Bernanke, Flying by the Seat of His Pants

In Fed We Trust:

Ben Bernanke's War on the Great Panic

By David Wessel

Crown Business; 323 pp.; $27.99 When will it end? When can we wake up from this lurid nightmare of nearly double-digit unemployment, balance sheet toxicity, and taxpayers forced to own whole swaths of Michigan and lower Manhattan? Two years into the economic crisis, there are no cut-and-dried answers. This much is certain: Great Recession, Econalypse, or whatever you want to call it, you'll be telling your grandkids about our fine mess one day (perhaps in Chinese, the language of America's creditors). Lucky for you, bookstores now stock David Wessel's In Fed We Trust: Ben Bernanke's War on the Great Panic. In a sense, you can actually judge this book—with its title ascribing divine powers to our Fed chief, and his face on coins—by its cover. Wessel lends gravity to our situation with his preferred term, the Great Panic. But the second subtitle cuts to the chase: How the Federal Reserve Became the Fourth Branch of Government.

With incredible speed, The Wall Street Journal's veteran economics editor has managed to put together a defining and vivid look at policymakers' unprecedented response to the crisis. Wessel's disconcerting conclusion: Out of necessity Bernanke is playing most of this by ear, loosely interpreting and appropriating arcane laws and creating new powers just to keep the system on its hinges. Not since John Pierpont Morgan rescued the U.S. in 1907 has so much, economically speaking, been dictated by one man. In Fed We Trust is persuasively told and richly reported. It is an absorbing read—no mean feat in the otherwise drab world of monetary policy. It will win awards and inspire copycats.

The irony of there now being a halo above Ben Bernanke's head is hardly lost on Wessel. The introverted academic was not the odds-on favorite to succeed Alan Greenspan. Yes, he parlayed his near-perfect SAT scores into economics degrees from Harvard and MIT, but to finance that pedigree he waited tables at a kitschy Mexican-themed truck stop in South Carolina. Bernanke made himself an expert on the Great Depression and in 1996 became chair of economics at Princeton, where he recruited Paul Krugman. In 2002, Bush & Co. tapped the soft-spoken scholar to work for the central bank; four years later he had replaced Fed Chairman Greenspan, often referred to as the world's most powerful man. But Bernanke, writes Wessel, "didn't think a Fed chairman should be a rock star. He wanted to avoid the cult that had attached to Greenspan, the perception that the chairman is the Fed. An economy shouldn't rely so much on the instincts of a single man, he thought...."

But that's the lopsided situation Bernanke inherited—and would have to perpetuate. As Wessel shows, Bernanke's predecessor vastly underestimated the effects of keeping interest rates as low as he did for as long as he did (from 6.5% in 2001 to a 45-year low of 1% as late as June 2004). That easy money, we now know, fueled an epic housing and credit bubble whose bursting took down the global economy within two years of Bernanke's ascension. In 2008, Bernanke had to log a string of all-nighters—and devote record sums—to contain the rolling meltdowns at Bear Stearns, AIG (AIG), Merrill Lynch (BAC), and beyond.

Between 2006 and the end of 2008, notes Wessel, the Bernanke Fed went from having $860 billion in supersafe loans and securities on its books to $2.2 trillion, much of it far riskier fare. By March 2009, the Fed was ready to commit an additional $1 trillion to its mop-up efforts. By then Greenspan, who got an $8.5 million advance for his book The Age of Turbulence, was well into his revisionism tour, asserting that it wasn't his role to preemptively deflate asset bubbles. Wessel duly dubs one of his key chapters "Age of Delusion: What Greenspan Wrought."

So much for overreliance on the instincts of a single man. Indeed, as Bernanke learned in the dark days of September 2008, a strong, central economic figure was exactly what the system needed. Wessel lays out why the failure of Lehman Brothers—perhaps the defining blunder of the crisis—was hardly preordained.

For starters, eight investment banks were willing to tag-team with the Fed to rescue the firm. Bernanke, writes Wessel, thought that letting Lehman die was "idiocy." Even so, he wouldn't go to bat for a bailout without the support of Treasury Secretary Hank Paulson, the former Goldman Sachs (GS) boss who "never thought much of Lehman." So, responsibility set adrift, they let the bank go under, and the aftermath has cost multiples of the amount needed to save it. In other words, Wessel illustrates how Bernanke might have used the superpowers he had acquired—however reluctantly—a little sooner.

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkPrime-Time BenFed chairmen don't usually do Good Morning America or The Late Show. But that's only part of the reason Ben Bernanke's lengthy 60 Minutes interview, aired in March, is captivating. The Fed chief comes across as both humble and frank, revealing, for instance, the great anger he felt at having to prop up AIG (AIG)—and prop it up again.To view the segment, go to

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