Ben Bernanke And The 'Great Panic' Wall Street Journal economics editor David Wessel's new book, In Fed We Trust: Ben Bernanke's War on the Great Panic, examines the expanding powers of the Federal Reserve in the face of the current economic crisis.
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Ben Bernanke And The 'Great Panic'

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Ben Bernanke And The 'Great Panic'

Ben Bernanke And The 'Great Panic'

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This is FRESH AIR. I'm Dave Davies, senior writer for the Philadelphia Daily News, filling in for Terry Gross.

Could you imagine being able to create a million, a billion, even 50 billion dollars just by hitting some key strokes and increasing the balance in a bank account? Well, that's exactly what the Federal Reserve does. And during the nation's financial meltdown, the Fed has created and pumped close to $2 trillion into the nation's banks and financial institutions to keep the economy afloat.

Our guest, writer David Wessel, argues that the Fed's aggressive intervention in the crisis may well have prevented a second Great Depression. But because it's been so active and independent, the Fed and its chairman, Ben Bernanke, have become controversial. Many in Congress don't like the idea that the Fed has the authority to create and lend enormous amounts of money on its own, without congressional or presidential approval. And there are proposals to increase scrutiny of the Federal Reserve and limit its authority.

On the other hand, many economists argue that it's critical for the economy to have a central banking system that is independent and free from political influence. And a proposed revamping of the financial system gives the Fed even more regulatory power. Wessel says the Fed has effectively become a fourth branch of government, and he explores its role in the financial crisis in his new book, "In Fed We Trust." David Wessel is economics editor of the Wall Street Journal.

Well, David Wessel, welcome to FRESH AIR. In this book, you note that the Federal Reserve has such enormous power and independence, it could be called a fourth branch of government. I'd like to begin with a naïve question, really, and that is what is a central bank or a national bank? I mean, you know, we all know that commercial banks get deposits from its customers and then takes that money and lends it out to businesses and mortgage holders and then, you know, makes a return. How is a national bank different?

Mr. DAVID WESSEL (Economics Editor, Wall Street Journal; Author, "In Fed We Trust"): Well, a central bank, which is an old invention, dates to the 17th century in Britain, is really a regulator of credit. And one way to think about it is that if we're going to have paper money, fiat money it's called, somebody has to oversee it.

We didn't have to do that when we had barter economies, where you traded your cow for somebody else's horseshoes. And you didn't have to do it when people had faith in gold, and if you had gold, you had money, and if you didn't have gold, you didn't have money. So in a very real sense, the Fed is - stands behind the paper currency. In fact, the paper currency we have are called Federal Reserve notes. The Fed actually runs the printing presses, or these days they're electronic, and it controls how much money there is in the economy.

DAVIES: Now, you note in the book that from I guess the 1830s, for the next 75 or 80 years, there really was no central banking system in the United States because there was such suspicion of bankers. But there was a crisis in 1907 that really brought the fragility of the financial system into focus. Tell us about that and how catastrophe was averted then.

Mr. WESSEL: Well, that's right. Alexander Hamilton, in the founding of the U.S., wanted to have a central bank. And there was, as you say, the First and the Second Banks of the United States, both of which blew up.

In 1907, there was no central bank. There was a crisis. It started with speculation actually on copper in New York. There were a number of banks that were the core of the system, and they kind of took care of each other. And then there were a number of banks on the periphery, and they weren't considered that important, sort of like what we saw during the recent period.

Some of those banks on the periphery, they were called trust companies, got into trouble and there was a panic, a widespread panic. The president, Theodore Roosevelt, was off hunting in Louisiana, and it fell to the only man who had the money and power to hold the system together, J.P. Morgan, to do the job. And at one point during the panic of 1907, one big bank has fallen, another bank is in trouble.

J.P. Morgan tries to organize bankers, commercial bankers, to come together and rescue this bank for the good of the system, much as the Federal Reserve did when it called everybody and asked them to help with Bear Stearns in this period, and nobody will come to the party.

So he calls the president of the bank, and he tells the bank to bring all his best securities to Morgan's office, and Morgan goes through them one at a time until he has enough security, enough collateral so he feels comfortable in lending the money in order to keep that bank afloat and keep the system from imploding.

