Wessel’s telling arouses sympathy for all the main players. Mistakes were made, to be sure, but they were not obvious errors at the time. These leaders all did their best in extremely trying circumstances. Still, some of the principals emerge looking better than others.
Wessel is not much impressed with Paulson, arguing that his trader mentality — instinctive more than calculating, inclined to abrupt and unpredictable changes of position — was ill suited to the problem. Greater consistency was needed. No doubt, but was anybody inside or outside government supplying that at the time? George W. Bush is also somewhat unfairly impugned for choosing to take a backseat. When you recall that his rare interventions on the subject unsettled markets more than calming them — that deer-caught-in-the-headlights affect was enough to panic anybody — you might thank him for recusing himself as often as he did.
It is hard to disagree with Wessel’s criticisms of Alan Greenspan, Bernanke’s once-lionized predecessor at the Fed. If any official should have acted to avert this crisis, either by raising interest rates sooner to choke off the credit boom, or by bringing subprime mortgages under stricter regulation, it is he. Again, though, one should remember that Greenspan was little criticized on either score while the bubble was inflating. As recently as 2007, the politicians and commentators now pillorying him were cheering him on.
Many would say that Geithner faltered in his early days as Treasury secretary. He started under a cloud because of his difficulties during confirmation; he was ridiculed for his first lamentable performance for the cameras; and his previous position at the New York Fed implicated him in the mess. Lately his stock has risen, and he will not be displeased with Wessel’s essentially sound take on him. The book treats him kindly, calling him calm and coherent, and well prepared to lead by his experience from earlier financial crises.
Wessel touches on wider issues, but he keeps the focus on the Fed. This emphasis guarantees the book an extended shelf life, because the salience of the Fed is only going to grow, not just in the domestic economy but internationally as well. The awkward unwinding of the Fed’s financial interventions, its role in managing the dollar and the external deficit, the new duties envisaged for it in the Treasury’s blueprint for financial regulation, and the disenchantment of many in Congress with the way it has performed — raising the possibility of stronger external oversight, which Bernanke opposes strenuously — all put the Fed at the center.
A Myriad of Causes
In Fed We Trust is superb, but if you want a brisk overview of the whole story, Wessel’s book is not it. Here the honors go to the new edition of Financial Shock: Global Panic and Government Bailouts — How We Got Here and What Must Be Done to Fix It, by Mark Zandi, the chief economist of Moody’s website Economy.com.
As he finished work on the first version in the summer of 2008, Zandi wrote, “The worst of the crisis appears to be over.” Not long after, the authorities made their fateful decision to let Lehman Brothers go bankrupt. That decision, which most observers now regard as a terrible error, shut the credit system down and precipitated the full fury of the crisis.
This gives Zandi reason to argue — as he does, in this revised edition — that the Lehman decision “turned a serious yet manageable financial crisis into an out-of-control financial panic.” Yet in Zandi’s view, although mistakes were made, they were not inexplicable or downright stupid. His retelling of his own mistaken prediction seems to inoculate him against the 20/20 hindsight to which most authors on this subject fall prey. He writes with a keen sense of the complexities that confronted policymakers. He is level-headed and fair.