Comment of the Day: Jackson Hole 2015 Weblogging Lehman Brothers Once Again...: "Fed transcripts: Bernanke chose to let Lehman fail...:
...Newly released transcripts cast doubt on the claim that the Fed didn’t have the power to save the investment bank http://fortune.com/2014/02/21/fed-transcripts-bernanke-chose-to-let-lehman-fail
But the difference between a firm being insolvent and illiquid isn’t cut-and-dried, and it hinges on how you value a bunch of inscrutable assets. Based on the opinions of Federal Reserve Open Market Committee members revealed in the recently released minutes, the decision to let Lehman fail seems to have much more to do with an ideological aversion to government intervention than anything else....
In e-mails unearthed by the Financial Crisis Inquiry Commission, we can see that the Fed was clearly considering a $200 billion loan to help keep Lehman afloat. These emails called that approach 'a gamble' that might be worth taking.
But the Fed never took it, and it appears they did so at least partly for ideological reasons. This is all the more confusing because the federal government had spent the last 30 years intervening in crises to prevent destructive financial system meltdowns. In light of this, economist Alan Meltzer has called the decision 'one of the worst blunders in Federal Reserve history.' Five years later, the recently released transcripts give us no reason to disagree with Meltzer’s assessment...'