The Federal Reserve and the Financial Crisis

January 14, 2013
In this edited collection of lectures (originally delivered at the George Washington University in March 2012), Bernanke (Essays on the Great Depression) portrays the U.S. Federal Reserve’s actions during the 2008 financial crisis as consistent with the role of central banks, and as a series of unfortunately necessary improvisations. The most glaring issue that emerges is the mismatch between regulatory agencies, still operating with a Depression-era mindset, and today’s complex financial system. This situation was exacerbated leading up to the 2008 crisis by the undercapitalization of agencies such as Freddie Mac and Fannie Mae, and a flurry of innovative mortgage practices. Bernanke’s dispassionate, academic tone throughout contrasts, no doubt deliberately, with the sheer terror manifested by the media at the time. Bernanke offers no crystal-ball vision, noting dourly, “financial crises will always be with us.” The lessons learned include the virtues of making the Fed more transparent about its goals; the benefits of international coordination; and the need to end the “too-big-to-fail” dilemma. The sophisticated economist probably will find these speeches lacking in both financial details and theory; the more general reader probably will be thankful for this approach. Anyone interested in a primer on recent financial history will likely find Bernanke’s book to be worthwhile reading. 1 halftone, 39 line illus.

January 15, 2013
Federal Reserve Chairman Bernanke (Essays on the Great Depression, 2000, etc.) presents his views on the Federal Reserve System, central banking and the financial crisis in four lectures given to students during the course of 2012. The author examines what the Federal Reserve was intended to accomplish, how it performed its statutory task as it evolved over time and the special functions of the lender-of-last-resort that have been called upon during the financial crisis. These lectures provide a useful primer on matters not often presented in such a comprehensive or unequivocal way. Bernanke's reputation is often identified with his expertise on the Great Depression. Here, he presents himself differently, as a practitioner of central banking. Thus, his views on the Federal Reserve called on by statute "to serve as a lender of last resort and to try to mitigate the panics banks were experiencing every few years" come into sharp relief relative to his presentation of what has gone amiss in the financial sector. He argues that the regulatory structure of finance failed to keep up with the structure of financial institutions. The private sector took advantage, using weaknesses in risk management, the increasing complexity of financial transactions and the reliance on short-term funding and leverage to do so. Bernanke views the subprime mortgage crisis as the lesser part of a much larger threat to the global financial system, and he shows how AIG's triple A credit rating was used to backstop these developments through default swaps. "In our estimation," he told the students, "the failure of AIG would have been basically the end." A great introduction to the functioning of central banking for general readers.

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Starred review from February 1, 2013

In March 2012, Federal Reserve chairman Bernanke gave four lectures to undergraduates on the origins and role of the Fed. His texts, charts, and answers to student questions are contained in this slim volume. Bernanke addresses the value of a central bank as an economic stabilizer through its powers as regulator, influencer of interest rates, and lender of last resort. After giving a brief history of the Fed, he describes the financial environment leading up to the 2008 crisis. He talks about how the Fed in concert with the U.S. Treasury and other central banks implemented policies first to dampen the panic, then to strengthen the financial system, and finally to support the economic recovery. He stresses the openness of Fed actions subsequent to 2008 and their consistency with longstanding practices. Bernanke is careful in his wording and presents no revelations; the lectures have been accessible over the Internet. VERDICT This important book deserves to be read widely both because Bernanke admirably explains the Fed and its actions and because his authorship provides a window into his thinking as one of the world's most powerful financial figures. Former Fed governor Alan S. Blinder (economics, Princeton Univ.) also examines the crisis but with sharper criticism in After the Music Stopped (Jan. 2013).--Lawrence Maxted, Gannon Univ. Lib., Erie, PA

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