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Aug 27 / Jonathan

Or did it?

James Galbraith in the Washington Monthly, reviewing David Wessel’s In Fed We Trust: Ben Bernanke’s War on the Great Panic.

Did Ben Bernanke really save America’s financial system?


Thus, in the phrase that forms the second subtitle of this book, “the Federal Reserve became the fourth branch of government.” And the system survived.

Or did it?

The first question is: Did the system actually survive? It is true that checks still clear, that incipient runs on small banks and money markets were stopped, that neither the dollar nor the euro collapsed, and that the major commercial banks were not nationalized. But does all this add up to survival of finance capitalism as we knew it? Can we expect, with moderate passage of time, that households will resume borrowing, banks will resume lending, and that before long we will pick up the pattern of our economic lives as before?

Or does the fact that the Federal Reserve was prompted, in the heat of the crisis, to issue trillions of direct loans to private institutions fundamentally strip away the capitalist character of the system? Are we left with a system of large institutions of doubtful solvency, state dependent, unable to function without an implicit public guarantee, and therefore also needing government approval for their actions? If so, how is this system different from that in, say, the People’s Republic of China? Wessel notes that Chinese observers described the result as “socialism with American characteristics.” It’s not necessarily a joke.

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