Danielle DiMartino Booth, a former Dallas Federal Reserve official, released a new book this week entitled Fed Up. The book, a first-person account of the inner-workings of the Federal Reserve (Fed), provides readers with unique insight into the operations, leadership, and mentality of what is un-questionably the world’s most powerful financial force. What it reveals about the Fed is neither flattering nor confidence-inspiring. By pulling back the curtain to reveal the Fed’s modern-day mach-inations, DiMartino Booth provides an assessment of the highest levels of economic thinking and how it is afflicting our economy.
Throughout the book, it is clear her purpose is equal parts entertainment and education with a dash of sermon to underline the gravity of the situation. Fed Up is compelling, well-written and its objec-tives are clear; expose the hubris at the Fed which results in poor decision-making and generate much-needed debate to bring about change in how the Fed functions. As you read this review, and hopefully the book as well, we remind you the Fed is sworn to serve the American public and should be held accountable to this obligation.
We thank Danielle for giving us the privilege of reading an advance copy of her book so that we can provide this timely review to you. Neither 720Global, LLC nor its owners have received any form of direct or indirect compensation in exchange for the review of this book.
Confluence of Events
Skill, talent, temperament and career path often have a funny way of converging at just the right time to produce something that is needed at a particular moment to change the course of events. Danielle DiMartino Booth’s Wall Street experience and tenure as a journalist converge with her per-sonal traits of curiosity, healthy skepticism and integrity to expose the powerful forces of the Fed and the means by which they use their influence.
DiMartino Booth spent enough time on Wall Street to become “enlightened” as to the ways of high finance and then went on to pursue a career in journalism at the Dallas Morning News. Her insight and warnings in the years preceding the Great Financial Crisis of 2008 are well-documented and stand in stark contrast to the mindset of the Fed and then-chairman Ben Bernanke who “found little evidence to support the existence of a national home price bubble.” Fortunately, the President of the Dallas Federal Reserve Bank, Richard Fisher, was a rare exception within the Fed and took notice of DiMartino Booth’s articles. In the fall of 2006, Fisher convinced her to join the Dallas Research De-partment.
Theory Versus Practice and a Dose of Hubris
From her early days at the Dallas Fed, DiMartino Booth recognized that the Federal Reserve is run by Ph.Ds. from the premier economic schools of the nation. Referring to them as the “MIT mafia,” she notes that the large concentration of academicians at the Fed is a recent trend. Traditionally, Fed governors hailed from the banking sector where they came equipped with a deeper understanding of the workings of the main street economy and a real-world perspective of the benefits and consequenc-es that accompany monetary policy. In years’ past, the practical experience of leadership naturally guided academically-oriented researchers and analysts on staff. According to DiMartino Booth, Richard Fisher was a Fed President of this mold. Unfortunately, the influx of Ph.Ds. over the last 15 to 20 years with virtually no practical experience changed the Fed’s thinking. In her words, “the overwhelming dominance of academics goes a long way toward explaining why the financial crisis of 2008 blindsided the Fed”.
Prominently throughout the book, DiMartino Booth highlights the arrogance and hubris that these aca-demics-turned-central bankers possessed and the control they garnered. They believed that their text-books, unproven theories, and complex research papers provided new sophistication and certainty with which to manage the domestic and, indeed, the global economy. They shelved simple models, and all but ignored real-time market data and the word on the street. In their pursuit of certainty, they for-got that human behavior could not be replicated in a petri dish.
This myopic academic perspective affected the staff economists and spread to the upper echelons of the Federal Reserve. As DiMartino Booth writes, “not that Bernanke wasn’t listening, but over time, he fixated on academic theories. Real life reports by Fisher and other District Bank presidents counted for little.” She added that current Fed Chairwoman Janet Yellen, who at the time ran the San Francisco Fed, was “more married to her models than Greenspan and Bernanke combined.”
Despite warnings from DiMartino Booth and Fisher, the Fed failed to see that “Malignant stars were aligning for a once-in-a-century global economic meltdown. Though precious few inside the Fed saw the crisis coming, it is patently false to suggest insiders hadn’t been fairly warned”.
As concerning as the Fed’s myopia was, she found their hubris equally troubling. From the Fed Gover-nors and district presidents down to the staff Ph.Ds.’ the air of royalty and elitism permeated the at-mosphere. Many of these economists lived in vacuums, where assumptions about human behavior and intricate modeling replaced real world experience and observation. It should be no surprise therefore that DiMartino Booth and Fisher, lacking Ph.Ds.’ were generally ignored despite their repeated expres-sion of concern and warning.
Driving Animal Spirits
In giving us the proper perspective on the events of the financial crisis and the Fed response, DiMartino Booth effectively lays the ground work for historical events that influenced future course. She de-scribes the sequence of events beginning ten years earlier that would formally establish the ultimate term describing financial moral hazard, “the Greenspan Put.”
The once-mighty hedge fund, Long-Term Capital Management (LTCM), run by the so-called best and brightest Ph.Ds. (a theme that should start to sound familiar by now), including two Nobel Prize win-ning board members, thought they had developed a means by which they could guarantee profits from derivative trading. When their theories and models didn’t align with reality, massive losses ensued, and Wall Street was holding the risk. Fed Chairman Alan Greenspan, along with Treasury Secretary Robert Rubin and Treasury official Lawrence Summers, orchestrated a government-sponsored bailout of the hedge fund.
The LTCM bailout – to be clear, the American taxpayer bailout of a hedge fund and in turn Wall Street – sent a very clear “risk-on” signal to major financial institutions and investors which elevated Greenspan and company to a status akin to deity. Per DiMartino Booth: “They were hailed as geniuses. I imagined my fellow Wall Streeters going to the cathedral in my neighborhood and lighting candles. Thanks be to God and Greenspan”.
Fast forward to the aftermath of the 2008 crisis, and through many different forms of extraordinary and highly questionable monetary policy, DiMartino Booth makes a case that the Fed remains overly concerned with spurring animal spirits. In other words, they believe that continually boosting investor confidence and driving financial asset prices higher is a necessity. In DiMartino Booth’s words “and yet here was the Fed, with Yellen as its biggest cheerleader, once again trying to build an economic recov-ery on the back of frenetic animal spirits.” In the Fed’s mind, Bear Stearns, Lehman, Fannie Mae and other institutions