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LINDA WERTHEIMER, host:

David Wessel of the Wall Street Journal is a frequent guest on our program and he's out with a new book. It's called "In Fed We Trust," and it's about the Federal Reserve Chairman Ben Bernanke and his war on what Wessel calls the Great Panic, the financial meltdown, and the effort to prevent a second Great Depression. But Wessel tells a serious story as a kind of high finance thriller filled with plot twists and unpredictable characters dashing around the elegant corridors of the Federal Reserve.

Thanks very much for coming in.

Mr. DAVID WESSEL: You're welcome.

WERTHEIMER: Now, your book is not a diatribe on how the U.S. economy got into this mess. It's about the rescue mission mounted by the Federal Reserve. And in your first chapter you give us a quite dramatic account of why it nearly went completely astray, what you call the colossal mistake of allowing a major investment bank, Lehman Brothers, to fail.

Mr. WESSEL: Right. I think as we look back, we now know that that decision to allow Lehman Brothers to fail was, if not the catalyst for this terrible economic shock, at least a contributing factor.

WERTHEIMER: Do you think that the group of people that were conferring about all these decisions, Ben Bernanke, the New York Fed president, Tim Geithner, who's now the Treasury secretary, and the then-Treasury secretary, Hank Paulson, do you think they knew how bad it would be when Lehman went down?

Mr. WESSEL: I can't imagine they knew how bad it would be. Mr. Bernanke, Geithner, and Paulson knew that the market would be upset if Lehman failed and they knew that people who had money in Lehman would get hurt. What they didn't realize was how big the ripples would be, almost a tsunami of people all over the world questioning whether any bank was solvent.

I think there were two things about Lehman that were a shock to the system. One is, despite what the officials say, a lot of people in the markets figured that in the end they would save Lehman. They had saved Bear Stearns. As one European central banker said to me, in Europe we don't even let dry cleaners fail. It never occurred to us that the U.S. would let Lehman go.

And the second thing, Lehman was not just large, it had tentacles all over the world, and so that made it hard to manage, but it also guaranteed that the pain from the Lehman bankruptcy would show up in London and Paris and China and Japan, and that made it much worse.

WERTHEIMER: Now, in one year, in 2008, the Fed saved the brokerage house Bear Stearns, helped the Treasury take over mortgage giants Fannie Mae and Freddie Mac, let Lehman Brothers go, turned around and rescued the insurance company AIG, and at some point it became clear that the Fed was expanding its powers, being willing to release billions and billions of dollars into the economy, becoming, as you say in your book, really a fourth branch of government with one man in a position to make all the decisions.

Mr. WESSEL: Right. Now, of course he would say that he couldn't make the decisions alone. There's a committee there. And he would say that Congress has the power to reign in the Fed, and in fact there's some discussion of it.

But at that moment there was no alternative but the Fed. They did all the things you said, they brought interest rates to zero. When that wasn't enough, they started spending literally hundreds of billions of dollars in buying government bonds and buying mortgage-linked securities in order to keep the economy from starving.

WERTHEIMER: Did they succeed?

Mr. WESSEL: We know that the Fed, with some help from the Treasury and the Congress, has succeeded in preventing another Great Depression. The economy has pulled back from the abyss.

Did they succeed in getting the economy going again so we can go back to something that resembles normal? Not yet. Did they lay the foundation - did they plant the seeds for another financial crisis by letting all these investors know that in a pinch if they lend money to a big financial firm the government will bail them out? Well, they did that and we don't know yet whether they are planting the seeds of the next financial crisis.

WERTHEIMER: And Ben Bernanke, do you think, did he do well enough in this crisis to - for the president to consider reappointing him? 2010 is the end of his term.

Mr. WESSEL: Right. Well, the president is going to decide that and he's not going to consult me. I think that if the president were making that decision today, he would reappoint him. Because, one, he's done a good enough job. Two, changing Fed chairman at a time like this could create some uncertainty and doubt in the markets, and that could raise interest rates and hurt the economy, which is weak. And third, I suspect the president will realize that if he puts someone from his team in charge of the Fed, that will lead to suspicions that he's trying to muscle the Fed or help them keep the deficits going or create inflation or all sorts of perceptions that he won't want to create.

WERTHEIMER: David Wessel, thank you very much.

Mr. WESSEL: You're welcome.

WERTHEIMER: David Wessel's new book is called "In Fed We Trust." You can read an excerpt at the new npr.org, where you can also learn more about the economy on our Planet Money blog.

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