In Fed We Trusted
David Wessel is economics editor for The Wall Street Journal and writes the Capital column, a weekly look at the economy and forces shaping living standards around the world. He is responsible for overseeing coverage of the Fed and the Journal’s daily coverage of the macro economy, global trade and economic trends. He appears frequently on National Public Radio.
His book, “In Fed We Trust: Ben Bernanke’s War on the Great Panic,” was published August 4, 2009.
Previously, Mr. Wessel was deputy bureau chief of The Wall Street Journal's Washington bureau. David joined The Wall Street Journal in 1984 in Boston, and moved to Washington in 1987. In 1999 and 2000, he served as the newspaper’s Berlin bureau chief.
He previously worked for the Boston Globe, the Hartford (Conn.) Courant and Middletown (Conn.) Press. A 1975 graduate of Haverford College, he was Knight Bagehot Fellow in Business & Economics Journalism at Columbia University in 1980-81.
David has shared two Pulitzer Prizes, one for Boston Globe stories in 1983 on the persistence of racism in Boston and the other for stories in The Wall Street Journal in 2002 on corporate wrong-doing. He is the co-author, with Wall Street Journal reporter Bob Davis, of Prosperity, a 1998 book on the American middle class.
Question: Did Bernanke’s mantra of “whatever it takes” lead us astray?
David Wessel: I think that a “whatever it takes” approach got us through this crisis but has a number of enormous risks. One of them is that it can justify almost anything. If you don’t have a set of principles that you can explain for what you are doing, then how can anybody know what you’re going to do next? In fact, one of the problems in this crisis was that the rules kept changing. If you were a preferred shareholder at Fannie Mae and Freddie Mac, you got wiped out. But if you were a preferred shareholder at Bear Stearns, you didn’t. If you were a bond holder at Washington Mutual, you got largely wiped out, but if you were a bondholder of AIG you didn’t get wiped out. If you were a bondholder of Lehman Brothers though, you got devastated. And so this kind of shifting the rules of the game makes life kind of difficult.
I think that, in my view, one of the things that Bernanke and Hank Paulson, and Tim Giethner did that, in retrospect was a mistake, was wasting the time after Bear Stearns, which occurred in March, 2008, and not coming up with a more articulated game plan for what they would do if they had to cope with a collapse with another financial institution. Of course one of the biggest criticisms of Mr. Bernanke is that he didn’t do whatever it takes and he let Lehman Brothers fail. He says he didn’t have any other choice under law. We at the Wall Street Journal surveyed four dozen economists on Wall Street and by 3 to 1; they said they didn’t believe him. That had there been a will to save Lehman Brothers, there would have been a way.
I do think that the AIG bailout is one that is getting a lot of scrutiny for exactly the right reasons. And the question really is, was it necessary to pay the counterparties of AIG, Goldman Sachs, Deutsche Bank, UBS, the big names of global finance, 100 cents on the dollar in order to protect the financial system? Admittedly, the Fed and the Treasurer were making decisions under a lot of pressure. That was a very busy week in September, 2008. But with the benefit of hindsight, it looks like they did themselves a lot of damage, politically, and it hurt their credibility when it looked like only the big guys, Goldman Sachs and Deutsche Bank and so forth got 100 cents on the Dollar and everybody else has to take a haircut. So, one can understand why they did it, and it’s clear that they did not have enough tools to deal with a collapse of an institution other than a bank. That’s why Bernanke, and Geithner, Paulson, George Bush, and Barack Obama, have all asked Congress to change the rules so that when something like Lehman Brothers, or Bear Stearns, or AIG gets into trouble in the future, the Federal Government will be able to treat them the way it treats a bank. Say, “Okay, you screwed up, you’re mine now, we’ll decide who gets paid and who doesn’t, and we have a system for doing that.” There is no system. There was no system then, there is no system today, a year later, for dealing with an AIG or a Lehman Brothers. So, the tools that the authorities had were unfortunately limited. They weren’t up to the task.