It was that episode and the days that followed that led both the bankers in New York to feel they couldn't control things by themselves anymore, they needed help from Washington, and Washington to feel it wasn't so healthy to rely on an aging, albeit very rich and powerful, man to keep the country out of trouble. And that led to the founding of the Federal Reserve in 1913.

DAVIES: Right, so that led to a commitment to create a central banking system. And you had this tension because there was a perceived need for some stability and regulation. On the other hand, there was this great suspicion of giving bankers commanding positions in the economy. What kind of system resulted? What does the Fed look like today?

Mr. WESSEL: Well, there were a lot of - there was a lot of tension at that time. There was tension between borrowers and lenders, between city and urban interests on one hand and rural interests on the other. There was a lot of suspicion, as you say, about big bankers. The banks actually wanted to control the Federal Reserve. And Woodrow Wilson and some of his progressive colleagues at the time didn't want - didn't think that was a good idea. So they ended up with a hybrid.

There were 12 regional Federal Reserve banks, each of which was owned by the banks in its own district, technically, and there was a very weak Federal Reserve board in Washington. And in fact, the strongest player was not in Washington, but it was the president of the Federal Reserve Bank of New York, a man named Benjamin Strong, who had once worked very closely with J.P. Morgan. So that was the structure that we got after World War I that, for the next couple of decades, was the central bank.

DAVIES: It changed in the '30s, right?

Mr. WESSEL: Right. The '30s is a calamity in central bank history. The Fed, operating under what it thought was the orthodox, conventional monetary policies of the time, took a bad recession and made it horrendous. It's really incredible to look back and see how badly they handled the thing.

As a result of that, Congress revisited the structure of the Fed, and it made the Washington board of governors much stronger. So today, we are living with a structure that was created in 1935, where we have seven Federal Reserve governors in Washington, who are appointed by the president, confirmed by the Senate, and 12 regional Fed banks, each of which has a president who is chosen by its private-sector board of directors. And together those two groups of people form a committee that sets interest rates and makes monetary policy, but the Washington directors, the seven, always have the power to out-vote the 12 because only five of the 12 can vote at any one time.

DAVIES: So we have strong influence of the federal government, but there remain private sector elements to the system, right?

Mr. WESSEL: Right, and the idea was to prevent it from being 100 percent controlled by politicians because what the Fed really is is a compromise between people who don't trust bankers and people who don't trust politicians. So there's a kind of built-in checks and balances there.

DAVIES: Now, the current chairman of the Federal Reserve is Ben Bernanke. And he is - was, by training, an economist, right, who spent a lot of time studying the Great Depression and the role of the Federal Reserve. Tell us his view of what happened, you know, after the stock market crash of '29.

Mr. WESSEL: Well, most economists think that the stock market crash of '29 was as much a symptom as a cause of the Depression. The very famous economist Milton Friedman, who won a Nobel Prize, and his co-colleague, Anna Schwartz, who is still alive and in her 90s, wrote a very influential book that blamed the Great Depression on what the Fed did, that the Fed was basically too miserly with credit.

Ben Bernanke was a graduate student and, at MIT, read that book, was very influenced by it and pursued their line of inquiry to try and understand how was it that such smart people, well-meaning, made such colossal mistakes and created the Great Depression? And Bernanke agrees in part with Milton Friedman and Anna Schwartz. He thinks the Fed was too stingy with credit, and he thinks Herbert Hoover made a number of mistakes with tax and spending policy, but he added his own little channel to the discussion of how monetary policy got it so wrong.

And what he said was, the Fed didn't understand that when banks collapse, that isn't just a symptom of a problem, but that makes the problem worse because when banks collapse, they can't lend. Credit is the lifeblood of the economy. It's like the circulatory system of a body shutting down.

And so his work emphasized that it wasn't just that the Fed did the wrong thing on interest rates at the wrong time or that Hoover did the wrong thing on taxes and spending and that Roosevelt got some things right and some things wrong, it was everybody misunderstood how important the banking system was and how much it was transmitting this economic disease to the whole economy.

