The Courage to Act: Ben Bernanke's inside account of the global financial crisis

There is much quirkiness in the study of government and public administration, elsewhere as well as in Australia. One example is that while political scientists have been historically absorbed in, among other issues, the evolution of treasuries, central banks have been very much the territory of economists and economic historians.

This feature characterises even those political scientists who define their interests in the location and workings of power, even though central banks are very plainly repositories of vast and pervasive power!

The same pattern of interest has been reflected in parliamentary scrutiny of administration. The Treasury was very much a target but, until the past couple of decades, central banks have lurked on the sidelines. That they are essentially not funded by parliamentary appropriation is only a part of the explanation.

Although some change was under way in the last decades of the 20th century, the great financial crisis of 2007 did much to change this. Students of government now have a much more comprehensive view of economic policy and its formulation, the various roles of finance departments and central banks, and the interactions between them and other institutions.

A variety of books have been published on the crisis. Some come from usual suspects, in particular journalists who reported it at the time. Less predictable have been books from the pens of leading participants. The two heads of the US Treasury are conspicuous among them (Hank Paulson and Tim Geithner) as are recent heads of the US Federal Reserve board.

Other major contributors have been former British chancellor of the exchequer Alistair Darling, part of Gordon Brown's Labour government (2007-10), and recently retired Bank of England governor Lord Mervyn King, lately appointed a Knight of the Garter. Readers of these pages will be familiar with Australian contributions from ministers of the time, such as Julia Gillard and Wayne Swan, but not, alas, Kevin Rudd, for whose significance in coping with the crisis much has been claimed, even, for example, by the Treasury head Ken Henry (on the ABC's The Killing Season).

In this batch, Ben Bernanke's memoir can certainly be read for enlightenment. Its core is the tale of how the US government, and especially the Federal Reserve, coped with the financial crisis, from early (but not the earliest) tremors that something – something serious – was amiss, to major problems centring around Bear Stearns, Fannie Mae and Freddie Mac, and the eventual bankruptcy of Lehman Brothers.

Bernanke chaired the Fed for eight years, from 2006 until 2014. He came to the post, succeeding Alan Greenspan ("the maestro"), after a distinguished career in universities, culminating in heading the economics department at Princeton followed by a few years as a Fed governor and a brief stint as chairman of the Council of Economic Advisers.

The book's obvious readership will be economists and others in the finance and related industries. In that respect, it's Bernanke's account of his role and the policies he promoted. A full appraisal of these events remains a work in progress; there is plenty of room for debate about how the successive episodes of the crisis were handled.

Bernanke, however, has told his story within a biographical and an organisational context. This quality of his narrative makes his book a worthy study for others with broader interests in government, including the practice of government during a time of crisis.

Bernanke was a product of Dillon, South Carolina, in the segregated south. All his grandparents were immigrants from central and eastern Europe. They were not affluent but they were educated and knew the value of education. This was Bernanke's advantage in life.

It was here that Bernanke "learned about hard work, responsibility and respect for others". This background meant Bernanke knew about Main Street possibly before he'd even heard of Wall Street.

As his schooling drew to a close, it was "the accomplished son of a prominent black family [who] took it upon himself to convince me – and my parents – that ... I should leave Dillon to go to Harvard".

Once at Harvard, then a centre of protest against the Vietnam War, Bernanke did not plunge immediately into economics. In his first semester, he studied math, physics, creative writing, Japanese history and culture, and Jewish history. After a wobbly start, he made a late decision to study introductory economics. One of his tutors helped him to see "economics as an intellectually challenging subject that also might improve the lives of millions of people". He set about catching up.

His subsequent studies embraced economic history, especially the Great Depression, together with research on more contemporary topics, specifically energy policies.

There is plenty of specialisation in Bernanke's education but, similarly significantly, there was also breadth, both within economics itself and beyond the boundaries of economics. This continued after he arrived in Washington: "during off-hours," he writes, "I read fiction and non-fiction, all subjects – history, biology, math, rarely any economics".

Likewise, in his pre-Washington career, there is variety: life was about more than just university. He served six "gruelling" years on the school board in the neighbourhood where his young family lives. On the board, a "constant battle raged between the newcomers to the township, like us, who wanted more and better schools, and the long-time residents, who worried about the cost".

Before he was nominated as a governor of the Fed, then president George W. Bush asked if he had any political experience. Bernanke mentioned his time on the school board in a self-deprecating manner; Bush told him that being on a school board was "thankless but it's important service".

He had some instructive observations on his arrival at the Fed. He realised that Greenspan's ascendancy was such that scope for influencing individual interest rate decisions was limited. His focus was, instead, upon the broader framework in which policy was made.

