Former Treasury Sec. Hank Paulson and Fed Chair Ben Bernanke misled the public about the bank bailout and damaged its "credibility" by claiming that TARP money was going to help healthy banks that later turned out to be quite troubled. I'm sure this fits snugly into the conspiracy narrative of the government's corrupt efforts to rescue Wall Street, screw the American taxpayer, and elect Goldman Sachs the crypto-chancellors of the financial underworld. But to me, this just seems redundant. On the brink of an apocalyptic worldwide financial panic, our economic leaders told us white lies about the banks' health. I'm not surprised. In fact, isn't that the point?

My understanding of TARP's and the stress tests' (which had their own credibility crisis) impact on the banks' health is that they instilled a sense of confidence in investors who have since helped to re-capitalize the banks. As Larry Summers told Ryan Lizza in a recent New Yorker profile, the key to a bailout is managing public (especially investor) confidence in the viability of the banks:

[Summers] pointed out that full nationalization of a financial institution might trigger systemic shocks, as investors retreated from other banks, creating exactly the kind of panic that nationalization was intended to prevent. (As [Obama economic official Gene] Sperling often argued, "You might come out and say, 'I'm gonna take over Bank of America and Wells Fargo, but everybody else is safe!' Maybe they believe you. And maybe they don't. But if you get this wrong the Dow's at thirty-five hundred! You're the worst economic manager in the history of the United States!")

Crisis management is difficult. There's a short-term gain to telling white lies to keep confidence in the system, but a long-term risk, because the revelation of their falseness can destroy that confidence. But I've yet to see a convincing argument that September and October 2008 were anything less than a remarkable, if imperfect, tango of financial improvisation that largely worked to save our financial system.