Well, if you flash forward, you see that that's exactly what happened in our own time, and he was looking for that. A lot of people thought he was nuts at first, that this wasn't a repeat of that kind of thing, but he was - he saw it through that lens, and I think you can understand much of what he does during this great panic through that lens.

DAVIES: Let's talk about the recent calamities, which you have dubbed the great panic. First of all, to what extent did the Federal Reserve contribute to this mess by either faulty policies or misreading the situation?

Mr. WESSEL: Well, that's a very good question. I think the list of people who blew it is very long. And it includes everybody from the people who ran the banks, to the people who run their risk-management committees, to the sophisticated investors that were buying mortgages from people who had no income and didn't have any down payment, to the mortgage brokers who sold those, to the people themselves who bought houses they couldn't afford, to the financial press that didn't blow the whistle or at least not blow it loudly enough. But it's impossible to excuse the Federal Reserve in that long list.

And in the book, I talk about some things that I think the Fed, with the benefit of hindsight, and that's important, didn't get quite right during the years when Alan Greenspan was the chairman and Ben Bernanke was a member of the Federal Reserve Board but not in charge.

It looks to me like the Fed kept interest rates too low too long because it was worried about a weak economy and about a phenomenon called deflation or falling prices. By keeping interest rates so low, it just encouraged a whole lot of borrowing that led people to speculate wildly and helped to produce the housing bubble. But more than that, I think that the Fed fell down on its responsibilities to regulate the economy.

Ever since the '30s, it has had responsibility for keeping an eye on the banking system, and it did not use the power it had to stop these kind of crazy mortgages that were being made or to sort of curtail the wild borrowing that was going on that later blew up in our faces.

And then I think the third thing is that Alan Greenspan, as chairman of the Federal Reserve, believed very strongly that markets left to themselves would sort things out. That if you had a whole lot of rich people, very sophisticated investors playing poker, that those people would have such a strong interest in keeping the poker table honest that there wasn't any point to having a bunch of bureaucratic regulators who were trying to do that job. And that turned out to be wrong, and he's admitted as much in a testimony before Henry Waxman's committee on the Hill that his world view was wrong.

So keeping interest rates too low too long, not using the regulatory muscle they had and contributing to this the-market-can-do-no-wrong attitude are the three things which I think the Fed can be cited for causing or contributing, as you say, contributing to the current crisis.

DAVIES: We're speaking with David Wessel. He is the economics editor for the Wall Street Journal. He has a new book about the Federal Reserve called "In Fed We Trust." We'll talk more after a break. This is FRESH AIR.

(Soundbite of music)

DAVIES: If you're just joining us, our guest is David Wessel. He's the economics editor for the Wall Street Journal. He has a new book about the Federal Reserve, particularly its handling of the recent economic crisis. It's called "In Fed We Trust."

When this crisis emerged, I mean, we saw, you know, problems with mortgage-backed securities, and then I guess the first big bank to get into trouble was Bear Stearns. And then you had this - you had Ben Bernanke at the Fed, you had the Treasury Secretary Henry Paulson, and you had Timothy Geithner, who was then president of the Federal Reserve Bank, the most important of the 12 regional banks. And as you described, these folks had to kind of operate together as an ad-hoc team to respond to these crises.

We can't go through them all, but I'm kind of - but let's talk about a couple. When Bear Stearns was in trouble, at that point, the Federal Reserve actually acted to, in effect, salvage the company by finding a buyer and providing credit. When Lehman Brothers was in trouble five months later, it let the company fail. Why the inconsistency?

Mr. WESSEL: Well, that's a very good question. I don't think I would say that the crisis began with Bear Stearns. It really began in August, 2007, but it certainly reached what looked like a crescendo in March, 2008, when Bear Stearns got into trouble.

It discovered that it couldn't get enough money to keep itself in business. And the Federal Reserve Bank of New York, Tim Geithner the president and Ben Bernanke and Hank Paulson, who was then the treasury secretary, decided that the system could not handle a collapse of Bear Stearns. And they couldn't find anybody to buy it without a little help from their friends, the taxpayers.

So they organized a rescue of Bear Stearns, where they put $30 billion, later reduced to $29 billion, of taxpayer money into this deal to take stuff off the books of Bear Stearns that the buyer, JP Morgan Chase, didn't want. And it was significant because it was the first public use of the Fed's power to lend to almost anybody in a crisis since the 1930s, when it was given that power. And there was a great deal of debate of whether it was the right thing or the wrong thing to do.

