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Ben Bernanke And The 'Great Panic'
DAVE DAVIES, host:
This is FRESH AIR. Iâm 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, thatâs exactly what the Federal Reserve
does. And during the nationâs financial meltdown, the Fed has created
and pumped close to $2 trillion into the nationâs banks and financial
institutions to keep the economy afloat.
Our guest, writer David Wessel, argues that the Fedâs aggressive
intervention in the crisis may well have prevented a second Great
Depression. But because itâs been so active and independent, the Fed and
its chairman, Ben Bernanke, have become controversial. Many in Congress
donât 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 itâs 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, âIn Fed We Trust.â 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. Iâd 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, âIn Fed
We Trustâ): 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 weâre going to have paper money, fiat
money itâs called, somebody has to oversee it.
We didnât have to do that when we had barter economies, where you traded
your cow for somebody elseâs horseshoes. And you didnât have to do it
when people had faith in gold, and if you had gold, you had money, and
if you didnât have gold, you didnât 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 theyâre 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, thatâs 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
werenât 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 Morganâs 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 couldnât control things by themselves anymore,
they needed help from Washington, and Washington to feel it wasnât 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 â 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 didnât want â didnât
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 â30s, right?
Mr. WESSEL: Right. The â30s 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. Itâs 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 donât trust bankers and people who donât trust
politicians. So thereâs a kind of built-in checks and balances there.
DAVIES: Now, the current chairman of the Federal Reserve is Ben
Bernanke. And he is â 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 â29.
Mr. WESSEL: Well, most economists think that the stock market crash of
â29 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 didnât understand that when banks
collapse, that isnât just a symptom of a problem, but that makes the
problem worse because when banks collapse, they canât lend. Credit is
the lifeblood of the economy. Itâs like the circulatory system of a body
shutting down.
And so his work emphasized that it wasnât 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 thatâs 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 wasnât a repeat of that kind of thing, but
he was â 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: Letâs 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, thatâs 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 didnât have any down payment, to the
mortgage brokers who sold those, to the people themselves who bought
houses they couldnât afford, to the financial press that didnât blow the
whistle or at least not blow it loudly enough. But itâs 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 thatâs important, didnât 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 â30s, 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 wasnât any point to having a bunch of bureaucratic regulators who
were trying to do that job. And that turned out to be wrong, and heâs
admitted as much in a testimony before Henry Waxmanâs 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: Weâre speaking with David Wessel. He is the economics editor for
the Wall Street Journal. He has a new book about the Federal Reserve
called âIn Fed We Trust.â Weâll talk more after a break. This is FRESH
AIR.
(Soundbite of music)
DAVIES: If youâre just joining us, our guest is David Wessel. Heâs 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. Itâs called âIn Fed We Trust.â
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 â 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 canât go through them all, but Iâm kind of â but letâs 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, thatâs a very good question. I donât 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 couldnât 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 couldnât 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,
didnât want. And it was significant because it was the first public use
of the Fedâs 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. Weâll find somebody else to
buy Lehman and take this off our hands, and we can get through this
thing. Well, it turns out they canât find a buyer. The last buyer in the
room is Barclays, a big British bank, and the British government, in the
end, wonât 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 Lehmanâs in trouble, and if
we let them go, itâll teach people a lesson, and itâll be bad, but it
wonât 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 itâs 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: Thatâs 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 doesnât turn out so well. Thereâs
Lehman. They let it go down, it has a huge shockwave, but as theyâre
letting it go down, they know they have this big problem in AIG.
And AIG was really something they didnât understand very well. AIG was
an insurance company. It hadnât been regulated by the Fed. They didnât
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 canât 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 theyâre still trying to get out of.
DAVIES: Now, before this series of calamities that you refer â 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 donât be
bound by conventional tactics, try lots of things, and some of them will
work, and some of them wonât 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 theyâd 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 hadnât 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, youâre right, the Fed caused
the Great Depression. Thanks to you, weâll 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 theyâre
shrinking a little bit below $2 trillion, but one thing thatâs 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 didnât have access to the money because
Congress hadnât 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. Heâs
economics editor of the Wall Street Journal and author of the new book,
âIn Fed We Trust.â Iâm Dave Davies, and this is FRESH AIR.
(Soundbite of music)
DAVIES: This is FRESH AIR. I'm Dave Davies filling in for Terry Gross.
Weâre 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, wouldnât 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 couldnât 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 - theyâll sell their stake and
maybe theyâll make some money and maybe theyâll 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 itâs 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 couldâve 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 â 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 donât 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
didnât do a very job protecting consumers so why donât 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 wasnât
from outside. Ben Bernanke, who recognizes that the Fed is under assault
by Congress, that in his view people in Congress donât 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 Lehrerâs 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 hereâs 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 doesnât 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
theyâre 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 weâre 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.
DAVIES: Wow.
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 weâre 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 mightâve 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 weâre going to make a lot of mistakes, but we didnât do a
good enough job. There were enough warnings about the housing bubble and
about aggressive subprime lending to people who couldnât 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 weâre
doing and this is why weâre doing it. Otherwise, theyâll always be
accused of either bailing out the rich guys, or the markets will be very
confused and they will say weâre not sure what the rules that the Fed is
playing by, and if they donât 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 itâs 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 â60 Minutes.â Heâs 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 youâre absolutely right that itâs a two-pronged
approach. He would say if he were sitting here that heâs doing it all to
explain to people how the institution worked and given their role itâs
important that people understand and so forth. Itâs 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. Thatâs an approach heâs chucked.