Question: DEAN BAKER, BEAT THE PRESS: How did the Fed fail to see a trillion dollar housing bubble?
David Wessel: I think that when you go back and look at what was going on inside the Fed, there were people who warned that this was a housing bubble. But, they were not convincing and the reigning view at the Fed was, even if it is a bubble, we shouldn’t interfere with it. We should let the markets do their thing and if it bursts, it will be as Bernanke and Paulson said in late 2007 even, it’ll be contained. And they were comforted by the fact that when the tech stock bubble had burst earlier in the 2000’s, it had done a lot of damage to people who had bought a lot of internet stocks, but it hadn’t really done a lot of damage, lasting damage, to the economy. And so they looked at it as they looked at that. So, it was not only a failure of analysis, it was failure of ideology in the best sense, a world view that led them to believe that even if there was a housing bubble, they shouldn’t do anything.
Now, Greenspan went around saying, “You can’t have a national housing bubble. Real estate is local, housing prices are local, you can have froth,” he said, “in some markets.” And it’s very late in the rise in house prices where he kind of throws in the towel and says, “I think we have a big problem.” So, he was just wrong, and because he had been right so often, people kind of believed him.
Question: DEAN BAKER, BEAT THE PRESS: Does this raise questions about the Fed’s competency?
David Wessel: Sure. But who was more competent? The rest of the bank regulators were just as bad. I think as a result of this, we have every right to expect the Fed to be much more thoughtful about asset markets and to be more open and to think about how it can use it’s weaponry to let a little air out of any bubble before it bursts. I think they are not yet convinced they can or should do that, but I think that’s the right debate to have.
I think some of it had to do with the fact that the financial system had evolved and a lot of the mortgages were being made in institutions that were not under the Fed’s jurisdiction. And the Fed, like a lot of bank agencies said, “We’re responsible for this set of people and someone else is responsible for other people and it’s their problem.” But some of these mortgages were made by affiliates of banks, and the Fed could have pushed harder into those affiliates to see what they were doing, but Greenspan didn’t think it was a good idea.
Greenspan says that he was caught by surprise by the surge in sub-prime lending in 2006 and 2007, that when he first saw reports in trade publications that there had been this big increase in sub-prime lending that he didn’t believe the number because he didn’t believe that the situation could change so rapidly and that was something where he just made a bad judgment. When the official numbers came in, it turned out that these earlier reports from mortgage trade publications were right. But in 2005 and early 2006, there wasn’t yet as big a sub-prime problem. It’s really 2006 and 2007 when sub-prime mortgages take off and where everybody begins to say, “Whoa. There’s a problem here.” And then, of course, people didn’t think that housing prices could fall as much as they did, so they assumed that a lot of these mortgages would be okay because the people could refinance, or the bank could take the house and it would be worth what people had borrowed against, and that turned out just to be wrong.
To put it another way, some of these mortgages were bad in any circumstance. Some of them were only bad because house prices fell so much and people misunderstood how far house prices could fall.
Question: Do you see any real impetus for financial regulatory reform?
David Wessel: Well, I think it’s kind of obvious that the financial regulatory system is broken and there is a push by the President and the Treasury Secretary, and the Fed Chairman, and Barney Frank, the Chairman of the House Financial Services Committee, to change the rules. But they’re running into a lot of resistance and I think they are running into resistance for a number of reasons. One is, that this is kind of hard, and Congress doesn’t like to do hard things and some people want to do a lot and some people want to do nothing, and as a result the status quo sometime prevails. The memory of the crisis is fading enormously quickly and that means that the urgency of doing a financial regulatory reform is fading as well.