On one hand, people said they saved the system. Bear Stearns would have gone down, and it would have been a huge shockwave. On the other hand, other people said, well, they set a bad precedent here, and everybody on Wall Street will take more risk because they think the Fed and the Treasury, particularly the Fed, will bail them out.

So Lehman Brothers comes along, and the Treasury and the Fed think, well, we can just do this same thing again. We'll find somebody else to buy Lehman and take this off our hands, and we can get through this thing. Well, it turns out they can't find a buyer. The last buyer in the room is Barclays, a big British bank, and the British government, in the end, won't let them buy Lehman Brothers. And Mr. Bernanke and Mr. Geithner and Mr. Paulson did not come to that fateful day with a Plan B.

At the time, they were talking, and they were open about how they thought, well, maybe the markets know that Lehman's in trouble, and if we let them go, it'll teach people a lesson, and it'll be bad, but it won't be catastrophic.

It turns out to be pretty catastrophic. It leads all sorts of people around the world to think that no bank is safe. Lots of Americans pull money out of money market funds and it becomes a big calamity. But Mr. Bernanke says, after the fact, that had he had the power, and had Congress given them the money that they subsequently gave them, he would have saved Lehman Brothers because he knew that at a time like that, having a big financial house collapse would cause problems. But neither he nor Mr. Paulson nor Mr. Geithner had any idea of how many problems it would actually cause.

DAVIES: Now, after Lehman collapsed, of course there were other big problems ahead. AIG got into trouble. And Bernanke, you say, took an anything-it-takes approach. What do you mean by that?

Mr. WESSEL: Well, I think it's important to remember that that weekend in the middle of September was pretty overwhelming, even for people who have as much power as the chairman of the Federal Reserve or the president of the Federal Reserve Bank in New York.

DAVIES: That's when Lehman was on the precipice of collapse?

Mr. WESSEL: Right. Lehman is not alone. There are three institutions in trouble. One is Merrill Lynch, and they happily married Merrill Lynch off to Bank of America, although that doesn't turn out so well. There's Lehman. They let it go down, it has a huge shockwave, but as they're letting it go down, they know they have this big problem in AIG.

And AIG was really something they didn't understand very well. AIG was an insurance company. It hadn't been regulated by the Fed. They didn't appreciate just how big a mountain of hedge funds had been built on top of its insurance operations and how many interconnections they had.

Lehman goes down. They realize that they can't let AIG go down, too, or we really will be pushing our economy into another Great Depression. So all the teach-Wall-Street-a-lesson talk vanishes, and they turn out to make a very messy deal to keep AIG from filing for bankruptcy, a mess that they're still trying to get out of.

DAVIES: Now, before this series of calamities that you refer - you call the great panic, did the character of the Fed change? I mean, did it start doing things it had never done before?

Mr. WESSEL: The answer to that is yes. You know, Ben Bernanke gave a speech when he was a Fed governor, lecturing the Japanese about what they were doing wrong. And one of the things he recalled was that Roosevelt had this approach during the Great Depression to don't be bound by conventional tactics, try lots of things, and some of them will work, and some of them won't work, but the ones that work will save you from catastrophe. And he adopted that whatever-it-takes approach during this period.

So not only do you have them lending money to AIG and lending money to JP Morgan in order to buy Bear Stearns, that they'd never done anything like that before, but there are all sorts of lending that they do. They lend to industrial companies that are having trouble selling short-term IOUs called commercial paper. They start buying mortgages on the open market, something they hadn't done before, all sorts of tactics, all designed to do whatever it takes so that Mr. Bernanke can keep a promise he once made to Milton Friedman, which was, you're right, the Fed caused the Great Depression. Thanks to you, we'll never do it again.

DAVIES: So it became this fountain of money, of providing kind of liquidity and credit all throughout the economy. I read in a piece in the Washington Post that the Fed had provided more than a trillion dollars to prop up more than 400 financial firms. Is that the scale of this?

