VIEWS | 270K Top 10 Posts

Thank you for reading! CityEconomist has just passed 270,000 page views. Here are the 10 most-viewed posts in August 2016:  BLACKOUT | Survival List Jul 24, 2016.

DONALD TRUMP | Why Did He Run as a Republican? Jul 25, 2016

SENIORS | Most Livable Cities Aug 8, 2016.

WW2 | 9. Resistance Banker–Wally van Hall (Updated... Feb 19, 2015, 5 comments

SENATE 2016 | Top Races (Heidi's Picks) Aug 5, 2016

LEHMAN | Did It Have to Fail? Jul 22, 2016

GLASS-STEAGALL | Bipartisan Support to Bring It Ba... Jul 27, 2016.

ART BIZ | 100 Priciest Art Sales at Auction Aug 14, 2016.

ED BIZ | Manager-Sharing, Long Island, N.Y. Jul 31, 2016.

WW2 | BOISSEVAIN Links (Updated July 23, 2016) Jan 26, 2015, 4 comments

LEHMAN | Did It Have to Fail?

Paulson, Bernanke, Geithner.

James B. Stewart in The NY Times today reports on a new study of the dark days of Lehman Brothers in September 2008.

Could Lehman have been saved from bankruptcy? Should it have been? Would the world thereby have been saved from the Great Recession and its globally destabilizing consequences?

The study's author is Laurence M. Ball, Chairman of the Economics Department at Johns Hopkins University. He presented his 214-page paper, "The Fed and Lehman Brothers", which took him four years to write, to a conference of economists in Cambridge, Mass.

The study makes, as I read the story, two main points. Despite what Treasury and Fed officials (i.e., Henry M. "Hank" Paulson Jr., Treasury Secretary; Fed Chairman Ben S. Bernanke; and NY Fed President Timothy F. Geithner) have said,

• Lehman Brothers could have been saved. Bernanke told the Financial Crisis Inquiry Commission in 2010 that Lehman's collateral was weak and saving it would have required breaking the law. Ball argues that is not true, and that Lehman's financial condition was never properly analyzed. The whole point of the creation of the Federal Reserve in 1913 was to "lean against the wind" and when panic hits, its job is to save the system. The officials of the time underestimated the consequences of not saving the system and we live with these consequences today. 
• Paulson called the shots. Bernanke at the Fed followed the lead of Treasury Secretary Paulson, who took charge of the situation and was the prime mover in promoting the decision to let Lehman fail, because he didn't want to be known as "Mr. Bailout". Paulson says that the decision was that of the Fed to make.

Ball's paper was supported in its general conclusions by Prof. David Romer at Berkeley and another professor at M.I.T. Other academics interviewed by The NY Times withheld their judgment.

2008 CRISIS | Fed Couldn't Save Lehman, Says Bernanke

Bernanke Says Now That Fed Was Helpless.

In DealBook today, in the New York Times (p. B1) Andrew Ross Sorkin says:

Mr. Bernanke, in perhaps the most candid explanation of Lehman’s 2008 collapse, writes that he and Henry M. Paulson, then the treasury secretary, purposely obfuscated when asked about Lehman’s demise early on, allowing a narrative to develop that the government had purposely let the firm fail.

 Sorkin quotes from Bernanke's new book:

In congressional testimony immediately after Lehman’s collapse, Paulson and I were deliberately quite vague when discussing whether we could have saved Lehman. But we had agreed in advance to be vague because we were intensely concerned that acknowledging our inability to save Lehman would hurt market confidence and increase pressure on other vulnerable firms.

Pam and Russ Martens conclude that Bernanke is trying to "rewrite the financial crisis".

U.S. DEBT | Debt-Ceiling Chicken Again?

Suggestions for the trillion-dollar coin.

There is nothing in the U.S. Constitution about a debt ceiling.

But there is something in the U.S. Constitution about:

• Congress approving the President's budget and

• The President paying debts of the U.S. Government (especially see 14th Amendment, Section 4). 

If the Tea Party faction in the House wants again to play chicken over the budget and the debt ceiling, and put into question the payment of interest on previously issued, supposedly "risk-free" U.S. government bonds, it is time to resurrect the trillion-dollar coin idea.

Sure, the Tea Party will go nuts. But the debt-ceiling debate is about whether Congress will provide the money for debts already issued. If the idea of an experimental default on U.S. debt gets support in Congress, "No, the financial markets won't go apocalyptic," says one newsletter (I paraphrase). "It will be worse than that."

Financial panics are no fun. Ask those who were involved in the Lehman-bankruptcy days of five years ago, or look at the effects of the widespread bank panics of 1932-33. It took FDR and his Republican Treasury Secretary, Will Woodin, months to quell the panic and it took two new agencies  (the FDIC and the SEC) to fix the financial system for the next half-century. 

Secretary Woodin had language inserted in the bill outlawing private ownership of gold. The language allowed ownership of high-value gold coins to be inserted in the legislation that ended (until Nixon and the freeing of the market for gold) Americans' right to own gold. A subsequent law updates this law to allow the Treasury to mint platinum (palladium) coins of any denomination. The language seems well suited to minting a special trillion-dollar coin that the Treasury would deposit with the Federal Reserve. A last resort.