September 30, 2014
We continue to be treated to stories of how everything about the housing bubble and the economic crisis caused by its collapse was simply unpreventable. None of the people responsible for this immense policy failure has been held accountable in any way. With few exceptions, all are now incredibly rich.
One of the items on the failure list that deserves immense ridicule is that the Fed did not rescue Lehman because it lacked the legal authority. (There is another question as to whether it should have allowed the whole cabal of Wall Street banks to crash in their own greed. No, it would not have condemned us to a second Great Depression — save that fairy tale for the kids shows.) The NYT has a piece with the Fed Chair Ben Bernanke and Treasury Secretary Henry Paulson reasserting their position that the Fed lacked legal authority to bail out Lehman.
The question that is never asked in this piece is, who would have stopped them? If Bernanke and Paulson had taken steps to rescue Lehman, did they think someone would file a suit in court to undo the rescue? If so, who would it be and what would the legal case look like?
That question makes the claim that they didn’t save Lehman because of lack of legal authority look absurd on its face. Many of the actions taken by the Fed and Treasury during the bailout had questionably legal authority, yet no court case ever interfered with their actions in any important way. No one would have had standing to prevent a rescue of Lehman.
If Bernanke and Paulson had wanted to go the route of rescuing Lehman they undoubtedly could have done so. They chose not to rescue the bank and were obviously unprepared for the consequences. The story about lacking legal authority was clearly made up after the fact in the great Washington tradition of CYA. And in the great Washington media tradition of protecting the powerful, this story has been treated as credible for the last six years.
Addendum:
Dax makes a very good point in his comment. We do know what a legal action against a Fed bailout of Lehman would like look, it would look like the suit now coming to trial over the bailout of AIG. In other words, Bernanke, Paulson, and Geithner want us to believe that they didn’t rescue Lehman, even though they knew it was essential to the stability of the financial system, because they were worried they might face long shot legal suit six years later. That might sell at NYT and WaPo, but not among actually serious people.
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