Mr. WESSEL: Right. I mean, the Fed, all its lending and all its securities now exceed $2 trillion, or they did, and now they're shrinking a little bit below $2 trillion, but one thing that's important here is that one of the reasons the Fed did this, and why I used the fourth-branch-of-government phrase is that no one else had any money to do this.

You know, we learned from the J.P. Morgan experience that sometimes you need a lot of money to put out a financial fire. The Treasury and the president of the United States didn't have access to the money because Congress hadn't given it to them. The Fed was the only organization that basically had the unlimited power to spend money as long as it decided that the circumstances were, as the law provides, unusual and exigent. And so one reason why the Fed comes to the fore here is that there is no other source of financial water to put on this fire until Lehman and AIG caused Congress to actually give them some money, the 700 billion known as the TARP, the Troubled Asset Relief Program.

DAVIES: David Wessel will be back in the second half of the show. He's economics editor of the Wall Street Journal and author of the new book, "In Fed We Trust." I'm Dave Davies, and this is FRESH AIR.

(Soundbite of music)

DAVIES: This is FRESH AIR. I'm Dave Davies filling in for Terry Gross.

We're speaking with David Wessel, economics editor of the Wall Street Journal and author of a new book about the Federal Reserve and its role in the financial crisis. The Fed used its authority to create money on an unprecedented scale during the financial meltdown, pumping up to two trillion dollars into the nation's banks and financial institutions. David Wessel's new book is called "In Fed We Trust."

Now I want to understand this a little more deeply. When the Fed comes up with up to a trillion dollars to lend, does it simply create this by keystrokes on a computer?

Mr. WESSEL: Yes.

DAVIES: Well, so here's what's confusing about it: When the government wanted to come up with the Troubled Asset Relief Fund, they get Congress to come up with $700 billion, or the stimulus package much later, again, hundreds of billions of dollars, wouldn't it be much easier to have the Fed simply, with keystrokes, create money which is not part of the federal budget, not an obligation of the federal government, and not a burden to future taxpayers? Why not just do it all that way?

Mr. WESSEL: Well, it's a good question. So let's think about this for a minute. First of all, the Fed makes a lot of money every year and it takes that money, the profits it makes from buying and selling government securities and other things, and gives it to the Treasury and it reduces the federal deficit. So if the Fed loses money, or makes less money, that's just less money that the government has and some other taxes have to go up or spending has to go down. So it's not free money.

Secondly, the way that this was conceived was the Fed was always willing to print money to lend to a bank as long as the bank had collateral, some securities or properties that it could give the Fed, so that if the bank couldn't pay back the loan the Fed would get, you know, the house or the bond or something, so it would be made whole. What happens in this period is it becomes clear that a lot of the banks that want to borrow may not be able to pay it back. They're basically broke. And the tradition is that when that happens that's what the taxpayers do. And in every earlier banking crisis in this country, and others, the taxpayers come in, buy a stake in the banks, effectively, when the banks get healthy the idea is they'll sell back - they'll sell their stake and maybe they'll make some money and maybe they'll won't. So a line was crossed here that made a lot of people at the Fed uncomfortable. The Fed was lending money in some circumstances where the collateral was a little bit shaky and they were at risk of taking a loss.

The other thing to remember to keep in mind is if the Fed creates too much money - I mean, why can't the Fed just print enough money for us all to buy Rolls Royce's and enjoy a fine champagne? If the Fed prints too much money, then we get inflation, prices go up, and we have less stuff for the same amount money. So it's not a free ride and that's one of the things that's been a concern now.

DAVIES: All of the money that's gone into the economy, particularly the financial institutions, is it resulting in them increasing lending, or are they simply using it to shore up their balance sheets, or pay stockholders or compensate their employees?

Mr. WESSEL: All of the above. One of the things that's really hard for the Fed to explain, I think, was well captured by Barney Frank, the Congressman from Massachusetts who chairs the House Financial Services Committee. He said the other day: no politician ever got reelected with a bumper sticker that said, it could've been worse.

(Soundbite of laughter)

Mr. WESSEL: And so to some extent, the Fed and the TARP money that the Treasury spends has been successful in the sense that without it things would've been worse. But not all the institutions have increased their lending. Some of them have used the money to pay big salaries or payout in dividends to their shareholders, and that's why there's so much controversy about it.

