Key members of Congress were stunned to hear Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Hank Paulson say on Sept. 18 in a closed-door meeting on Capitol Hill that the country was “days away” from a complete financial meltdown–one that could lead to Depression-like runs on banks, widespread violence and ultimately even to a possible declaration of martial law. It was a vision of Armageddon, but, of course, 10 days later, the House rejected a Wall Street bailout package sent over by Paulson, only to pass one in a more limited form–the Emergency Economic Stabilization Act–a week later that gave Paulson less power and only half the money he wanted.

Meanwhile, the financial system did not collapse and while a few banks were failing, there were no runs on them, and martial law wasn’t invoked. One reason things didn’t fall apart when Congress didn’t immediately act as Paulson and Bernanke demanded, may be that there wasn’t any danger of a meltdown in the first place. So say three senior economists working at the Federal Reserve Bank of Minneapolis, who in October examined the Fed’s own data, and concluded in an article titled Facts and Myths About the Financial Crisis of 2008 that the claims that interbank lending and commercial lending had seized up were simply not true. “Bank lending to consumers and to non-financial companies had not ceased, and banks were lending to each other at record levels,” says V.V. Charri, an economist at the Minneapolis Fed. “Maybe Bernanke and Paulson had information that they were not making public, but the available data simply did not support what they were saying.” Charri and his colleagues and co-authors Lawrence Christiano and Patrick Kehoe agree that with companies like Lehman Brothers, AIG and Citigroup foundering because of toxic debt instruments, there was a sense of a financial crisis brewing, but they say it wasn’t a credit freeze. “This was a lot like the run-up to the Iraq invasion in 2003,” says Charri. “You had people in government saying: `We’re smart guys, trust us.’ But they were either wrong or they were lying.”

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

Your access to unlimited Treasury & Risk content isn’t changing.
Once you are an ALM digital member, you’ll receive:

  • Critical Treasury & Risk information including in-depth analysis of treasury and finance best practices, case studies with corporate innovators, informative newsletters, educational webcasts and videos, and resources from industry leaders.
  • Exclusive discounts on ALM and Treasury & Risk events.
  • Access to other award-winning ALM websites including PropertyCasualty360.com and Law.com.

Already have an account?


NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Dig Deeper

Treasury & Risk

Join Treasury & Risk

Don’t miss crucial treasury and finance news along with in-depth analysis and insights you need to make informed treasury decisions. Join Treasury & Risk now!

  • Free unlimited access to Treasury & Risk including case studies with corporate innovators, informative newsletters, educational webcasts, and resources from industry leaders.
  • Exclusive discounts on ALM and Treasury & Risk events.
  • Access to other award-winning ALM publications including PropertyCasualty360.com and Law.com.

Already have an account? Sign In Now
Join Treasury & Risk

Copyright © 2024 ALM Global, LLC. All Rights Reserved.