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Ben Bernanke, Revisionist

by: Felix Salmon October 15, 2008    
Felix Salmon

Felix Salmon

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This, from Ben Bernanke, is disingenuous:

 The difficulties at Lehman and AIG raised different issues. Like the GSEs, both companies were large, complex, and deeply embedded in our financial system. In both cases, the Treasury and the Federal Reserve sought private-sector solutions, but none was forthcoming. A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman's acquisition by another firm. Consequently, little could be done except to attempt to ameliorate the effects of Lehman's failure on the financial system.

Funny how Bernanke never once mentions Bear Stearns in this speech. Bear posted $30 billion of collateral against a $29 billion loan: Was Lehman really incapable of doing something similar?

Bernanke makes it sound ("a public-sector solution for Lehman proved infeasible") as though the government tried to rescue Lehman but simply couldn't find a way to make it work. This is revisionism.

It was made quite clear at the time that Paulson was extremely worried about the Bear Stearns precedent, and didn't want to repeat it. Now that letting Lehman (LEH) fail looks increasingly like the single most expensive mistake that any Treasury secretary has made in living memory, Bernanke's trying to persuade us all that Paulson had no choice. Of course he had the choice -- he exercised his right to let Lehman fail, thereby triggering direct losses even outside the US of $300 billion. The total losses are much greater still.

Bernanke continues:

The financial rescue legislation, which I will discuss later, will give us better choices. In the future, the Treasury will have greater resources available to prevent the failure of a financial institution when such a failure would pose unacceptable risks to the financial system as a whole.

Treasury had the resources to prevent the failure of a financial institution all along. It did it with Frannie; it did it with AIG. Was it able to buy equity in solvent banks? No: the new legislation does give Paulson more powers than he had before. But let's not kid ourselves that during the Lehman crisis Paulson's hands were tied: They weren't.

At the time, I thought that Paulson was right to let Lehman fail, because "the US government's contingent liabilities are quite big enough, thank you very much, without adding the entirety of US bank debt on top". Well, we've now done just that, and as in all bailouts, it would have been much better to do it sooner rather than later.

I, like Bernanke, supported the Lehman decision. The difference between us is that I'm perfectly happy to admit, with hindsight, that I was wrong.

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This article has 5 comments:

  •  
    Oct 15 04:00 PM
    Perhaps you were right then and you're wrong now? We can never know what the future brings. How will you judge the success or failure of the current bailouts? It's good to set baselines before you see results.
    Reply
  •  
    Oct 15 04:53 PM
    You WERE right back when, and you are WRONG now.

    Badly run companies must be allowed to fail. "Investors" -- or more truthfully vultures who figured they could stick taxpayers with the costs-- who invested in a poorly run company SHOULD take losses.

    There is nothing in this crisis that is "unprecedented&qu... That is a bunch of nonsense from revisionist commentators who think Bear Stearns was the first major Wall Street firm to fail. Get out your history books and get a clue -- they weren't even in the first 10 major firms to fail.

    If your argument holds -- that poorly run companies should be bailed out -- then there is no reason to even have Wall Street, and even less reason to have commentators like yourself.

    Any idiot can blindly buy a security, knowing that he wins if it goes up, and the taxpayers lose if it goes down.

    This isn't about "punishing" the stupid. This is about preserving the system.

    If your argument holds, then we don't need banks or Wall Street or financial commentators like yourself.
    Reply
  •  
    Oct 15 10:29 PM
    lehman should have been bailed out. this is not an argument about capitalism - it is a defense of the currency.

    measures must be taken now to stop the results of the stupidly and lax legislation/regulation... if capitalism means we have to suffer chaos we have adopted a poor definition of capitalism.
    Reply
  •  
    Oct 16 12:49 PM
    Did they not know how tangled financial institutions were - as much with Lehman as with AIG ? Or was it nonchalance that comes with arrogance and well, plain stupidity.

    Well, you can't blame Bernanke, if he does not want to admit the error, even if he realises it now. What credibility would he have. Better though he speaks less.
    Reply
  •  
    Oct 16 03:50 PM
    The bottom line is that the entire American economics establishment, which varies from neo-classical to neo-Keynesian has lost its nerve and is now telling us that the free market doesn't work anymore.

    By the way, Keynesian economics was never tried in America and neo-Keynesian economics is simply a slightly more "liberal" (less pure) version of neo-classical economics. See the articles on post-Keynesian and neo_Keynesian economics in Wikipedia and elsewhere.

    This reminds me of the collapse of the "Marxist" Soviet Union where virtually all professors of economics were Marxists.

    The essence of the neo-classical economist's argument is:

    1) The old economic laws that we've been teaching our economics students since World War II no longer work.

    2) To save the financial system, we have to use unprecedented (post-Keynesian) methods.

    But how can they possibly engender confidence in a system they tell us no longer works but needs to be saved by post-Keynesian methods?

    The result: The highest level of volatility of American stock markets of their entire existence.

    A seeking Alpha trader's nightmare and a Las Vegas nightmare too (if this kind of random walk behavior continues, there will be no need for Las Vegas.)

    Whoopee.
    Reply
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