One of the problems here is - or the dilemmas is if you think a financial system is vital to the economy and if the financial system implodes everybody suffers and we run the risk of something that looks like the Great Depression where one in four workers was out of work, then you decide you have to save the financial system for the good of everybody and the economy. But if you save the financial system, the people who are in it get bailed out. And that's what happened in this case. And one of the reasons why people are so upset is they think that some of the people who caused the problem are getting bailed out. And they're right. Some of the people who caused the problem are getting bailed out because we need them so badly we have no choice. And that's the way the Fed looks at it and I think the Treasury and both the Bush and the Obama administrations looks at it, although they never put it that way.

DAVIES: Well, Congress and the Obama administration are now considering some reforms for the financial system. It's - there's a strong sense that we can't continue to do things as we have, that there need to be, you know, institutional protections and better regulation. What does the Obama administration contemplate for the Federal Reserve?

Mr. WESSEL: Well, I think everybody agrees that if you have the worst recession since the Great Depression itself, and it was caused by some explosion in the financial system, that something was wrong in the way we oversee the financial system and we ought to fix it. So I think on that there's no controversy.

The controversy comes on what we should do. What the Obama administration has said is that we would like to give the Fed a little more power. We'd like them to be - have the responsibility of being the overarching regulator of financial stability, working with a council of regulators, so that we maybe don't find ourselves in this position again, where things fall through the cracks. And they want to be sure that the Fed has the power to oversee an organization like AIG, if another one grows up, which is on the edge of the banking industry but is so big, or so interconnected, that the Fed cannot let it fail without causing calamity.

And finally, the Treasury - the Obama Treasury says, you know, the Fed didn't do a very job protecting consumers so why don't we take the power away from them and create a new consumer agency that has only responsibilities correct - is to protect the consumers, so that the Fed can concentrate on financial stability and interest rates and someone else can worry about consumer protection.

DAVIES: It's interesting that the Fed recently hired a lobbyist.

Mr. WESSEL: Right. The Fed has always had somebody who's job was to be a lobbyist with Congress, but that person was very low profile and wasn't from outside. Ben Bernanke, who recognizes that the Fed is under assault by Congress, that in his view people in Congress don't understand exactly what they're doing or why they're doing it, has gone outside and hired a lobbyist. A woman who used to work for the Treasury and for a while worked, of all places, at Enron to be his lobbyist.

DAVIES: And that tells you that they need to get into the game at the Hill and really play more aggressively. Yeah?

Mr. WESSEL: Oh, absolutely. I mean, we see - Mr. Bernanke goes up to the Hill and gets pummeled by members of Congress. And I think Mr. Bernanke and some of his colleagues at the Fed feel that they're getting pummeled unreasonably, and part of the reason they're getting pummeled unreasonably, for being secretive or not transparent enough, is because members of Congress, in their words, don't understand. And so the purpose of the lobbyist, they say, is to make sure that members of Congress understand.

Look, there's a temptation to find villains, to find people to blame when you have a calamity like this. And the Fed, because it was aggressive and showed itself as having so much power, has made itself a target. And now they're beginning to play defense. It's not only the lobbyist, it's - you see Ben Bernanke himself going on "60 Minutes" or "Jim Lehrer's NewsHour," things that his predecessors never did, going over the heads of Congress to build a constituency for the Fed with the people.

DAVIES: Tell us what members of Congress are so angry about at the Fed.

Mr. WESSEL: I think different members of Congress are angry at the Fed for different things. Some people think that they fell down on the job and allowed this to happen, and those members of Congress who were urging the Fed to be more aggressive as a consumer regulator feel vindicated. Other members of Congress are upset by some of the points that you raised earlier, which is: wow, we have to go through an awful lot of work to get someone to give us permission to get a bill and then the president has to sign it to spend a billion dollars, and here's Ben Bernanke, you know, in one weekend he - 30 billion for Bear Stearns and 85 billions for AIG and now trillions of dollars and stuff. So they're saying, like, this doesn't seem right in a democracy.

