Some thoughts on Bernanke’s book

Ben Bernanke must have been busy.

Passing through Denver airport last Tuesday, the day after the book had been released,  I found a large pile of autographed copies of Bernanke’s new book The Courage to Act.    That was one bookshop in one city (not even one of the twenty largest in the US), and it had me wondering just how many days the former head of US central banking system had had to devote to autographs.  I guess even eminent  authors have to earn their –  no doubt rather large –  advances.

The stock of books on the post-2007 financial and economic crises continues to grow.  And it is still early days.  We can expect many more in coming decades –  akin perhaps to the continuing flow of works on the Great Depression, and the unresolved controversies that still  surround that episode.

Many of the key US participants have now published their accounts:  Hank Paulson, Secretary to the Treasury (to January 2009), Tim Geithner (New York Fed, and then Secretary to the Treasury), Sheila Bair (head of the FDIC).   And now Bernanke has joined them.  Each has a story to tell, and a case to make –  typically, a reputation to burnish or defend.

Bernanke’s book written for a mainstream intelligent lay audience. Plenty of copies are likely to be unwrapped on Christmas morning

For anyone who closely followed the crises, and their aftermath, there isn’t much new in Bernanke’s book.  It is a good refresher as the specific dates and events begin to blur in the memory.  And although no one will buy the book for story of his upbringing story, I found his account of a Jewish boy growing up in protestant South Carolina in the 1950s and 60s interesting.

It isn’t a great book by any means.  The writing often feels a bit pedestrian, and although he enlisted a former reporter to work with him on the book, that former reporter was on a year’s leave from the Public Affairs Division of the Federal Reserve.   Enhancing the sense of being written a little too close to the events and people he describes, Bernanke records that after leaving the Fed on Friday 31 January 2014 he started work in the book, from his new perch at Brookings, the following Monday.  I guess market demand (and the scale of publishers’ advances) was at its peak immediately after he left the Fed.  I hope he thinks about another substantive and more reflective contribution, perhaps aimed at a narrower audience, in 10 or 15 years’ time.

Bernanke does acknowledge the odd mistake, but they are “easy” ones, around the timing of particular interest rate adjustments.  Mostly this is a defence of his record, without actually engaging with any more-substantive critiques or alternative views.  In some ways, I found that a little surprising, especially in view of the dismal economic performance of most of the advanced world since the crises.  Arguments that seemed compelling in 2008 or 2009 – when a fairly fast snap-back in economic activity, employment  and inflation pressures were expected  – must surely look at least a little different now?

Here are some of the specific aspects of the book that struck me:

Bernanke doesn’t seem to have met a bailout he didn’t like.  Even in hindsight he does not think Bear Stearns should have been allowed to fail and close. He wanted to bail-out Lehmans (constrained only by lack of legal authority for either the Fed or the US Treasury) despite the enormous losses that Lehmans incurred.  He thought that holders of sovereign debt in Europe should not have been exposed to the possibility of loss, and appears not to consider that (eg) wholesale creditors of Irish banks should have been exposed to losses.  Somewhat to my surprise, he is not critical at all of the far-reaching guarantees offered to Irish bank creditors in October 2008, which triggered the range of guarantees around the world.  And he acknowledges that he favoured putting in place comprehensive guarantees for US banks (rather than the targeted, on new issues, wholesale guarantee approach that was eventually adoped [and which was also adopted for wholesale issues in New Zealand]).

In his defence, Bernanke might argue that the US did not in 2008 have good mechanisms for dealing with failing banks.  But in an interview with PBS the other night, I heard him acknowledge that “too big to fail” issues have still not been fully addressed in the US.    And in the book there is nothing sustained on the nature of the moral hazard to which such bailouts –  and the prospects of them being repeated in future –  is likely to give rise to.  Having come through the largest financial crisis in US history that is disappointing.

It is easy for people who spend their entire working lives in the public sector to assume too readily the benevolence and competence of government agencies and interventions.  Most of Bernanke’s career was spent in academe, but he has a fairly heroic view of public officials and their contributions.  There is no sense at all, anywhere in the book, of any concept of “government failure”, or of any sense that well-intentioned official interventions can sometimes (often?) have unintended adverse consequences.  Not unrelatedly, without directly addressing the issue, there is a strong sense that the crises were caused by the private sector, with courageous government officials intervening to save the private sector from itself.  It is a common view, but one might have hoped that someone with Bernanke’s academic stature might have been better able to make the case, including by dealing with stronger arguments of the sceptics.  His is a technocrat’s world. The one group he is consistently critical of is the US Congress and although one might sympathise to some extent, Bernanke shows little sign of appreciating the importance (or reality) of genuine differences of ideology or worldview.  Like many bureaucrats, he has lofty distaste for political theatre and the messy world of dealmaking –  but then, like them, he never had to face an election.

