Something Happened

Ben Bernanke’s memoir is out and the chatter about it inevitably turns to the sickening moments in September 2008 when “the world economy came very close to collapse.” Easy to say, but how many people know what that means? It’s every bit as opaque as the operations of the Federal Reserve itself.

There were many ugly facets to the problem but they all boiled down to global insolvency — too many promises to pay that could not be met. The promises, of course, were quite hollow. They accumulated over the decades-long process, largely self-organized and emergent, of the so-called global economy arranging itself. All the financial arrangements depended on trust and good faith, especially of the authorities who managed the world’s “reserve currency,” the US dollar.

By the fall of 2008, it was clear that these authorities, in particular the US Federal Reserve, had failed spectacularly in regulating the operations of capital markets. With events such as the collapse of Lehman and the rescue of Fannie Mae and Freddie Mac, it also became clear that much of the collateral ostensibly backing up the US banking system was worthless, especially instruments based on mortgages. Hence, the trust and good faith vested in the issuer of the world’s reserve currency was revealed as worthless.

The great triumph of Ben Bernanke was to engineer a fix that rendered trust and good faith irrelevant. That was largely accomplished, in concert with the executive branch of the government, by failing to prosecute banking crime, in particular the issuance of fraudulent securities built out of worthless mortgages. In effect, Mr. Bernanke (and Barack Obama’s Department of Justice), decided that the rule of law was no longer needed for the system to operate. In fact, the rule of law only hampered it.

Mr. Bernanke now says he “regrets” that nobody went to jail. That’s interesting. More to the point perhaps he might explain why the Federal Reserve and the Securities and Exchange Commission did not make any criminal referrals to the US Attorney General in such cases as, for instance, Goldman Sachs (and others) peddling bonds deliberately constructed to fail, on which they had placed bets favoring that very failure.