Ben Bernanke, Revisionist

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 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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