Bernanke found his new roommates in the Yard to be a football player, a Vietnam veteran and a maths prodigy. To be at Harvard was a liberating and formative experience for him. I lived in a wooden house, unable to sleep because of the noise of the cicadas and the fire engines, and was taken aback by the tear gas used to break up anti-Vietnam war protests in Harvard Square. We never met then, but if we had I am sure he would have tried everything to make me a baseball fan.
After an illustrious career in academia, Bernanke became a governor of the Fed in 2002, and Chairman in 2006 after the retirement of Alan Greenspan. When the earthquake hit in 2007 he was the right man in the right place. America was fortunate to have a team of determined and highly capable people handling the challenges thrown up by unfolding events. Hank Paulson at the Treasury, Ben Bernanke at the Fed in Washington and Timothy Geithner at the New York Fed, ably supported by those under them, worked long and hard. They complemented each other. Paulson was bold and incisive, Bernanke thoughtful and patient and Geithner imaginative and politically astute. Bernanke proved to be innovative in devising solutions and extraordinarily persistent. Geithner described him as “the Buddha of central banking.” The phrase captures Bernanke’s serene, often silent, manner in dealing with the most fraught problems. On the international scene, he was cooperative and helpful, although not a forceful leader. His book reveals that beneath that calm exterior was someone who was angry at much of the behaviour in the banking sector, and with a strong determination to prevent any repetition of the Great Depression. Given the hours that he put in, and the many absences from his family, it is perhaps not surprising that Bernanke’s title was chosen, he says, by his wife. It is probably the most controversial aspect of the book, and a hostage to fortune. As the title of a biography of Bernanke, The Courage to Act would have been highly appropriate because, in the face of much opposition from Congress and elsewhere, he did indeed have the courage to act. But there are some things best left to others to say.
"Saving Lehman would not have saved the system"By far the largest part of Bernanke’s book concerns the efforts he and his colleagues made to fight the fire that broke out initially in 2007 and then flared up to a conflagration in 2008. It is a detailed account and although it does not differ significantly from the memoirs already published by Geithner and Paulson, there are subtle differences of interpretation and nuance. For British readers, the most interesting episode is the weekend immediately prior to the failure of Lehman Brothers in September 2008. Even in Bernanke’s even-handed description of the events over that weekend, there is the impression that at least some of his colleagues had a lingering feeling that if only Britain had been willing to underwrite the losses of Lehman and allow Barclays to purchase the firm then all would have been well. This overlooks two points. The first is that it would have been extraordinarily difficult for Gordon Brown or Alistair Darling to go to the House of Commons and say, “I want to report today that we have put at risk tens of billions of pounds of British taxpayers’ money to save an American bank because our friends across the Atlantic did not have the courage to act.” Since Barclays was able to buy Lehman at a much lower price only a few days later, the risks were real. As Bernanke writes, “the company and its critics profoundly disagreed on the value of its complex investments” and “as Saturday wore on, it became evident that Lehman was deeply insolvent.” The US authorities did not feel they should prop up an insolvent bank, and chose not to nationalise it. It should have been no surprise that the UK was unwilling to step into the breach.
The second consideration is that saving Lehman would not have saved the system. Other institutions were in trouble. Across the industrialised world, the major banks were so thinly capitalised that any small disturbance was capable of bringing the system down. The failure of Lehman did not come out of the blue, nor was it the last bank to fail.
The final section of the book describes the efforts, still continuing, of the Fed to generate a lasting economic recovery in the US. When dealing with events after the immediate crisis had passed in the spring of 2009, a more defensive tone surprisingly sets in. I suspect this reflects not criticism of the actions taken by the Fed and other central banks to prevent a catastrophic collapse of the money supply, and so a possible repetition of the Great Depression, but criticism from Congress about the Fed having overstepped its powers during the crisis. On more than one occasion my US colleagues would bemoan the lack of a parliamentary system in which quick decisions could be made and where the government takes responsibility for the use of public funds.
At the end of what is a long book (over 600 pages), one is left with a sense that a larger proportion could have been devoted not to fire-fighting but to the prevention of future fires. The UK was the first country to announce a recapitalisation of its banking system, and academics have since taken up the cause of higher capital requirements for banks. For my taste, Bernanke is perhaps a little too sympathetic to the standard macro-economic models which are still at the centre of the analysis of central banks, and too uncritical of the doctrine of the “lender of last resort” to a banking system very different from that which existed when Walter Bagehot wrote Lombard Street in 1873.
When historians come to analyse and review the history of the crisis in 2008, its origins, the way it played out, and the new world to which the crisis led, what will they make of the many memoirs that have now appeared? The recollection of the participants in combat are rarely completely consistent, not least because they were fighting on different parts of the battlefield. Inevitably, an episode in which one participant played only a small part receives little emphasis, even though it may have been decisive in the outcome of the war. Events in which the participant was a central figure receive an exaggerated importance. The only answer to this bias in reporting lies in the careful sifting of evidence of historians when all the official material is available, not only memoirs but papers and documents of a wide range of participants from all sides of the conflict. It is no accident that some of the most informative and entertaining history is produced many years after the events which are described.
Bernanke’s memoir is a crucial document of record that will be invaluable to future historians. As far as any memoir can be, it is an honest and accurate account. There is no hubris nor exaggeration: simply a telling of the tale of the most dramatic period in office of any Fed Chairman to date. In due course historians are likely to provide us all with a subtle evaluation.