And then they also think, and they're reflecting I think the views of their constituencies, that in some cases the Fed seems to have been awfully close to the bankers it was supposed to be regulating, and they're worrying that the Fed is secretive - in some kind of cabal with the bankers to not save the economy but to save Wall Street. And so there's a lot of anger at what they consider - what members of Congress consider the secrecy of the Fed. Some of which is - the Fed responds by saying we're giving you more and more information. In fact, the Fed is giving out so much information now that there's a story in the Financial Times this week that says that private investors are taking advantage of the amount of information that the Fed is giving out against - about its portfolio in order to bet against it.


Mr. WESSEL: But I think also that what's really interesting is it's a kind of suspicion of concentrated financial power that we saw in earlier episodes in American history - whether it was Alexander Hamilton's Bank of the United States or some of the William Jennings Bryan stuff in the years at the turn of the century - that Americans have this kind of visceral suspicion of concentrated financial power and they worry that a central bank is too close to the commercial banks and together they will do things that are in the interest of Wall Street in the interest of Main Street. And we're seeing that kind of populist anxiety and Congress has very good antenna. When people are upset about something Congress is upset about it. The Gallup Poll did a survey a few weeks ago and they found that fewer people think the Fed is doing a good job than thinks the IRS is doing a good job. On those circumstances you'd want a lobbyist too.

(Soundbite of laughter)

DAVIES: Yeah. Right. It's hard to...

Mr. WESSEL: Probably an ad agency on top of it.

DAVIES: It's hard to do much worse than that.

Our guest is David Wessel. He is the economics editor for the Wall Street Journal. His new book is "In Fed We Trust." We'll talk more after a break. This is FRESH AIR.

(Soundbite of music)

DAVIES: If you're just joining us, our guest is David Wessel. He's the economics editor for the Wall Street Journal. He's written a new book about the Federal Reserve and the recent financial calamities. It's called "In Fed We Trust."

If you can put on your policy hat for a moment, I mean, how suspicious are you of this enormous concentration of power and discretion in the Fed?

Mr. WESSEL: I think that the crisis has exposed some difficulties in our current structure. So for instance, a system that allows the big banks in New York to elect the board of the Federal Reserve Bank of New York, and then they, with permission from Washington, get to pick the president of the Federal Reserve Bank of New York, who is a very important regulator, seems like a - something that might've made sense a hundred years ago but seems offensive now. So I think it's important that the Fed be seen as acting in the interest of the country and not in the interest of the big banks, which is, of course, what Ben Bernanke repeatedly says he's doing.

Secondly, I think that we do know that it's hard to always spot a crisis in advance and we're going to make a lot of mistakes, but we didn't do a good enough job. There were enough warnings about the housing bubble and about aggressive subprime lending to people who couldn't ever afford to pay back the mortgage, and about people in buying securities they couldn't possibly understand and everybody saying well it's a big bank, they must know what they're doing. And it turns out that they didn't know what they're doing. So having some kind of financial stability regulator, someone who can blow the whistle loudly, and who has the obligation to blow the whistle loudly is important. But I...

DAVIES: Does it make sense to you to invest that responsibility with Fed?

Mr. WESSEL: I'm not sure there's a perfect solution. That one seems as good as any given the choices at hand. But one of the things that's important, and really up for debate now, is how important is it to have an independent central bank? I mean after all, we could create an agency that the president appoints the head of and the Congress confirms, and every four years it could change, and Congress could have up or down the right to vote their budget and make up or down decisions on whether they're doing a good job. And I think we have learned over time that having an independent central bank works pretty well in most instances, but they have to be very accountable and they have to be very open about what they're doing. And I think the Fed fell down on the job. It didn't explain very well what it was doing during the crisis, mainly because they were in a manic stage just trying to save the country, and as a result they - people don't understand why they did what they did and people are suspicious.

So they have to do a better job of telling their story and explaining both to sophisticated people and regular voters, this is what we're doing and this is why we're doing it. Otherwise, they'll always be accused of either bailing out the rich guys, or the markets will be very confused and they will say we're not sure what the rules that the Fed is playing by, and if they don't make their rules clear we won't understand the rules we should play by.

