One of my favourite passages in Ben Bernanke’s memoir of the financial crisis and its aftermath, The Courage to Act, describes how, on the way to the Federal Reserve building to deal with the imploding Bear Stearns, Bernanke takes the time to email his assistant Rita Proctor: “Pls order a couple of muffins and oj for me. I’ll be in in 10 minutes.” Now that shows a cool head in a crisis. Bernanke was certainly the right person for arguably the most important job for an economist in the world during the time of the crisis, Chair of the US Federal Reserve. He had the sangfroid, the character and the intellect to co-lead (with Treasury Secretaries Paulson and then Geithner) the US response to the financial crisis. Indeed, as an academic economist, he had established his reputation and earned a Princeton chair through his research into the causes of the Great Depression, which emphasised the need to prevent a banking panic and widespread bank failures, something which the Fed failed to do in the early thirties.
Bernanke’s memoir is excellent in its description of the relevant economic theories which guided his policy making during the crisis. He is particularly lucid in his description of the Fed’s lender-of-last-resort role, through the so-called discount window. He rightly gives credit to Walter Bagehot, whose 1873 classic Lombard Street implored central banks to lend liberally during panics, and is compulsory reading for all central bankers. Also, I liked Bernanke’s discussion of how he attempted to get the Greenspan Fed to be clearer in its signalling to the market regarding the future direction of monetary policy, and to adopt an explicit inflation target—which was not adopted by the Fed until 2012 (at rate of 2 per cent).
For his role in helping the global economy avert a re-run of the Great Depression—not an exaggeration—Bernanke may go down as history’s greatest central banker so far. Certainly Alan Greenspan’s star has faded as the loose monetary policy under his reign arguably contributed to the US housing bubble and the subsequent financial crisis after the bubble burst. Bernanke, however, has been followed by another outstanding economist, Janet Yellen, who may well distinguish herself in the role. She definitely faces large challenges, including the difficult decision regarding whether to raise the Federal Funds Rate from near zero later this year (see Janet Yellen just got some pretty bad news). This is a difficult decision because there is uncertainty about the strength of the US recovery and there are ominous signs from China. For example, you may have seen the worrying article about China’s debt binge in last week’s Economist (see Deleveraging Delayed). We live in interesting times.
You can pick up a copy of Bernanke’s Courage to Act at Dymocks on Albert St, Brisbane, which has dozens of copies. Dymocks incidentally now has an outstanding collection of economics books, which I understand is due in large part to the efforts of one staff member who is currently an economics student at the University of Queensland.