Friday, August 9, 2013

The Professor Who Did Not Save the World

A very good summary, by Frederic Sheehan, of the massive expansion of Fed and Treasury power, crony capitalism sold by Bernanke, Paulson, Geithner and crew as necessary to save the financial system, when all it actually did was transfer a lot of money from taxpayers to bail out banks, insurance and trading companies that made a lot of bad decisions.

"The Fed's efforts prevented a 'total meltdown' of the financial system at a time when fears of a second Great Depression were 'very real,' Mr. Bernanke said Tuesday at the third of his four lectures at George Washington University in Washington."

Wall Street Journal, "'Fed Prevented Total Meltdown,' Bernanke Said," March 28, 2012.
This is not true.
Each of Federal Reserve Chairman Ben S. Bernanke's four lectures at George Washington University was unfortunate in its own way. In his third assault on history, logic, and common sense, "The Federal Reserve's Response to the Financial Crisis," Simple Ben made it clear he still cannot think his way through the 2008 financial crisis.
The sequence of events follows: On September 15, 2008, Lehman Brothers, an investment bank, failed. This triggered claims on credit default swaps. These derivatives pay the holder a specified amount of money when a company defaults. American International Group (AIG), an insurance company, had sold credit default swaps to protect the buyer if Lehman Brothers failed. (Credit default swaps are often labeled "insurance." As an analogy to insurance, this description is helpful; but they lack a key feature of insurance (insurable risk), one reason they should be banned.) It was time to pay, but AIG did not have the resources to do so. In the mythology of the moment, Ben's World introduced a waterfall of Old Testament proportions: AIG would fail, and the entire financial system would follow, without a government bailout.
On September 16, 2008, the U.S. government "seized control of AIG" (quoting from the September 17, 2008, Wall Street Journal). The Federal Reserve lent AIG $85 billion which allowed AIG to honor its credit default swaps.
On Sunday, September 21, 2008, "Morgan Stanley and Goldman Sachs applied to the Fed to become bank holding companies." The applications were "approved with extraordinary speed." (Financial Crisis Inquiry Commission Report) This was "in tandem with the Department of Justice," a caper that has been insufficiently explored.
The mythology is just that. I thank David A. Stockman, former director of the Office of Management and Budget under President Reagan, for the analytical assistance and for the pleasure of reading an early draft of his book: The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy.
Follow the link and read the rest.

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