Limitless: The Federal Reserve Takes on a New Age of Crisis
By Jeanna Smialek
Alfred A. Knopf, 374 pages, $30
The Federal Reserve System, the United States central banking system, was established in conjunction with the Federal Reserve Act, which was signed into law by President Woodrow Wilson on Dec. 13, 1913, in the wake of the Panic of 1907, which was punctuated by an economic recession, a 50 percent drop in the value of the New York Stock Exchange over the previous year, and the collapse of many state and local banks. The Federal Reserve was given the tasks of “promot[ing] effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
In recent years, the Federal Reserve has seemingly moved beyond its initial charter, as evidenced by its “bailout” of Wall Street in the 2008 financial crisis and its backstopping of Main Street during the 2020 pandemic. Over the past few years, the Fed has also been pressured to weigh in on topics outside the confines of financial market stability, such as climate change. What is the current role of the Federal Reserve and is it in danger of overstepping its raison d’être? In her new book: Limitless: The Federal Reserve Takes on a New Age of Crisis, New York Times Federal Reserve reporter Jeanna Smialek poses these questions and presents a compelling portrait of the Fed at this watershed moment.
Limitless provides a highly readable, comprehensive history of the Federal Reserve and its current infrastructure. Smialek details key flashpoints, such as the Banking Act of 1935, which transferred the balance of power from the Fed’s 12 private reserve banks to the presidentially appointed Washington, D.C.–based Board of Governors. The Banking Act of 1935 was implemented based on the recommendations of Marriner Stoddard Eccles, who served as the seventh Federal Reserve chairman from 1934 to 1948 during the administrations of Franklin Delano Roosevelt and Harry S. Truman. The act authorized the Board of Governors to set bank reserve requirements and interest rates for deposits, further solidifying the Fed’s power. The author explains in detail how the Federal Reserve operates today and describes the current relationship between the Board of Governors and the regional banks, of which the New York Fed plays the most significant role. Smialek also delineates the member composition of the Federal Open Market Committee, the body charged with setting national monetary policy.
Smialek provides background and context about the subprime mortgage crisis of 2007–2008, which precipitated the failure or near failure of large financial institutions, including Lehman Brothers. She elaborates on the role that complex collateralized debt obligations played in stimulating this crisis. Additionally, she describes the Emergency Economic Stabilization Act of 2008 and the associated $700 billion Troubled Asset Relief Program (TARP) whereby the U.S. government “bailed out” the banks by purchasing $700 billion in distressed assets from them. Smialek juxtaposes the 2008 “too big to fail” bailout against the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provided financial assistance to individuals, families, and businesses negatively impacted by the pandemic.
Smialek drives home the point that the Federal Reserve crossed the Rubicon with the 2008 “too big to fail” bailout. Also, she argues that Ben Bernanke, the Federal Reserve chairman at the time, “created an emergency loan program template that could be pulled off the shelf and reused for various markets.” As Smialek writes, “The idea was to convince investors in critical markets that if things got bad enough, the central bank would be there to buy temporarily troubled securities. That knowledge would prevent investors from dumping the holdings in a risk to limit losses. The programs could act as a stabilizing force.”
Smialek also stipulates that since Congress was disturbed by the scope of the 2008 bailouts, it mandated that the Treasury Department sign off on any future Fed market rescue programs. Consequently, in 2020, Fed Chairman Jerome Powell had to obtain then–Treasury Secretary Steve Mnuchin’s commitment to back up Fed rescue initiatives with Treasury money. And while the two men did not agree on the duration of these programs, their shared background in private equity facilitated a mostly fruitful collaboration.
The author also addresses the pressure placed on the Fed to involve itself in discussions on climate change and global warming and their associated risks to the financial markets. Although Powell had previously displayed an environmental consciousness in his personal life through his past employment with the Global Environment Fund and by driving a Tesla, he pushed back on engaging the Fed in the climate change agenda. He was concerned that the Left wanted bankers to go beyond assessing the climate risks to the banking system and move toward making credit decisions based on environmental policies. “Climate change is an important issue but not principally for the Fed,” Powell told the Joint Economic Committee in November 2019. “We’re not going to be the ones to decide society’s response. That’s for elected officials, not us.”
Smialek is an engaging storyteller with an ability to create vivid portraits of Fed leaders past and present, such as Marriner Eccles and 13th chairman Alan Greenspan, who served for an unprecedented five terms (1987–2006) and is credited with ensuring liquidity in the markets on Oct. 19, 1987, after the Dow fell 508 points. Smialek also provides background on individuals who are not household names but played key roles in the Federal Reserve’s response to the pandemic, including Lael Brainard, former vice chair of the Federal Reserve (2022–2023), and Randy Quarles, vice chair of the Federal Reserve for Supervision (2017–2021). The author also takes us behind the scenes in informal decision-making settings, such as Powell’s regular breakfasts with Mnuchin.
The Federal Reserve’s mandate continues to be tested, and concerns about endless bailouts persist, as is evidenced by the March announcement that the Federal Reserve is working in concert with the Federal Deposit Insurance Corporation and the Treasury Department to guarantee the deposits of the failed Silicon Valley Bank. Moreover, the Fed faces the additional challenge of a rise in shadow banks, nontraditional financial institutions that have little oversight. As of this writing, 49 percent of financial institutions fall under the rubric of a shadow bank. Furthermore, the central bank is dipping into new waters with the likely launch of Central Bank Digital Currencies (CBDC), which theoretically has limited credit or liquidity risk. Opponents of CBDCs are concerned about the invasion of consumer financial privacy and the possible undermining of the traditional banking system.
Limitless: The Federal Reserve Takes on a New Age of Crisis is a highly engaging and extremely informative book about the role that the Federal Reserve has played in times of national economic crisis. Given that we are currently living under the specter of an inflation rate exceeding 6 percent, it is critical that we as a nation become better informed about the central banking system’s potentially expanding sphere of influence. Jeanna Smialek has an entertaining narrative voice and the ability to distill complex banking system industry topics against broader economic, social, and moral considerations. I highly recommend Limitless as an accessible resource for understanding the ever-evolving complex financial environment.