After playing peekaboo with the public and legislators for decades, central banks are finally discarding their multiple veils. The financial crisis of 2007-08 and its aftermath had forced governments and central banks to push many economic levers. The aim was twofold: to limit the contagion effect and to provide a stimulus to the economy. It also required central banks to shed some of their mystique and improve their communication with the public.
This new wave of glasnost in central banking is understandable. The chaos and economic meltdown that followed the collapse of Lehman Brothers were marked by outrage and public protests, especially when the Federal Reserve's survival strategy was pressed into action. Legions of people felt that the Treasury Department and the Fed had played favourites by providing a lifeline to many large banks. The actions seemed to condone criminal activity by bankers. The term "too big to fail" stirred up national repugnance. Consequently, all the decisions taken by the Fed were viewed through the prism of this revulsion.
Therefore, the only way the Fed could counter this perception was by cranking up its communication machinery. While that might have been the immediate provocation for the Fed to adopt greater transparency, most central banks across the world have been working on improving their communication skills for a while. Central banks globally seem to have realised that drafting and pursuing monetary policy in utter secrecy - a strategy pursued even by governors in the Reserve Bank of India, or RBI, till a few years ago - can actually be counterproductive, especially in asset markets sensitive to interest rates.
These developments might have prompted Federal Reserve Chairman Ben S Bernanke to embark on a unique communication exercise. He gave four lectures - about the Fed and the 2008 financial crisis - to students of George Washington University (Washington, DC). These lectures were part of a course on the role of the Fed in the economy. The lectures - available on video on the Fed website - have now been compiled and released in the form of a book.
The lecture series is an interesting experiment in the communication game; in a modern, connected world, the lectures at George Washington University were soon accessible to anybody who wanted to view them. There is another aspect of this mode of communication: since he is speaking to students, Mr Bernanke's speech is shorn of jargon. Simplicity is a great weapon - when used effectively, it enables Mr Bernanke to delve into some arcane concepts. For instance, he manages to meticulously demolish many myths that have arisen about quantitative easing.
Mr Bernanke's lectures also strive to establish how the Fed's firefighting tactics have essentially been derived from the time-tested basic role of central banks - as providers of macroeconomic stability (through pursuit of monetary policy) and financial stability (as the lender of last resort). These roles have evolved over time and through various crises and laws.
The lectures are divided into four parts: the origins of the Fed, the evolution of its role after World War II, its response to the 2008 crisis, and the aftermath of the crisis.
The first chapter lucidly narrates the story of the Great Depression, displaying Mr Bernanke's love for this period and his extensive body of work on the political and economic reasons behind this upheaval. In fact, Mr Bernanke's stand on recessions and depressions is suitably informed by Milton Friedman's monetarist thesis: that the Fed did not do enough to douse the initial fires of the Great Depression. And that probably explains the drastic measures that the Fed undertook this time: taking interest rates close to zero and launching an aggressive asset purchase programme.
Seen through a monetarist lens, the Fed can be faulted for many things in the past. And Mr Bernanke, too, tackles the issue headlong. But when it comes to the current crisis, he regains some sense of political propriety. He painstakingly avoids blaming the surplus reserves of the emerging economies (particularly China) for the crisis. He is also sparing with his criticism of his predecessor, Alan Greenspan, the man who is popularly viewed as responsible for the catastrophe. Mr Bernanke is also refreshingly, and disarmingly, frank about his distaste for the notion of "too big to fail".
The 2008 financial disaster has given birth to a new species: crisis aficionados. They should definitely include this book in their growing collection.
THE FEDERAL RESERVE AND THE FINANCIAL CRISIS
Lectures by Ben S Bernanke
Princeton University Press
134 pages; $19.95