But the other problem is that the financial reform has not good constituency. There are a lot of individual constituencies, a lot of businesses and each one of them is attacking one piece of the bill or another, and as a result, that’s slowing it down. The President’s strategy clearly had been to put a new consumer regulatory agency on the bill as a kind of locomotive, to pull it through Congress. But that hasn’t worked very well. So, we’re talking here in November, 2009, looks to me like the House of Representatives will manage to get a bill out before the end of the year, but it will be next year before we learn whether the Senate can do the same and then they’ll have to be compromised and by then the memory of the crisis will have faded so much, or the bitterness over high unemployment may be so severe that it’s difficult to get a coherent bill out of Congress.
You know, I should say that the reason we have a Federal Reserve was because we had a financial panic in 1907, and that panic ended because of the intervention of one man, J. P. Morgan. Everybody agreed after that, that we needed to have a better system. But the Federal Reserve Act didn’t pass until 1913. There were six years of arguments between debtors and creditors, farmers, and bankers, and populace. It wasn’t until Woodrow Wilson became President and kind of showed some leadership and Louis Brandeis helped him form a compromise that got this clunky bill through Congress. So, that was six years, it could take six years this time too.
Jamie Dimon did not do exactly what J. P. Morgan did, the man whose name is on the bank that Jamie Dimon runs. But in the crisis, in March, 2008, someone had to step up and take over Bear Stearns, get some money from the Feds, $30 Billion to help do it, but Jamie Dimon was that man. And J. P. Morgan in that episode saved the day. And they also ended up buying Washington Mutual and they play, now an important role because some banks are bust and other banks are weak and J. P. Morgan and Goldman Sachs are among the strong. So, it is very much history repeating itself. It’s kind of ironic, the rules are different, the circumstances are different, but the J. P. Morgan empire is once again at the center of the whole system.
Recorded on November 20, 2009
The economics editor of the "Wall Street Journal" on Bernanke’s performance, AIG’s bailout, and the ironic position of J.P. Morgan in the crisis. This series was made possible by the Charles G. Koch Charitable Foundation.
Nazi supporters held huge rallies and summer camps for kids throughout the United States in the 1930s.
- During the 1930s, thousands of Americans sympathized with the Nazis, holding huge rallies.
- The rallies were organized by the American German Bund, which wanted to spread Nazi ideology.
- Nazi supporters also organized summer camps for kids to teach them their values.
A Bund parade in New York, October 30, 1939.
Credit: Library of Congress
1930s AMERICAN FASCIST BUND CAMP HOME MOVIE BERGWALD NEW JERSEY<span style="display:block;position:relative;padding-top:56.25%;" class="rm-shortcode" data-rm-shortcode-id="69d54b175b0d317cf9bfd688e4fa04f3"><iframe type="lazy-iframe" data-runner-src="https://www.youtube.com/embed/gOPeDaDcw3w?rel=0" width="100%" height="auto" frameborder="0" scrolling="no" style="position:absolute;top:0;left:0;width:100%;height:100%;"></iframe></span>
Tea and coffee have known health benefits, but now we know they can work together.
Credit: NIKOLAY OSMACHKO from Pexels
- A new study finds drinking large amounts of coffee and tea lowers the risk of death in some adults by nearly two thirds.
- This is the first study to suggest the known benefits of these drinks are additive.
- The findings are great, but only directly apply to certain people.
