Avdi Grimm's List: 2008 Bank Failures

• At the root of the problem are not mortgage-backed assets as such but the Fed's boom-bust policies. It is the extremely loose monetary policy between January 2001 and June 2004 that set in motion the massive housing bubble (the federal-funds-rate target was lowered from 6% to 1%). It is the tighter stance between June 2004 and September 2007 that burst the housing bubble (the federal-funds-rate target was lifted from 1% to 5.25%).

• Senators McCain and Obama, failure to  recognize that what the financial markets went through changed the fabric of our economic model and in turn the impact of your economic policy is completely irresponsible.

• Against this backdrop, if the government had rescued Lehman, it would have repudiated the claim that the Bear rescue was extraordinary; it would have also conceded that in the six months since Bear failed, neither the new facility that it set up nor the other steps to make markets more robust were reliable. Essentially, the Fed and the Treasury would have been admitting that they had lied or were incompetent in stabilizing the financial system — or both.
• As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.
• A second challenge comes with defining the acceptable level of chaos. We will never be able to find out what would have happened if A.I.G. had been allowed to fail. Furthermore, there are some reasons to believe that even if A.I.G. continues to operate, the fundamental stress in the financial system will remain. If the rescue does not mark a turning point, the bailout may be viewed quite differently down the road.

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