Understanding The Fed
Book Recommendations
I will be offline for the next week or so but will be watching the financial news. Look for my next post in ten days or so, absent something major before then.
The Fed is very much in the news these days, as it has been since the dark days of the global financial crisis and again during the covid pandemic. But I wonder how much most of us really know about the Fed. Or about central banking more broadly.
Students who have taken my Financial Services Industry course will know a little bit about central banks and the Fed, and in particular about their role during the global financial crisis and the covid pandemic. They will know for example that the Fed is charged with maintaining stability in the financial system as well as in the real economy and that the Fed has a number of policy tools at its disposal, including not only monetary policy but also bank regulation and supervision and acting as lender of last resort to member banks and other financial institutions. This last function is particularly important during periods of financial panic, as in 2008 and 2020.
We don’t spend much time in my class on the structure or governance of the Fed and we don’t get too deep into the mechanics of how the Fed implements monetary policy, banking regulation and supervision, or liquidity provisioning. However these are all important topics about which we all could be more knowledgeable.
Unfortunately, I don’t have the time this week to write at great length on this rather complex topic and so I am going to conclude this note with a few book recommendations for those of you who are interested in learning more about the Fed and about central banking more broadly.
I have no doubt the Fed will continue to be front page news for some time to come and that I will write further about this topic in the weeks and months to come.
Book Recommendations:
The Fed and the Financial Crisis, Bernanke (2013). This is the book my students read in class and it is a great place to start for Fed novices. This book started as a series of lectures at GW University in 2011 by former Fed chair Ben Bernanke, who walks students through some of the history of the Fed, its structure and governance, its missions and tools, its actions during the global financial crisis and a bit of the aftermath. He also addresses some of the criticism of the Fed’s actions during the last financial crisis, which remain very topical today. If you are going to read just one book about the Fed, make it this one.
The Alchemists, Irwin; In Fed We Trust, Wessel; and After the Music Stopped, Blinder. These three books all focus on the role of central bankers (most notably the Fed) during the Great Financial Crisis, from varying perspectives. It has been a while since I read them, but they are all good. By memory, The Alchemists is more global in scope and assumes little prior knowledge of central banking. In Fed We Trust is more advanced and more US-centric but also very good. And Blinder’s After the Music Stopped is the most detailed and sophisticated of the three, reflecting his role as a Fed governor and his academic expertise in central banking and the operations of the Fed. You can’t go wrong with any of these books.
America’s Bank, Lowenstein (2015). The story of the founding of the Federal Reserve, at a key time in US and global financial history, as told by a master story teller. (Lowenstein also wrote a great biography of Alexander Hamilton, founder of the First Bank of the US.) The history of the Fed is not well understood by most students of finance, and perhaps not much better understood by our elected representatives charged with Fed oversight. This is a must read for students of financial history and it pairs well with Conti-Brown’s book (below). Read them in that order.
Lords of Finance, Ahamed (2009) The story of central banking during the Great Depression, and a reminder of the cataclysmic economic and human consequences caused by financial crises when central bankers get it wrong (as they did then). Winner of the Pulitzer Prize in 2010. A great read.
Lombard Street, Walter Bagehot (1873). If you took my Financial Services class, you will know of Mr. Bagehot and his famous “dictum” for how central banks should behave in a financial crisis. Walter Bagehot was a 19th century journalist and I believe the first editor of The Economist magazine. He also wrote a classic 1867 study of the English constitution, which may be of interest for those of you interested in legal history. In this short book—a financial history classic—Bagehot discusses the collapse of Overend Gurney in the panic of 1866. The lessons he draws from this particular financial crisis have been studied for decades by central bankers all across the world, and are ignored at their peril. If you want to sound really knowledgeable about central banking during financial crises, cite Bagehot. But make sure you know how to pronounce his name. (Pronunciation for Americans and Brits, here and here.)
Monetary Policy in the 21st Century, Bernanke (2022). I read this book earlier this summer and wrote about it in one of my recent Fed blog posts. The focus of the book is on monetary policy and it gets into a bit more detail than may be of interest to some readers. The book does not address the current state of the US economy, or the actions of the Fed which we have been reading about recently, but it does provide some good historical and economic background for those who are particularly interested in monetary policy. (As we all should be.)
The Power and Independence of the Federal Reserve, Conti-Brown (2016). I just finished this book and I thought it was excellent. The focus of the book is on the structure and governance of the Fed, rather than on its policy making per se, which is not something many of us really understand (although we should). The book was written by a lawyer and financial historian, not an economist, and this is reflected in its content and writing style. This is very much a “nuts and bolts” book about the Fed, and I would not start with this book. But I would recommend it after you finish Bernanke’s The Fed and the Financial Crisis and perhaps Lowenstein’s book on America’s Bank.
A Monetary and Financial History of the US, 1961-2021, Blinder (due out in October). This book is not out yet, but it is at the top of my Amazon wishlist and I can’t wait to read it. No, really I mean it. Alan Blinder is a renowned expert on these topics, with practical experience and he writes very well for an economist. It should be good.