DAVIES: Now there's a bill by the libertarian Ron Paul to give Congress's, you know, auditing arm, the Government Accountability Office, the authority to, you know, to audit the Fed. And I'm wondering to what extent does - it's one thing for the Fed to not say what it's doing as it's doing it, particularly when it's, you know, when it's in the midst of a crisis - but to what extent does it disclose what it has done? For example, this trillion dollars that was loaned to all these companies, are all those transactions a matter of public record?

Mr. WESSEL: All right. So it's important to understand what the controversy is over that bill. Ron Paul has proposed this bill and more than half the members of the House of Representatives have cosponsored it. The issue isn't whether the Fed should be audited. The Fed is audited by the GAO, except in the decisions it makes on interest rates in monetary policy. The change would be that the Fed would be audited on that function as well. And the Fed says if Congress audits that - that is, if Congress can come in and say, you moved interest rates on Tuesday, why did you do it, and then they will be able to second guess the Fed, and Mr. Bernanke says that that would cross the line and the Fed would no longer be independent within the government to make interest rate decisions and that bad things would happen as a result.

So the controversy is, it sounds innocuous - audit the Fed - but the real question is, does Congress have the right to go in and second guess these interest rate decisions?

DAVIES: Ben Bernanke has been really active on, you know, talk shows. He was on "60 Minutes." He's done town hall meetings and, as you say, part of that is a defense of the institution and its independence. It also happens that his term comes up in January and he could be reappointed by the president. How safe is he, do you think?

Mr. WESSEL: I think you're absolutely right that it's a two-pronged approach. He would say if he were sitting here that he's doing it all to explain to people how the institution worked and given their role it's important that people understand and so forth. It's kind of ironic that he is making himself so much the symbol of the Fed since one of his goals, when he came in, when he replaced Alan Greenspan in 2006, was to be the un-Greenspan and to make the Fed more the subject of this attention rather than the chairman. That's an approach he's chucked.

It's obvious that it has the added benefit to him of making it easier for the president to reappoint him, although Mr. Bernanke doesn't admit that. I think if the president had to make a decision right now, he would probably reappoint Mr. Bernanke. You know, you can bet on this online, on a Web site called In-tray, and they've been giving odds of 65 percent that Mr. Bernanke would be reappointed when his term is up at the end of January. And I think the reason is quite simple.

While Mr. Obama might prefer to have his own person in there, perhaps somebody like Larry Summers, his economic advisor, there's a lot of cost to changing the Fed chairman in the middle of a weak economy. People in the bond market will be uncertain what the new guy is going to be like and that can lead to a higher interest rate at an inconvenient moment. But I also think that there may be some advantage to the president to be seen as reappointing someone who was put in place by his Republican predecessor because the United States owes a lot of money to a lot of people around the world, and those people may be suspicious - the Chinese, for instance - if the president puts one of his own people there.

And they'll think, oh my God, they're going to run up the deficit, they're going to have inflation and they'll dump their securities. And while that probably would not be the case of anybody Mr. Obama appointed, the perception would be there. So my guess is if the president had to make the decision right this minute, he'd reappoint him. So if he's going to do that, why hasn't he said it? Well, because he wants the option of changing his mind if the economy falls apart in the next couple of months and he needs someone to blame. Mr. Bernanke, a Bush appointee, will be a convenient target.

DAVIES: Well, David Wessel, what's your sense of where the economy is now? Is this a recovery?

Mr. WESSEL: The best thing about where we are right now in the economy is we've pulled back from the abyss. When I talked to Ben Bernanke in the fall of 2008, when - during the worst of the crisis, he was afraid that we were on the verge of what he called Depression 2.0. Well, that's passed. And so now we see the economy is no longer contracting at a frightening rate. It's not yet begun to grow, but it's looking closer to that moment than ever before. The most likely scenario is that it will grow so slowly that we'll still have high unemployment for a couple of years, maybe as high as 10 percent. So it's going to be a very uncomfortable recovery.

Although there's a bit more optimism today than there was a week ago on that among some economist. So I would say we're near the point of recovery, but it's going to be a painfully slow recovery.

DAVIES: Well, David Wessel, it's been really interesting. Thanks so much for speaking with us.

Mr. WESSEL: You're welcome.

DAVIES: David Wessel is economics editor of the Wall Street Journal. His new book is called "In Fed We Trust."

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