Powering US prosperity and competitiveness through place-based investment


Powering US prosperity and competitiveness through place-based investment



Three new books, three new looks inside the financial black box

For those still trying to understand the financial crisis that provoked the Great Recession of 2007-09, October will be a good month. Three forthcoming books offer useful perspectives on where we’ve been, where we are, and where we might be headed.

(Full disclosure: I count all three authors as friends, and I advised Ben Bernanke on his book.)

Oct. 5: The former Federal Reserve chairman’s book, “The Courage to Act: A Memoir of a Crisis and Its Aftermath,” traces his upbringing and career, recounts the tense moments of the financial crisis from an insider’s perspective, and illuminates debates inside the Fed up to the very end of Mr. Bernanke’s term in January 2014.

One tidbit: Mr. Bernanke gives the back story of the “taper tantrum,” the abrupt market reaction to his May 2013 congressional testimony that hinted at an end to the Fed’s open-ended bond buying, known as QE3 (for the third round of “quantitative easing”). At the time, he writes, he was laboring to maintain supportfor QE amid resistance from some outspoken regional Fed bank presidents as well as from three of the Washington-based board members–Betsy DukeJay Powell, and Jeremy Stein–dubbed “the three amigos” by Fed spokeswoman Michelle Smith (p. 540).

The book also gives a glimpse of what it was like to deal with members of Congress–among them Sen. Richard Shelby, who excoriated Mr. Bernanke in public but courted him privately. The Fed chairman was surprised that the often-folksy Alabama Republican had distinctly high-brow tastes. “I once invited him to dinner,” Mr. Bernanke writes, “and he chose one of the finest Italian restaurants in Washington.” Among the topics discussed over dinner was Mr. Shelby’s affinity for Wagnerian opera (p. 431).

Oct. 13: In “Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe,” Greg Ip of The Wall Street Journal wrestles with a conundrum: The safer we make some aspects of life, financial and otherwise, the more risks people take and the greater the risk of calamity.

Inspired by the late economist Hyman Minsky (who was regarded as a bit of crank by his peers during his lifetime but is now seen as a prophet), Mr. Ipcounts all the ways that stability can be destabilizing. He draws a fascinating parallel between the downsides of suppressing forest fires (less frequent, but much bigger fires) and the consequences of persuading investors that the Fed can and will always do what’s needed to avoid big financial crises (excessive, unrealistic risk-taking that ends up producing episodes like the recent global financial crisis).

His bottom line: We should neither insist on nor expect total safety and stability because that will bring us hotter forest fires and more intense financial crises. We should accept that a little more chaos and risk today will produce more reward and stability tomorrow.

Oct. 20: Former Journal reporter Roger Lowenstein’s “America’s Bank: The Epic Struggle to Create the Federal Reserve” reminds us that the Fed was born in 1913 amid political controversy, unlikely coalitions, and tensions between the House and Senate and between Congress and the White House. To a remarkable degree, echoes of those battles are still heard today. There was and still is persistent public unease about centralizing power in Washington, suspicion of bankers, unquenchable angst about inflation in some quarters, and tension between the interests of debtors and creditors. (For inside-the-Beltway readers, Mr. Lowenstein will be discussing his book on Oct. 22 at the Brookings Institution’s Hutchins Center with political scientist Sarah Binder and former Fed vice chairman Don Kohn.)

After the Federal Reserve Act was signed into law by Woodrow Wilson, several men boasted of being the creator, Mr. Lowenstein writes. Asked about the identity of the Fed’s father, financier Paul Warburg (an original member of the Federal Reserve Board) replied that he didn’t know but that judging from the number of men who claimed the honor, “its mother must have been a most immoral woman.”

Editor’s Note: this post originally appeared on The Wall Street Journal’s Washington Wire on October 5, 2015.