The Federal Reserve and the Financial Crisis, Ben S. Bernanke

The Federal Reserve and the Financial Crisis by Ben S. Bernanke offers insight into the guiding principles behind the Fed's activities and the lessons to be learned from its handling of recent economic challenges by taking historic talks.

Author traces the origins of the Federal Reserve, from its inception in 1914 through the Second World War, and he looks at the Fed post-1945, when it began operating independently from other governmental departments such as the Treasury. During this time the Fed grappled with episodes of high inflation, finally tamed by then-chairman Paul Volcker.

Bernanke also explores the period under his predecessor, Alan Greenspan, known as the Great Moderation. Bernanke then delves into the Fed's reaction to the recent financial crisis, focusing on the central bank's role as the lender of last resort and discussing efforts that injected liquidity into the banking system.

Bernanke points out those monetary policies alone cannot revive the economy, and he describes ongoing structural and regulatory problems that need to be addressed. Providing first-hand knowledge of how problems in the financial system were handled, The Federal Reserve and the Financial Crisis will long be studied by those interested in this critical moment in history.

The author examines what the Federal Reserve was intended to accomplish, how it performed its statutory task as it evolved over time and the special functions of the lender-of-last-resort that have been called upon during the financial crisis. These lectures provide a useful primer on matters not often presented in such a comprehensive or unequivocal way. Bernanke's reputation is often identified with his expertise on the Great Depression.

In addition to the housing bubble and systemic effects, the third prominent feature of the financial crisis was the widespread mispricing of risk. Although Mr. Bernanke acknowledges that "too big to fail" creates perverse incentives, he neither uses the term "moral hazard" nor gives the concept much consideration. He explains the excessive risk-taking that precipitated the crash by saying that "nobody was in charge" and then sings the praises of the Dodd-Frank Act, which, with "more stringent scrutiny," will somehow help achieve financial stability in the future. This discloses Mr. Bernanke's astonishing faith in the ability of government to outperform the market in pricing risk.

Milton Friedman correctly insisted that the role of central banks was to merely control the total money supply and permit markets to allocate credit. Mr. Bernanke clearly rejects this view, and this finally is the underlying story of his lectures, reflected in his focus on interest rates as the sole indicator of monetary policy, his targeted but sterilized bailouts, his paying interest on reserves, his expanding Fed assets to include mortgage-backed securities, and his efforts to manipulate the yield curve.

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