Let’s Be Fair to Bernanke– hindsight’s 20/20

posted by Ogenec
While neither the Fed nor the Treasury got everything right, they did far better than the Monday-morning quarterbacks would have us believe

By Steven Rattner
Thursday, December 3, 2009.

When the Senate Banking Committee welcomes Federal Reserve Chairman Ben Bernanke for his confirmation hearing today, the questioning is sure to be sharp, yet another chapter in the unceasing second-guessing of the government’s handling of the Wall Street meltdown.

Almost since the first cracks in Wall Street’s facade appeared more than two years ago, commentators and politicians of all stripes have questioned whether the Fed and, equally, the Treasury made proper decisions as they faced the worst financial crisis in 75 years.

It is very much the Banking Committee’s responsibility to satisfy itself about Bernanke’s qualifications and the overall management of the financial crisis. It is also appropriate for other oversight groups to conduct their own inquiries.

But much of the barrage of criticism is unfair, and some of it is simply ignorant.
Take, for example, the drumbeat of criticism for the decision to let Lehman Brothers fail. Conveniently forgotten by critics is the fact that until the consequences of Lehman’s bankruptcy became evident, the refrain from all quarters after the bailout of Bear Stearns in the spring was that the next floundering bank needed to be allowed to fail to teach Wall Street a lesson (preserve “moral hazard,” to use the jargon).

Shortly after Lehman’s filing, Allan Meltzer, a distinguished monetary economist, commended the Fed for letting Lehman go, telling PBS that “within a few days, just a few days, Barclays was there buying up some of Lehman’s assets.” A year later, Meltzer had a different view: “Allowing Lehman to fail without warning is one of the worst blunders in Federal Reserve history.”

More recently, a government oversight report came out swinging against the handling of the AIG bailout, suggesting in particular that the Fed and the Treasury should have demanded concessions from the banks that were counterparties to AIG’s hundreds of billions of dollars of credit insurance contracts.

That criticism sounds good, but like much after-the-fact commentary, it’s off-base. Once the Fed and the Treasury concluded (correctly) that an AIG bankruptcy posed unacceptable systemic risks, the government immediately lost any bargaining power to demand concessions. The result was a very unfortunate windfall for the counterparty banks, but what was the realistic alternative?

read more here:

related story:
Unexpected drop in jobless rate sparks optimism
WASHINGTON (AP) — A surprising drop in the November unemployment rate and in job losses cheered investors Friday and raised hopes for a sustained economic recovery.



Filed under Bailout, Banking, Economy, Free Market, Timothy F. Geithner (Sec of Treasury), Uncategorized

5 responses to “Let’s Be Fair to Bernanke– hindsight’s 20/20

  1. ogenec

    Guys, thanks for helping me post this. To amplify Rattner’s remarks, the point is not that Geithner and Bernanke are blameless. They are not. They made some mistakes. But, overall, I think they did a good job of pulling us back from the brink.

    Whenever I hear criticism of what the Administration did, I ask this question: what would YOU have done? Nobody — but nobody — was arguing back then that AIG should be allowed to fail. Not because we had any special love for AIG, but because we wanted to make sure an AIG bankruptcy didn’t pull down other financial institutions and trigger a catacylismic meltdown. Given that, I really don’t understand the argument that the government should have demanded discounts from AIG’s counterparties. The best way to get the discounts, if we really wanted them, was to threaten its counterparties with an AIG bankruptcy. Most of us having decided that that strategy would have been too risky, I’m not at all impressed with the 20-20 hindsight argument. It just doesn’t hold up.

    One last point. We need to acknowledge that the Fed and the SEC have different regulatory goals. They may not often conflict, but in this case they absolutely did. The SEC is focused on transparency and protection of investors. The Fed is focused on the integrity of the banking system. The banking system depends on trust; if everyone suddenly got spooked and decided to withdraw their money at once, the whole system would collapse like a bad souffle.

    So actions like the shotgun wedding of Merrill and BofA, while they may be criticized from a transparency standpoint, may yet be justified on the basis of the Fed’s mandate. Above all else, the Fed wanted to prevent an erosion of trust in the banking system. This is a thorny problem, how to resolve these competing regulatory considerations. I hope the proposed reforms devote some attention to it. But it would be a colossal mistake to assume the problem does not exist.

  2. Thanks for your helpful information. You gain knowledge of a little something on a daily basis.

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