Itâs obvious that it has the added benefit to him of making it easier
for the president to reappoint him, although Mr. Bernanke doesnât 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 theyâve 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, thereâs 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 theyâll think, oh my God, theyâre going to run up the deficit,
theyâre going to have inflation and theyâll 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, heâd reappoint
him. So if heâs going to do that, why hasnât 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, whatâs 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 weâve 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, thatâs
passed. And so now we see the economy is no longer contracting at a
frightening rate. Itâs not yet begun to grow, but itâs looking closer to
that moment than ever before. The most likely scenario is that it will
grow so slowly that weâll still have high unemployment for a couple of
years, maybe as high as 10 percent. So itâs going to be a very
uncomfortable recovery.
Although thereâs a bit more optimism today than there was a week ago on
that among some economist. So I would say weâre near the point of
recovery, but itâs going to be a painfully slow recovery.
DAVIES: Well, David Wessel, itâs been really interesting. Thanks so much
for speaking with us.
Mr. WESSEL: Youâre welcome.
DAVIES: David Wessel is economics editor of the Wall Street Journal. His
new book is called âIn Fed We Trust.â
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âFordlandiaâ: An Automakerâs Failed Jungle Utopia
DAVE DAVIES, host:
Deep in the Amazon jungle there is a ruined town that sets its clocks to
Detroit time. The town is called Fordlandia, which is also the title of
award-winning historian Greg Grandinâs book on Henry Fordâs grand plan
to build a shinning city in the jungle.
Book critic Maureen Corrigan has a review.
MAUREEN CORRIGAN: Given GPS systems in our cars and Google Earth maps on
our personal computers, it seems like there isnât a square inch left on
this planet that hasnât been surveyed. But even if the worldâs remotest
regions have been charted, there are stories about those places that
remain unexplored. Thatâs the thrill that historian Greg Grandinâs new
book, âFordlandia,â gives a reader, the all too rare thrill of
discovery. Or I guess I should say rediscovery, because once upon a
time, most Americans had heard something in the newspaper or on
newsreels about Henry Fordâs attempt, in the late 1920s, to build a
version of Main Street, USA deep in the Amazon jungle of Brazil.
Fordâs all-American town, with its Cape Cod cottages and red fire
hydrants, its hospital, swimming pools and golf course, gradually gave
way to the encroaching vines, vipers and damp of the Amazon. In 2005,
when Grandin first visited the ruins of Fordlandia, still an 18-hour
journey by riverboat from the nearest provincial city, a few elderly
residents still remained who remembered the gleaming city that was. And
they spoke glowingly of Mr. Ford and his vision. Grandin is both an
academic authority on Central and South America and a compelling
storyteller. Heâs written a fascinating narrative history, not only of
Fordlandia, but also of Henry Fordâs later career, when the nightmarish
aspects of the assembly line revolution that heâd created bedeviled him.
As Grandin tells it, the official story behind the founding of
Fordlandia was commercial. Henry Ford wanted to grow rubber trees to
supply tires for the cars his plants were churning out. But that was the
rational excuse for a project that was much more utopian in its
ambitions. Ford, then in his 60s, had begun to look backward in the
1920s to a pre-industrial golden age in America. The mechanized horrors
of World War I and, later, troubles on the home front particularly the
rise of his foe, Franklin Roosevelt, and the backlash heâd begun to
receive for his anti-Semitic tirades had deeply unnerved him. Grandin
traces how Ford began escaping into the past by collecting antiques and
founding rustic villages in Michigan that evoked the farm community of
his childhood.
When Brazilian officials dangled land in front of Ford, he saw a chance
to begin the world anew. In 1927, Ford snapped up a parcel in the Amazon
basin roughly the size of the state of Connecticut. For the next decade
or so the father of standardized parts and sparkling factory
cleanliness, lost millions in an epic battle with the chaos that is the
Amazon jungle. Grandin says that the first years of the settlement were
plagued by waste, violence and vice, making Fordlandia more deadwood
than our town. Indeed, the stories he tells of Ford men in their ties
and white linen suits going native are, well, just wild.
In 1929, for instance, a trusted employee dispatched into the jungle to
gather rubber seeds wound up ignoring Ford's prohibition against
alcohol, getting semi-permanently drunk, and proceeding to go around
baptizing cows and pigs with bottles of perfume heâd gotten from a
trading post. Especially interesting is Grandinâs account of the native
laborersâ resistance to the strictures of industrial time. Whistles and
time clocks were foreign to workers who measured time by the sun and
seasons. After a riot destroyed the first settlement, order was imposed
and a Disneyfied town took shape in the jungle with 400 clapboard
houses, shops and an open air dance hall where wholesome minuets and
polkas prevailed. Ford disapproved of the sex dancing that was then
sweeping America.
Fordlandia, Grandin explains, never quite succeeded. Leaf blight and
insects decimated the closely planted rubber trees and, perhaps of
special insult to the virulently anti union Ford. The rubber plantation
workers successfully unionized themselves in 1939, years before the UAW
negotiated a contract with his River Rouge plant in Michigan. One final
historical irony that Grandin excavates is that in 1941, Ford even gave
tacit permission to FDR's Committee on political refugees to resettle
European Jews at the failing Fordlandia. Like the overriding plan of
escape that inspired Fordlandia, nothing ever came of it.
DAVIES: Maureen Corrigan teaches literature at Georgetown University.
She reviewed âFordlandia; The Rise and Fall of Henry Ford's Forgotten
Jungle Cityâ by Greg Grandin.
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