Maybe you should enjoy this article with a cup of coffee or tea.<p> The <a href="https://drc.bmj.com/content/8/1/e001252?T=AU" target="_blank" rel="noopener noreferrer">study</a> involved 4,923 type 2 diabetics living in Japan. The average participant was 66 years old. All of the participants were taken from the rolls of the Fukuoka Diabetes Registry, a study geared at learning about the effects of new treatments and lifestyle changes on the health of diabetics. <br> <br> The participants filled out questionnaires concerning their health, diet, habits, and other factors. Among the questions were two focused on determining how much green tea or coffee, if any, the participants consumed over the course of a week. The health of the participants was recorded for five years. During this time, 309 of the test subjects died from a variety of causes. <br> <br> Subjects who drank more than one cup of tea or coffee per day demonstrated lower odds of dying than those who had none. Those who consumed the most tea and coffee, more than four and two cups a day, respectively, enjoyed the most significant reductions in their risk of death. This level of consumption was associated with a 40 percent lower risk of <a href="https://www.sciencedaily.com/releases/2020/10/201020190129.htm" target="_blank" rel="noopener noreferrer">death</a>. </p><p>Most interestingly, the effects of drinking tea and coffee appear to combine to reduce risk even further. Those who reported drinking two or three cups of tea a day and two or more cups of coffee were 51 percent less likely to die during the study, while those who drank a whopping four or more cups of tea and two or more cups of coffee had a 63 percent lower risk of <a href="https://www.medicalnewstoday.com/articles/diabetes-coffee-and-green-tea-might-reduce-death-risk" target="_blank" rel="noopener noreferrer">death</a>. </p>
So, should I start swimming in a vat of coffee and green tea?<iframe width="730" height="430" src="https://www.youtube.com/embed/LY0E-JQxeoY" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe><p> Not quite. </p><p> The primary takeaway from this study is that Japanese adults with type 2 diabetes who drink a lot of green tea and/or coffee die less often than similar people who do not. If this effect is caused by something in the drink, lifestyle choices people who drink that much tea all make, or something else remains unknown. The finding must be considered an association at this point. <br> <br> The eye-popping reductions in mortality rates are compared to the risk of death of others in the study. The people who died reported drinking less tea and coffee than those who lived. Unless you have several demographic and conditional similarities to the subjects of this study, you probably won't suddenly be at a two-thirds lower risk of death than your peers because you drink green tea. </p><p> Like all studies that depend on self-reporting, it is also possible that people misstated how much they consumed any one item. The study also did not look into other factors like socioeconomic status or education level, also known to impact death rates and potentially linked to coffee and tea consumption. </p><p> However, it is yet another study in the pile that suggests that <a href="https://www.healthline.com/nutrition/top-13-evidence-based-health-benefits-of-coffee" target="_blank" rel="noopener noreferrer">coffee</a> and <a href="https://www.healthline.com/nutrition/top-10-evidence-based-health-benefits-of-green-tea" target="_blank" rel="noopener noreferrer">green tea</a> are good for you. That much is increasingly <a href="https://www.health.harvard.edu/press_releases/health-benefits-linked-to-drinking-tea" target="_blank" rel="noopener noreferrer">agreed</a><a href="https://www.rush.edu/health-wellness/discover-health/health-benefits-coffee" target="_blank" rel="noopener noreferrer"> upon</a>. This study also suggests the benefits are additive, which is a new development.</p><p><br> So, while it isn't time to start the IV drip of green tea, a cup or two probably won't <a href="https://www.webmd.com/diabetes/news/20201022/coffee-green-tea-might-extend-life-for-folks-with-type-2-diabetes" target="_blank" rel="noopener noreferrer">hurt</a>. </p>
Logic puzzles can teach reasoning in a fun way that doesn't feel like work.
- Logician Raymond Smullyan devised tons of logic puzzles, but one was declared by another philosopher to be the hardest of all time.
- The problem, also known as the Three Gods Problem, is solvable, even if it doesn't seem to be.
- It depends on using complex questions to assure that any answer given is useful.
