I worry greatly that the role of the Federal Reserve as the Lender of Last Resort (LOLR) is slowly morphing into a post-modern Insurer of Last Resort (IOLR -- new acronym alert, heard it here first!).
In fact, the whole of American governance seems to be in a fit of forgetfulness that it was the freedom side of the Cold War, as if shrugging its shoulders during each crises and taken another baby step towards socialism, "Oh well, we can afford this." Think national health care insurance. Think national hurricane disaster insurance. Think Social Security ... oh wait, we have that already.
So it was with great pleasure that I received the news that Lehman Brothers will not get a Fed or Treasury bailout. AEI's Vincent Reinhart gets it right in this WSJ commentary:
At some point, the government had to say enough. That point came this weekend.
Treasury and Federal Reserve officials gathered the reigning titans of Wall Street and told them that the solution to the problems some had with insufficient capital had to come from within the private sector. No such solution was forthcoming. And now there are two fewer independent investment banks. Lehman Brothers, a 158-year-old firm that started by trading cotton, is bankrupt, and the thundering herd of Merrill Lynch brokers will now answer to bosses at Bank of America.
These two giants will be missed. Even so, this was the right time for the government to draw the line.
All true, and yet still wrenching. More will fall. I have friends on Wall Street and at Lehman, and I have very, very close friends in the real estate business who may lost everything. There are good people who are going to suffer because of the greed and hubris of a few, not to mention their enablers in DC.
There is a silver lining, and it is much bigger than the storm cloud, which is this: now when experts like former Comptroller General David Walker tell Americans that the budget deficit is not sustainable, we will know the risks of fiscal crises are not idle. From an interview on "60 Minutes" over a year ago:
"It's the number one fiscal challenge for the federal government, it's the number one fiscal challenge for state governments and it's the number one competitive challenge for American business. We're gonna have to dramatically and fundamentally reform our health care system in installments over the next 20 years," Walker tells Kroft.
And if we don't?
"And if we don't, it could bankrupt America," Walker argues.
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