Bernanke still clueless: Blames Lehman failure for market turmoil, and tries to wrap his bald head around TBTF
Bernanke is just as guilty. He is out defending his response to Lehman Bros, but in the process is destroying his own credibility. He agrees in his response that the Lehman Bros caused the market turmoil. Prominent economists and market participants blame Lehman's failure with causing market problems, included the siezure of the credit market and the drop in the stock market.
Lehman's failure didn't cause the bubble to burst. The damage had already been done before. No one can really know if the government had come to rescue Lehman if the stock market wouldn't still have dropped and the credit markets wouldn't have siezed. It is all speculation.
Lehman was the canary in the coal mine adverting investors that there were some real problems. To say that we should have nationalized them like AIG is foolish. As it is we are never going to get our money back from AIG, GMAC, Fannie or Freddie.
For those of you who think that we should have bailed out Lehman, I have two questions:
How much did we spend on Lehman Brother's bankruptcy?
How many of Lehman's counterparts went bankrupt?
The answer to both questions is zero. But let's blame the canary.
The other thing Bernanke is trying to wrap his hairless head around is the Too Big Too Fail (TBTF). He blames regulators for not shutting down firms who had began to pose systemic risk. While he tries to overthink this problem, the rest of the world is not so perplexed.
The solution is easy: let them fail.
It is the easiest and simplest solution.
More via GARP:
Regulators fell short in using their powers "forcefully or effectively" to stop risky practices by banks and were slow to identify and address abuses in the U.S. financial system that led to global economic crisis, Federal Reserve Chairman Ben S. Bernanke told a panel investigating the financial crisis on Thursday.More
In a lengthy analysis delivered before the congressionally appointed committee, Bernanke said government regulators did not do enough to protect consumers in the marketplace and to force large financial institutions to curtail risky practices.
"Regulators had recognized these problems in some cases but did not press firms vigorously enough to fix them," he said.
Bernanke said the single most important lesson from the crisis was that the problem of financial institutions that are "too big to fail" must be solved.
He said that the U.S. government should be prepared to close down even the nation's largest firms if they pose a broader threat to the financial system. The financial overhaul signed into law earlier this summer gives regulators that power.
Bernanke's remarks were delivered on the second day of hearings by the Financial Crisis Inquiry Commission, which is charged with writing the official account of the causes of the financial crisis and the subsequent response by U.S. regulators. The government, invoking emergency powers, has issued more than $2 trillion in loans and other assistance since 2008 to help support the financial sector.
On Wednesday, former Lehman Brothers chief executive Richard S. Fuld said that U.S. regulators had acted on "flawed information" in making their decision to deny Lehman Brothers aid and force it into bankruptcy proceedings.
Thursday's event on Capitol Hill marked the final public hearing of the commission before the panel issues its report in December.
The commission's 10 members have been critical of Wall Street's role in the crisis since beginning their inquiry in January. They continued their attack on financial firms this week but also began shifting their attention to the government's responsibilities.
After Bernanke's remarks, members of the commission repeatedly pressed the central bank chairman on two of the most vexing questions about the financial crisis. They want to know why Lehman did not receive a government bailout and what role the Fed played in the housing market bubble.
Philip Angelides, chairman of the commission and a former California state treasurer, asked Bernanke to explain the Federal Reserve's decision-making on whether Lehman was considered too big to fail.
Bernanke said he recognized that if Lehman failed, the consequences would be catastrophic but that the Fed could not extend a lifeline without a reasonable expectation that it could get repaid.
Commission Vice Chairman Bill Thomas, a former Republican chairman of the House Ways and Means Committee who is now a visiting fellow at the American Enterprise Institute, asked Bernanke to explain the difference between Lehman and insurer American International Group, which received a $182 billion rescue package from the government.
Bernanke said there was a "very big difference" in whether the government was reasonably likely to be paid back. While Lehman's entire value was in financial instruments, he explained, AIG was "the largest insurance company in America, and the financial products division was just one outpost of this very large and very valuable insurance company."
After 2 1/2 hours of answering questions, Bernanke made a frank admission: Even as the Fed scrambled to save Lehman the weekend before it declared bankruptcy, the Fed had already concluded the bank would fail because customers and investors had declared it dead.
On the Fed's role in the housing market's run-up, Bernanke said it would have been "questionable" for the Fed to raise interest rates before the real estate market became overheated.
Bernanke, who in 2007 told lawmakers that he thought the subprime mortgage issue was "manageable," said he did not recognize the weaknesses that would turn the housing problem into a much bigger crisis.
WSJ: Bernanke defends his record on Lehman
LA Times: Fed couldn't save Lehman