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David Wessel


Subtitle - Ben Bernanke's War on the Great Panic: How the Federal Reserve became the Fourth Branch of Government. Crown Business, NYC, 2009, 323 pgs., index, selected bibliography,


Mr. Wessel is an economic journalist, meaning he uses the skills of a reporter and focuses on economic issues. His book reflects the strong and weak aspects of this background. The main weak point is in the organization. As a journalist he wants to entice the readers, so in typical journalist style he opens the story (and it is a story he is telling) with the end. In this case it is the opening in Chapter One in which the author describes the bankruptcy of Lehman and what his protagonists (Bernanke, Kohn, Warsh, Geithner, Paulson and supporting cast) were doing about it. The strong point is that he has an excellent eye for personal details and tells a great 'story' full of the excitement experienced by his protagonists as they reeled from one disaster to the next. But within his story he inserts much valuable by way of 'lessons learned' and critical analysis.
Actually he starts even more in journalism mode with the opening line of the Introduction "At the beginning of October 2008, after some of the roughest weeks of the Great Panic, the lines in Ben Bernanke's face and the circles under his eyes offered evidence of more than a year of seven-day weeks and conference calls that stretched past midnight." OK, was Mr. Wessel monitoring Bernankes countenance each day? The paragraph continues in this manner with mentions of Dr. Pepper and 'trail mix'. But the Introduction also does include some very interesting lines. "The president of the United States can respond instantly to a missile attack with real bullets; he cannot respond instantly to financial panic with real money without the prior approval of Congress. But Bernanke could and did."
Then in chapter 2 the author goes far back to discuss the origin of the FED in terms of the financial system that existed around 1900 and its purported problems. Since his focus is on the 'Great Panic' he skips over much discussion of the role of the FED in intervening years to take up Greenspan's activities in the 3rd Chapter "Age of Delusion", but this also is just as background. Also missing is much discussion of the causes of the 'Great Panic' especially the government role in the housing market.
My personal preference is an organization of a narrative that proceeds from origins to conclusion. In this case one reaches the point toward the end when the author skips over the Lehman affair to discuss its immediate impact on such entities as the Reserve Fund and AIG. I sensed that something was suddenly missing and had to go back and read chapter One again. But Mr. Wessel is far less guilty of this mixing up that David Stockman is in The Great Deformation which jumps around and around.
There are too many valuable points expressed in sentences here and there to quote them all. But they show that the author has a good understanding of the larger financial system in which these events took place and has limited his focus in this book to a narrow set of events on purpose in order to study the actions of the leaders.
The content is a very interesting personalized account focused on the players in this drama. We learn a great deal of trivia about their lives in the process of Mr. Wessel's effort to show the impact of their personalities on their assessments and reactions to unfolding events. He does not explain how the banking system, led by the FED, came to be in its role as the government outsourced the creation of the nation's money supply to the banks. But it is clear from his detailed discussion of what happened from 2007 on that this has happened. Thus his claim that the FED is now the "Fourth Branch of Government" is made clear. Given that the nation's financial system was dependent on the banking system (and shadow banks) Mr. Wessel claims and supports two opinions. First that the FED - mainly Bernanke himself - did not understand the nature or severity of the coming crisis. But second, that it did respond eventually to save the country, however, making quite a few mistakes along the way. His title' Great Panic' refers to his belief (correctly I also believe) that banking systems depend on confidence and that any threat of disruption can be quickly magnified into Panic. Thus the role of the FED was to reduce the Panic. In all this he shows that the U.S. Government played a very passive role, only the Secretary of the Treasury, Paulson, and a few of his chief assistants even understood what was going on. The President was only briefed in general terms and Congress was only involved at the last minute. One of the interesting items we learn in passing is the huge role lawyers play in government decisions. At every step the leaders at the FED, SEC, FDIC and Treasury had to obtain approval from their lawyers and such approval was withheld on occasions when the lawyers disapproved.
The author's conclusion is that the unprecedented and even legally marginal actions were essential and did save the day. In this he disagrees with authors who claim the whole process was a 'Bailout' of undeserving greedy financial gangsters. Stockman and Barry Ritholtz come to mind. He is in favor of government controls. But he writes, "Bernanke, like Greenspan and Volcker before him subscribed to the view that the best way to protect a democratic society from undesirable rates of inflation was to keep control of interest rates and the supply of money away from elected politicians". In fact, then, to place it in the hands of a self-proclaimed independent central bank such as the FED.
I recommend the book as a detailed description of the personal actions of the leading American financial rulers - the FED governors and Treasury leaders in the "Great Panic' as Mr. Wessel calls it. David Smick calls it 'the Great Credit Crisis' - but his point is similar in that he believes that the entire world financial system is based on confidence that supports credit and when confidence evaporates credit collapses. So a collapse of confidence results in panic. By extension one will realize that their power continues and is much greater than the public in general realizes. Also one can read between the lines to learn what the real role of the banks and entire financial system is in creating the actual money supply based on confidence in the future value of debt=credit. The U.S. money supply is much more than currency or even M1 or M2. Moreover, as the actions of the FED to swap dollars for Euros and Franc showed it is only part of the world-wide financial system that is beyond the control of any nation. The fragility of this entire financial system has not been reduced by the urgent 'seat of the pants' actions taken even though they did avert a disastrous financial collapse . The book was published in 2009 before Bernanke was reappointed as Chairman by President Obama in January 2010. One would like to learn what Mr. Wessel thinks about the events since then.


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