Why did the Fed bail out Bear?

More

I've gotten that question a lot over the last few days.  What, my questioners want to know, made Bear more worthy (or needful) of a bailout than Lehman.

Answer:  nothing but timing.  The Fed gambled that by supporting Bear into a quick sale, it could stop the liquidity crisis and prevent the contagion from bringing down the broader market.  By the time Lehman fell, it was clear that this hadn't worked.  Moreover, the bailout had introduced a serious moral hazard problem into the market:  AIG (and allegedly also Lehman) turned down private offers that were too paltry in the belief that the Federal Reserve wouldn't let them be forced into liquidation.  Other bankers required an object lesson.

Too, by that point, the various institutions involved had had some time to work out contingency plans for such a collapse.  They weren't complete, but they were adequate.  With Bear, on the other hand, it would have been utter chaos.

In my humble opinion, Ben Bernanke did the right thing both times.  Given the cost of a collapse (which we're now seeing), it was worth gambling $30 billion on the chance that it might be averted.  That gamble didn't pan out, but getting a bad outcome doesn't mean you made a bad decision.  Bernanke played a bad hand well, but ultimately it just wasn't enough to take the pot.

Jump to comments
Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Get Today's Top Stories in Your Inbox (preview)

'Stop Telling Women to Smile'

An artist's campaign to end sexual harassment on the streets of NYC.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Where Time Comes From

The clocks that coordinate your cellphone, GPS, and more

Video

Computer Vision Syndrome and You

Save your eyes. Take breaks.

Video

What Happens in 60 Seconds

Quantifying human activity around the world

Writers

Up
Down

More in Business

Just In