ECONOMIC CHAOS & LEADERSHIP
By David Brooks
EVERYBODY wants to be a striding titan. Almost all alpha-leaders want to be the brilliant visionary in a time of crisis - the one who sees the situation clearly, makes the bold plans and delivers the faithful to the other side.
It almost never works out that way. The historian Henry Adams concluded that 'in all great emergencies... everyone was more or less wrong'. Abraham Lincoln didn't feel like a heroic leader: 'I claim not to have controlled events, but confess plainly that events have controlled me.' In real crises, the successful leaders are usually those who cope best with ignorance and error.
Mr David Wessel's about-to-be-released book, In Fed We Trust, gives a revealing blow-by-blow account of the recent financial crisis and illustrates this point. It is a tale replete with errors. In theory, Mr Ben Bernanke, Mr Henry Paulson and Mr Tim Geithner were as well prepared as anyone for this sort of event. Mr Bernanke, chairman of the Federal Reserve, had spent his life studying the Great Depression; a former Treasury Secretary, Mr Paulson had led the world's most prestigious investment bank; Mr Geithner, current Treasury chief, had been involved in financial rescues in Asia and beyond.
Moreover, all of them were expecting some kind of crisis. They knew there had been a dangerous surge of debt. And yet as the panic unfolded in 2007 and 2008, they continually underestimated its scope and implications. In July 2007, Mr Bernanke estimated global losses from the sub-prime mortgages and other loans to be US$50 billion (S$72 billion) to US$100 billion. The losses turned out to be in the neighbourhood of US$4 trillion. In October 2007, Mr Bernanke said the banking system was healthy and doubted that the housing woes would destabilise it. He was wrong.
Their decision not to bail out Lehman Brothers was based on a complete misreading of the economic psychology. Mr Paulson was sick of doing bailouts. He seems to have had some sort of intuitive moral sense that it was time for some banks to pay for their mistakes. Mr Bernanke and Mr Geithner went along, and none of them anticipated the meltdown that followed.
But this is not a story of failure. It's a story of effective muddling through. Bernanke & Co never really got control of events. But they did avert disaster and committed only a few big blunders. In the real world, that counts as a job well done. Mr Bernanke's first achievement was social, not intellectual. Mr Wessel describes one long meeting and one tough decision after another.
Rarely have so few endured so many conference calls for the sake of so many. And yet through all the talk, the fear and the rotten choices, Mr Bernanke seems to have cultivated a feeling of comradeship and harmony within the group. He kept the conversation going.
Something unexpected would happen. At one point, AIG claimed that it needed a US$4 billion cash infusion. Within days, it drew in US$38 billion instead. Mr Bernanke, Mr Geithner, Mr Paulson and others would just keep talking it through. They developed a feel for the crisis, and for the sort of traditions they would have to smash to address it.
Also, Mr Bernanke avoided the grand gesture. Occasionally, Mr Paulson would make a bold policy pronouncement. The idea was to lay down some sort of principle so the markets would understand the new rules and feel more secure. But then events would change and he'd have to reverse course. He'd end up producing more uncertainty, not less.
Mr Bernanke and Mr Geithner favoured a process of constant and gradual adjustment. They tried to solve one problem at a time and worry about the unintended consequences later. Their method didn't produce a set of clear principles. Their lack of a grand plan or an exit strategy worried some. But their method matched the chaos of the situation.
Finally, there was the size of the response team. It wasn't too big. There weren't giant agencies going at each other. The White House and Congress were barely involved. But it also wasn't too small - just a lone genius and a few loyalists. Instead, the same little platoon of about a dozen people shows up again and again in Mr Wessel's account - a manageable community of decision makers with no single person dominating the proceedings.
This recession is happening at a time when many wonder if the US political system is capable of addressing the nation's problems. The presidency has become a gargantuan enterprise in which media-star leaders are surrounded by a permanent campaign apparatus. Congress is both riven by ideology and dominated by parochial concerns. The Federal Reserve is not the most democratic institution, but under Mr Bernanke et al, it seems to have done a good enough job. Self-effacement did not lead to timidity. Good people were mobilised and were able to talk frankly about the many things they did not understand.
NEW YORK TIMES