Moreover, thanks to Bloomberg's having forced the Fed to disclose the contents of all three Maiden Lane portfolios, we now know that, by April 3, 2008, when Bernanke made the same "investment grade" claim in testifying before the Senate Banking Committee, some Maiden Lane securities had already been downgraded to below investment grade. Furthermore we know that Maiden Lane I's portfolio was chock-full of toxic securities. Reacting to these disclosures, Ohio Senator Sherrod Brown, a member of the Senate Banking Committee, opined that "Either the Fed did not understand the distressed state of some of the assets that it was purchasing from banks and is only now discovering their true value, or it understood that it was buying weak assets and attempted to obscure that fact."
That Bernanke should repeat the "investment grade" claim in his book, after the true nature of the Fed's purchases has been disclosed, seems pretty surprising. So, for that matter, does his admission -- offered in defense of the Fed's subsequent decision to let Lehman go under -- that the Fed "had no legal authority to overpay for bad assets." If the Fed really lacked such authority, then its purchase of Bear's assets wasn't legal. If it did have permission to overpay, then the reason Bernanke gives for the Fed's having let Lehman Brothers fail -- a reason he only started referring to when questioned by the Financial Crisis Inquiry Commission (FCIC), almost two years after the rescue -- is phony.
Although the Fed's defenders, Bernanke among them, are quick to note that all three Maiden Lane portfolios eventually recovered, so that the Fed (or rather taxpayers) bore no losses, the fact that they did doesn't at all suffice to square the rescues in question with Bagehot's well-considered advice. That advice simply doesn't allow central banks to place risky bets on troubled firms. Bagehot never says that it's OK for a central bank to set his advice aside provided that its gambles end up paying off.* The Fed's apologists also fail to consider that, while the Fed itself may have come out of the deals it made smelling like roses, the same cannot be said for several of the private firms that took part in them.
The plain truth is that, despite his professed devotion to Bagehot, Ben Bernanke was never able to heed the principles laid down by that great authority on last-resort lending.** Nor is it hard to see why. When confronted by a failing SIFI, it generally takes more courage for a central banker to refuse aid than to grant it. After all, if the SIFI survives, the central banker can claim credit, whereas if it doesn't he can at least claim to have "acted." On the other hand, if the SIFI is left to fail, the costs are obvious and immediate, whereas the benefits are largely invisible and remote. Bad as it was, the drubbing Bernanke took for bailing out Bear and AIG was nothing compared to the horsewhipping he received, even from some people whose opinions he had reason to care about, after he let Lehman fold. The usual public choice logic applies. In any event, no one knows how to calculate the net present value of present and future financial losses. And who, in the midst of a crisis, would pay attention if someone managed to do it?
And that is why it makes little sense, after all, to blame Ben Bernanke for the Fed's irresponsible bailouts. Apart from allowing Lehman Brothers to fail, he only did what just about any central banker would have done under the same circumstances. For among that tribe, the courage to act is one thing; the courage to refuse to rescue large, potentially insolvent firms is quite another. And that is why we need laws that make such rescues impossible.