Did Bernanke (And Crew) Save The World?

I have not yet read Bernanke's new book, The Courage to Act, but plenty of people on both the left and the right are mocking claims made by many that Bernanke and crew "saved the world" by their actions in September, 2008.  Most of the focus of these discussions has been on the TARP bank bailouts along with the creation of a bunch of special lending entities, most of which were shut down later.  Those on the left tend to argue that we would have been better off letting some more big banks fail, along with throwing at least their CEOs and CFOs in jail. Those on the right worry about all the moral hazard hyped up by TARP as well as the more than doubling of the Fed bank balance sheet that happened in the next few months, going from roughly $900 million to about $2.2 trillion by  thge beginning of 2009, with this supposedly setting us up for that hyperinflation that is still supposedly going to come some day.

"Save the world" is awfully dramatic, but indeed the buzz by those defending Bernanke has been that this moment was like September, 1931, when the rolling international financial collapse that had started in May of that year in Vienna with the failure of the Creditanstalt finally hit the US shores hard, and the Fed did nothing, with this being reported and criticized by Friedman and Schwartz in their Monetary History of the United States, the work much on Bernanke's mind and to which he has referred, even famously promising Friedman at one point that he would never let that happen again, the failure to prop up the banking system in September, 1931, which indeed was followed by a massive wave of bank failures, and a severe plunge of the US economy into the Great Depression.  If he saved the world, it was that he prevented that. But many are skeptical, particularly with regard to TARP and the assoicated bailout of AIG.  The bums should have been shut down and jailed.

I have reported on this previously, but I think have again become aware of how few people understand what really went down in September, 2008.  We just had a well-known economist in yesterday, who will remain unnamed, who when I told him what really went down dismissed the whole thing as "a conspiracy theory."  It can sound like it if one does not know about it. But in fact this was a successful conspiracy that has been since made public, but about which many seem not to know, including professional economists who really should know better, even if they would still disapprove of it.

So, the most crucial action was not TARP or the AIG bailout.  It was the decision on September 18, 2008 to open swap lines to foreign central banks, especially the ECB, which were under heavy pressure and facing a complete freeze of their financial markets due to a plunging euro and lack of dollars.  This is recounted in Chapter 11 of Neil Irwin's The Alchemists from 2013.  They immediately approved $180 billion of lending, but  by December this had amounted to $580 billion, leading to eurojunk sitting on the Fed balance sheet.  This was nearly half the increase in the Fed balance sheet.  This increase would be gradually worked off over the next six months or so as the agreement in December to purchase $500 in mortgage-backed securities was approved, and these were accumulated as the eurojunk got rolled off.

If Bernanke and crew saved the world, this was the moment, and the parallel with 1931 is precisely that it involved the world economy and financial system.  In 1931, the world financial system was already going down the tubes, but the Fed let the US system join it.  In 2008, the crisis was emanating from the US and its subrime lending crisis.   The Fed effectively kept this from leading to a 1931 outcome in Europe and other nations as well.  Why it was kept secret what they were doing (although it was publicly knowable to those following the details of the Fed balance sheet at the time) was that the Europeans, particularly Trichet and those leading the ECB, did not want people to know how fragile their situation was for fear of generating a full-blown panic, which was indeed avoided. People should keep this in mind, even if they think CEOs should have gone to jail or we are about to experience hyperinflation or whatever other dislike they might have about Fed policies of that time.

Barkley Rosser