Home Bookend - Where reading meets review The Federal Reserve and the Financial Crisis by Ben S. Bernanke

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

by Venky


This book is a compilation of four lectures delivered in 2012 by Ben Bernanke, the former Chairman of the United States Federal Reserve. These lectures formed part of a course at George Washington University on the role played by the Federal Reserve in the Economy.

The first lecture elucidates the underpinnings that lead to the formation of the Federal Reserve as well as the roles and responsibilities of the Federal Reserve in keeping the economy stable as well as ensuring financial and fiscal balance. Bernanke provides a clear overview of the tools employed by the Federal Reserve such as monetary policy and also acting as a lender of last resort. The events leading to the creation of the Federal Reserve in 1914 sets the flavor for the next three lectures.

The second lecture reviews milestone developments in Central Banking and with the Federal Reserve post the catastrophic World War II. The perils of inflation and the potential remedial measures are dealt with in parallel to a refreshing overview of the Great Moderation. This lecture also lays out the build up to the Great Financial Recession of 2008-09.

The penultimate lecture dwells at length on the Financial Recession in general and what Bernanke terms “its intense phase” in particular. The cataclysmic collapse of Lehmann Brothers and the near disastrous folding up of AIG are some of the features forming part of this lecture. The swift response initiated by the Federal Reserve and the policy making body in conjunction with similar establishments across the globe are cited as stellar examples of international co-operation undertaken to prevent a global financial meltdown.

The final lecture is somewhat introspective in nature. Employing a medium of candour that is rare amongst policymakers, Bernanke admits to various shortcomings, both in the Federal Reserve as well as in the Banking Regulatory mechanisms that more or less led to unscrupulous deal making; spawned the creation of esoteric derivatives/financial instruments; facilitated the expansion of systemically gargantuan firms that were “too big to fail”; and ultimately bought the entire global financial system to the brink of ruin. Bernanke also talks about future reforms such as the implementation of reforms such as the Dodd-Frank Act, supervising the working of investment banks and other player in the money market such as hedge funds etc. He also makes a very important point of allowing firms to ‘fail’ but in a manner that would pose the least strain on the economy. Allowing the untrammeled growth of “too big to fail” firms would not only lead to a sense of complacency, but will also fuel the undesirable feature of “moral hazard”.

For a person desirous of understanding the working of the United States Federal Reserve in general and the institutional role played by it during a financial crisis, in particular, she would be well served to read this collection of lectures.

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