The Three Gods Problem<iframe width="730" height="430" src="https://www.youtube.com/embed/UyOGZk7WbIk" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen></iframe><p> One of the more popular wordings of the problem, which MIT logic professor George Boolos <a href="https://www.readersdigest.ca/culture/hardest-logic-puzzle-ever/" target="_blank">said</a> was the hardest ever, is:<br> <br> "Three gods A, B, and C are called, in no particular order, True, False, and Random. True always speaks truly, False always speaks falsely, but whether Random speaks truly or falsely is a completely random matter. Your task is to determine the identities of A, B, and C by asking three yes-no questions; each question must be put to exactly one god. The gods understand English, but will answer all questions in their own language, in which the words for <em>yes</em> and <em>no</em> are <em>da</em> and <em>ja</em>, in some order. You do not know which word means which."<br> <br> Boolos adds that you are allowed to ask a particular god more than one question and that Random switches between answering as if they are a truth-teller or a liar, not merely between answering "da" and "ja." <br> <br> Give yourself a minute to ponder this; we'll look at a few answers below. Ready? Okay. <strong><br> <br></strong>George Boolos' <a href="https://www.pdcnet.org/8525737F00588A37/file/31B21D0580E8B125852577CA0060ABC9/$FILE/harvardreview_1996_0006_0001_0060_0063.pdf" target="_blank" rel="noopener noreferrer">solution</a> focuses on finding either True or False through complex questions. </p><p> In logic, there is a commonly used function often written as "iff," which means "if, and only if." It would be used to say something like "The sky is blue if and only if Des Moines is in Iowa." It is a powerful tool, as it gives a true statement only when both of its components are true or both are false. If one is true and the other is false, you have a false statement. </p><p> So, if you make a statement such as "the moon is made of Gorgonzola if, and only if, Rome is in Russia," then you have made a true statement, as both parts of it are false. The statement "The moon has no air if, and only if, Rome is in Italy," is also true, as both parts of it are true. However, "The moon is made of Gorgonzola if, and only if, Albany is the capitol of New York," is false, because one of the parts of that statement is true, and the other part is not (The fact that these items don't rely on each other is immaterial for now).</p><p> In this puzzle, iff can be used here to control for the unknown value of "da" and "ja." As the answers we get can be compared with what we know they would be if the parts of our question are all true, all false, or if they differ. </p><p> Boolos would have us begin by asking god A, "Does "da" mean yes if and only if you are True if and only if B is Random?" No matter what A says, the answer you get is extremely useful. As he explains: <br> </p><p> "If A is True or False and you get the answer da, then as we have seen, B is Random, and therefore C is either True or False; but if A is True or False and you get the answer ja, then B is not Random, therefore B is either True or False… if A is Random and you get the answer da, C is not Random (neither is B, but that's irrelevant), and therefore C is either True or False; and if A is Random...and you get the answer ja, B is not random (neither is C, irrelevantly), and therefore B is either True or False."<br> <br> No matter which god A is, an answer of "da" assures that C isn't Random, and a response of "ja" means the same for B. </p><p> From here, it is a simple matter of asking whichever one you know isn't Random questions to determine if they are telling the truth, and then one on who the last god is. Boolos suggests starting with "Does da mean yes if, and only if, Rome is in Italy?" Since one part of this is accurate, we know that True will say "da," and False will say "ja," if faced with this question. </p><p> After that, you can ask the same god something like, "Does da mean yes if, and only if, A is Random?" and know exactly who is who by how they answer and the process of elimination. </p><p> If you're confused about how this works, try going over it again slowly. Remember that the essential parts are knowing what the answer will be if two positives or two negatives always come out as a positive and that two of the gods can be relied on to act consistently. </p><p> Smullyan wrote several books with other logic puzzles in them. If you liked this one and would like to learn more about the philosophical issues they investigate, or perhaps if you'd like to try a few that are a little easier to solve, you should consider reading them. A few of his puzzles can be found with explanations in this <a href="https://www.nytimes.com/interactive/2017/02/11/obituaries/smullyan-logic-puzzles.html" target="_blank" rel="noopener noreferrer">interactive</a>. </p>
But most city dwellers weren't seeing the science — they were seeing something out of Blade Runner.
On Sept. 9, many West Coast residents looked out their windows and witnessed a post-apocalyptic landscape: silhouetted cars, buildings and people bathed in an overpowering orange light that looked like a jacked-up sunset.