I recently came across a September 2009 New Yorker article (abstract is free subscription required to read the whole thing) written by James B. Stewart entitled “A Reporter at Large, Eight Days.” Though the article is an excellent and extremely detailed account of the eight days proceeding and immediately following the collapse of Lehman Brothers, one thing in the article really stood out to me.
According to Stewart, on Thursday, September 18th, Bernanke, Paulson, and others were meeting with Congressional leaders in an attempt to convince those leaders to give the Fed authorization to aggressively intervene in the markets. When Bernanke was asked what the danger of not intervening would have been, he “cautiously” replied that (1) the stock market could drop twenty percent, (2) unemployment would reach nine to ten percent, and (3) GM would fail in addition to other large companies. Stewart makes it sound as though it was this dire prediction that motivated Congress to eventually pass the multi-billion dollar TARP package. As we all know, that bill eventually passed, and a lot of the resulting money was used to “save” the financial system.
What did our billions achieve? Most of Bernanke’s doomsday scenario has still come true. Unemployment has exceeded Bernanke’s figure. GM and other big companies still went (and are going) bust. Yes, the stock market didn’t drop as far as he feared it would. This fact has protected many 401(K)s, which is admittedly no small thing.
Stewart concludes, and I think I still agree that drastic action was necessary to avert a bank run/collapse. Had our financial system as a whole collapsed as a result of bank runs, Bernanke’s doomsday scenario would have looked positively rosy. So perhaps, in the end, Bernanke’s doomsday scenario was simply too optimistic.
From where I sit, with the admitted benefit of hindsight, I am left to wonder whether what we achieved with our billions was worth the cost. I’m especially concerned given that we may be at the beginning of a lost decade of our own as a result of the debt we incurred and the inability of our markets to properly price debt and securities due to the obfuscating effect such an intervention invariably has. Had we let more firms fail and let assets reprice more freely, would we have been in any worse situation than we are now having spent the billions we did? We’ll probably never know. I, however, am not convinced that the price we paid was worth the results we got.