The Huge and Dire Consequences of the Fed

Ben Bernanke
Ben Bernanke; drawing by James Ferguson

The Federal Reserve is the most powerful institution in the US economy. It has also become, in recent years, among the most unpopular. The main source of discontent with the Fed is its actions during the financial crisis and Great Recession of 2007–2009, and the slow recovery that followed, actions that have come under fire from both the left and the right. Progressives have attacked the Fed for orchestrating the bailouts of big Wall Street banks and for neglecting the interests of ordinary Americans. Conservatives, meanwhile, have blasted the Fed not just for the bailouts but also for supposedly risking hyperinflation and the debasement of the dollar by keeping interest rates “artificially” low.

Against this backdrop, The Courage to Act, former Federal Reserve chairman Ben Bernanke’s memoir of the crisis and its aftermath, is a persuasive, if self-interested, corrective. The Courage to Act is an unusual memoir. Perhaps because of Bernanke’s famously even-keeled personality (Secretary of the Treasury Timothy Geithner dubbed him “the Buddha of central banking”), his book contains almost no gossip or personal attacks. Nor is it especially revealing about the emotional experience of presiding over what Bernanke has called “the worst financial crisis in global history.” What it offers instead is a surprisingly rigorous discussion of the economics and theory of monetary policy and the management of financial crises, filtered through a blow-by-blow account of Bernanke’s tenure at the Fed.

As that description suggests, The Courage to Act is a somewhat dry book. But it’s also an important one. Bernanke clearly wants the book to be read as a vindication, showing not just why he did what he did, but also why what he did was right. And that’s not an unreasonable ambition—he deserves a great deal of credit for his management of the crisis and of the Fed’s monetary policy in the post-recession years. But what his book also shows, perhaps in spite of itself, is how the Fed’s actions are often circumscribed by ideology and politics, in ways that are damaging to the economy as a whole. It helps us understand why even the most capable technocrats sometimes fall short of our expectations. And since today’s Fed is wrestling with many of the same issues of monetary policy and bank regulation that Bernanke did, his book has as much to say about the present as it does about the past.

Bernanke first came to the Fed as a governor in the summer of 2002, leaving a post as a professor of economics at Princeton, where he had spent much of his career working on the economics of the Great Depression (something that would turn out to be quite useful). He arrived with the economy still recovering from the 2001 recession, and stayed for almost three years. He then served as chairman of George Bush’s Council of Economic Advisers before returning to the Fed as chairman in February…

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