I took Pete's recommendation and read David Wessel's book, In Fed We Trust, last weekend.  Pete's right: The book is exceptionally well-written and a very easy read.

(Full disclosure: I've known Wessel since he first came to Washington about a million years ago to cover the federal budget for the Wall Street Journal.)

But I was struck but several things that Pete did not mention in his post.  The most important by far is that the policymakers at the Fed and Treasury were largely flying by the seat of their pants as the credit crisis that led to the economic downturn unfolded.

Before anyone takes this the wrong way, let me state as directly as possible that Fed Chairman Ben Bernanke, New York Fed President and subsequently Treasury Secretary Tim Geithner, and Fed Governors Don Kohn and Kevin Warsh -- what Wessel says inside the Fed were referred to as the "Musketeers" -- are all very smart people who absolutely were in the right place at the right time.

But if Wessel's reporting is to be believed, and there's no reason to do otherwise, the smarts and experience the Musketeers brought with them was not enough.  They were essentially guessing that the solutions they came up with to very novel situations would work.  And, as we know from the 20-20 hindsight we all have, many of those responses didn't work at all, didn't work as expected, or were much harder to implement than was anticipated.

Some of this is understandable.  Thanks to Wessel and others, we now know that the credit and financial situation was, in fact, largely unprecedented and close to a perfect storm.  Securitization, the tremendous growth in a largely unregulated shadow banking system, cancerous mortgage products offered by that system, a definite lack of information about counterparty risks, a regulatory system designed to deal with none of this, and sky-high consumer expectations meant that few could be sure of what was happening or how to deal with it when all hell broke loose.  In many cases it wasn't even clear that policymakers knew what the preferred outcome shoudl be other than just keeping things calm at that moment.

There was no checklist of what to do and when to do it and there clearly there was nothing approaching standard operating procedures and the results of this lack of preparation have often been disastrous.  For example, for reasons that still haven't been fully explained, Bear Sterns was saved but Lehman wasn't and the decision to let Lehman go sent shock waves that unexpectedly froze financial markets in their tracks and made the situation worse rather than better.

My question is why don't we do the financial equivalent of war games by having all of the economic policymaking agencies participate in simulations of the worst possible situations anyone can imagine.  Since the Fed and Treasury spent so many sleepless weekends a year ago trying to devise solutions to problems before the Asian markets opened on Monday morning, why not create hypothetical situations late on a Thursday that policymakers at the Fed, Treasury, the White House, Congress, and high-level participants from Wall Street are forced to deal with by midnight on Sunday?

And make these hypotheticals as off-the-wall as possible so that policymakers have to consider things they've never considered before or thought possible.  For example, what would we do if the Chinese announced on Thursday that they were going to stop buying U.S. debt on Monday?  How would we handle that if it occurred at the same time as a massive eathquake destroyed half of the homes (and the mortgages on them) in southern California?  Which Wall Street firms and banks would be most in jeopardy and what, if anything, should and could be done to help them?  Which local governments would be most affected by the loss in property and sales taxes?  Who on Wall Street would be hurt from the defaults by the state and local governments?  How much would the federal government have to spend to deal with the human side of the disaster and where would the money come from now that the Chinese have said they're not going to buy any more Treasuries.  What will happen to interest rates as the deficit instantly increases by hundreds of billions of dollars?  And what should be communicated to which audiences by whom?

As Wessel points out in his book, the entire U.S. economic policymaking team was unprepared for the crises not just because they had never considered the specific situations they were deaingl with, but because the apparatus for dealing with them didn't exist.  Because of that, Bernanke didn't know in advance how and when to keep the regional Fed presidents in the loop on many decisions and the relationship between the Fed, Treasury, Congress, the SEC, and the Wall Street firms was determined on the fly.

And they were often guessing about the impact of what they were considering.

For me, that's the biggest take away of In Fed We Trust.  Academic credentials and day-to-day experience is not enough when the world as you know it is crashing down around you.  Economic leaders need the policymaking equivalent of the stress test they administered earlier this year to banks to be prepared.