In this respect, he considered that the Fed was "behind the times", partly because Greenspan's thinking was "idiosyncratic" and less "conceptual" than he was used to. While Bernanke championed formal policy frameworks, Greenspan distrusted them.

As time moved on, Bernanke leaned towards greater transparency and increasingly stressed that secrecy had disadvantages as well as advantages. Indeed, as the financial crisis deepened, he realised the Fed increasingly faced two problems. The first was to do the "right thing". "The second would be to explain to the public and politicians why what we did was the right thing."

Unsurprisingly, he recognised that if the Fed was to hold its own in "the court of public opinion, we needed to get our side of the story out". He started spending time with reporters, especially those who wrote regularly about the Fed. This had its pitfalls and he recounted one especially telling case.

He noted, that, at least in his early years as chairman, predecessor Greenspan, by contrast, joked "about his own strained relationship with transparency", telling a Senate committee on one occasion: "Since becoming a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said."

Nevertheless, in Bernanke's view, undertakings to release full transcripts of meetings led to a decline in quality and spontaneity of discussion, as participants took to reading prepared statements.

While conscious of the need for close relations with the administration, Bernanke also continually guarded the Fed's independence. This, in part, reflected lingering memory of conflicts during the New Deal period. The book is, in particular, a testimony to the close relationship Bernanke forged with Treasury secretary Hank Paulson during the most critical period.

A caution marks his accounts of relations with various administration figures, including Bush. But Bernanke's attitude to the Congress could not be described in similar terms. His various references to Senate confirmation hearings would not give any encouragement whatsoever to those who advocate active parliamentary scrutiny of executive appointments in Australia.

Relations became almost visibly cool when his appointment came up for renewal. He talked with President Barack Obama. Bernanke said he wanted another (four-year) term but would then retire (Greenspan was chair for 16 years). "Two terms was about right for a Fed chairman."

He was nominated but did not know how the decision was made. In the meantime, he was chosen as Time magazine's 2009 "person of the year". "Along with the praise, Time also observed that the Fed's actions had triggered a powerful political backlash."

One senator responded with venom: "Chairman Bernanke may wonder if he really wants to be honoured by an organisation that has previously named people like Joseph Stalin twice, Yasser Arafat, Adolf Hitler ... as their person of the year." But he managed to end on a hopeful note: "I congratulate him and hope he at least turns out better than most of those people."

Bernanke had a testing confirmation hearing. As he reports it, the chairman of the Senate banking committee "praised the Fed's extraordinary actions under my leadership" but "he also questioned whether the Fed should continue to have a central role in financial regulation".

Two months later, the committee voted 16 to seven for confirmation. Although Bernanke was essentially Republican, it was largely Democrats' who confirmed the second term, 70 votes to 30, "not an especially close margin for many matters but nevertheless the closest vote by which any Fed chairman had ever been confirmed".

He had a few calls from those who voted against his confirmation. "After the senator expressed his confidence in me and apologised for his no vote, I asked him why he voted as he did. 'Well,' he replied blithely, 'sometimes you just have to throw some red meat to the knuckle-draggers'."

There are similar tales about appointments of Fed governors and especially appointment of his successor, Janet Yellen. While her nomination was pending, a third of the Senate's 54 Democrats signed a letter supporting her.

At one time, there were three vacancies at the top of the Fed, and there was a developing view that there should not be new appointments while the end of a presidential term approached – something that gives new meaning to caretaker conventions!

Unsurprisingly, as the book draws to a close, Bernanke admits he "could never get used to the Jekyll-and-Hyde nature of politicians".

In reflecting on policymaking, Bernanke counsels the need, when addressing problems, serious and otherwise, to think outside the box. This thought has been around perhaps for decades and no one is going to challenge it; it is, as it were, obvious.

Whether thinking inside or outside the box, decision-makers and their advisers must always ask questions about why a particular approach will solve the problem at hand, at least within the limits of available time and information. In the same context, if they are shrewd, they will ponder why a proposed resolution might not work; what the hurdles, barriers, costs and consequences will be.

This was not new but something else Bernanke did was more innovatory. As the financial crisis was steadily contained, Bernanke commissioned work within the Fed to study and analyse the lessons to be derived from the experience. And this activity usefully informed major restructuring of the legislative and regulatory framework of the finance industry.

Old hands will no doubt have reservations about Bernanke's book. There will be sage nods that little of what he has to say is new. This may well be so – to a point. But there will nevertheless be many, on lower rungs of governmental ladders, who will learn a great deal from reading it and considering the thinking it contains.

J. R. Nethercote is an adjunct professor at the Australian Catholic University's Canberra campus. The Courage to Act: a Memoir of a Crisis and its Aftermath, by Ben S. Bernanke, is published by W. W. Norton & Company (2015).