There is a paragraph towards the end of the book when Bernanke recounts a farewell dinner held in early 2013 when Tim Geithner ended his term as Secretary to the Treasury.    The attendees were former Treasury secretaries and former heads of the Fed.  Bernanke reflects:

Government policymaking at the highest levels involves long hours and near-constant stress, but it is exciting to feel part of history, to be doing things that matter.  At the same time, we all knew the frustrations of struggling with extraordinarily complex problems under unrelenting public and political scrutiny.  Rapidly changing communications technologies….seemed not only to have intensified the scrutiny but also to have favoured the strident and uninformed over the calm and reasonable, the personal attack over the thoughtful analysis.  In a world of spin and counterspin, we all knew what it was to become a symbol of a moment in economic history –  to serve as an unwilling avatar of Americans’ hopes and fears, to become a media-constructed caricature that no one who knew us would ever recognise.  But that’s the baggage that comes with consequential policy7 jobs, as we all knew too well.  The deepest frustration we shared, it soon became clear, was not with the baggage but with government dysfunction itself.

Technocrats as sacrificial heroes, saving the world from politicians and private markets…..

And yet, curiously, Bernanke seems untroubled by the continued growth in the size of government (whether spending/GDP, or the regulatory state). Ultimately those are choices made by the same Congresses that he views with such disdain.

I could go on at length, but there were several other areas of the book that left me disappointed:

  • There was no sustained engagement with the question of why, eg, real GDP per capita is still so far below the pre-crisis trend level (or, for all the contrasts he attempts to draw between himself and the Depression-era policymakers, why in many countries the record eight years on from 2007 is worse than that eight years on from 1929)
  • Bernanke is confident that (successive rounds of ) QE was the right policy, but actually offers little substantive basis for believing that QE made very much sustained difference at all.  Would US bond yields really have been much higher in the last few years absent QE?
  • Somewhat relatedly,  Bernanke does not discuss at all issues around removing or alleviating the zero lower bound on nominal interest rates.  In one sense that isn’t too surprising  – he started writing the book just a few days out of office, and ZLB issues can quickly get quite technical –   but for someone of the academic stature of Bernanke not even to have addressed the issue is a bit disappointing.    Perhaps he thinks nothing can be done, or should be done, but with year after year of policy interest rates near zero, it is not as if the ZLB proved to be a short-lived (or Japanese) curiosity that no one now needs to worry about.
  • Bernanke had a US-specific job, but I thought his treatment of the rest of the world was disappointingly weak.  Of course, US readers often aren’t that interested in the rest of the world, but I thought he was far too easy or glib about what could or should have been done in Europe (the poor old German taxpayer, facing not-low debt levels and a falling population, should apparently have spent a lot more).  And I spluttered when I got to the references suggesting that the IMF, under Strauss-Kahn and Lagarde, had shown no signs of favouring Europe.    And, as a hobbyhorse of mine, there wasn’t much sign that Bernanke has ever thought seriously about what marked out the countries that experienced crises from those that did not (there is, for example, only very brief reference to Canada), and whether the incidence of financial crisis can explain much about how respective economies have performed since 2007).
  • And there was nothing at all on the still extraordinarily large role the government plays in the housing finance market in the United States –  something that goes well beyond anything seen in most OECD countries, and which at least some observers suggest might have contributed to the severity of the US crisis..

I had been meaning for some time to write something about the contrasts between the legal constraints on central banks and government ministers in the United States on the one hand, and New Zealand on the other.  This was prompted by reading a fascinating book, To the Edge: Legality, Legitimacy, and the Responses to the 2008 Financial Crisis, by Philip Wallich, and contrasting it with our law, and my experiences in our Treasury during the 2008/09 crisis.  The powers of the Reserve Bank of New Zealand and New Zealand’s Minister of Finance in dealing with financial crises are extraordinary broad by comparison with those of the US authorities (either in 2008/09 or now).  No question could have arisen as to the Reserve Bank’s ability to lend to any institution it chose, or as to the ability of the Minister of Finance to guarantee any liability or institution he chose.  The US situation was very different, as Bernanke recounts.   There is a real tension here.  The New Zealand powers are frighteningly broad in the wrong hands –  as I read the Public Finance Act, the Minister of Finance could at a stroke bankrupt New Zealand, with no requirement for Cabinet or parliamentary approval –  but they are also very flexible.  I’m not at all sure what the right balance is, but would have been interested in Bernanke’s view on such issues in the light of his experience.  My guess is that he would favour more flexibility than the US had then or now, but how are citizens to be protected from official caprice and well-intentioned misjudgement?  Congress might be quite as bad as Bernanke suggests, but it is they who have an electoral mandate that the best central banker will never have.

Finally –  and perhaps mercifully –  there was nothing in the book of the numerous visitors who must have tramped through Bernanke’s offices over the years.  I wonder what he made of repeated meetings with visiting New Zealand delegations (that I used to read the file notes of) or those of the myriad visitors from other countries.  As a reserved academic, I suspect it wasn’t a highpoint of the job, but….at least they weren’t members of the US Congress.

I suspect Bernanke would have felt more at home in a system of government –  akin to ours, or that of Canada or the UK –  in which the legislature was kept more firmly in its place by the political executive, and there is perhaps less robust media scrutiny.    He ended the book

It is hard to avoid the conclusion that today we need more cooperation and less confrontation in Washington.  If government is to play its vital role in creating a successful economy, we must restore comity, compromise, and openness to evidence.  Without that the American economy will fall tragically short of its extraordinary potential.

For all its problems, of course, the US remains strikingly more successful economically than most of the countries  –  even the advanced democracies – where MPs make rather fewer problems for senior officials.