This is the Cato Daily Podcast for Thursday, May 29, 2008.

I'm Caleb Brown.

How has the Bernanke Fed handled the subprime crisis and the credit crunch?

And what blame can be laid at the feet of the Greenspan fed.

We get some perspective from Anna J Schwartz.

She, along with Milton Friedman, literally wrote the book on American monetary history.

She is a research associate at the National Bureau of Economic Research.

We spoke yesterday.

Can you clarify the difference here between this Bears-Stearns bailout and the banking

panic of 1907 and attempted rescue of the Bank of United States.

Well, the 1907 panic involved commercial banks that were regarded with suspicion by people in the market.

And the suspicion regarded their portfolios, their balance sheets as questionable. And in that respect, it's very like the situation in this credit crisis in 2007 and 8 because so many firms have invested in questionable assets and the market doesn't know whether these

assets are correctly valued on the balance sheets of these firms.

So that's one of the basic reasons that it's difficult to obtain a loan because lenders

aren't sure that whoever would borrow from them would be in a position to pay back alone.

They don't know that the balance sheet of a firm is accurate. So as I say, in

many respects, that's the basic problem in this credit crisis, and it's similar

to what was true in 1907.

In 1907, the plan, the strategy of J.P. Morgan himself was to direct Benjamin Strong, who was the future president of the New York Fed, to go to any firm in the market and inspect the assets that they owned in their portfolios and decide which firms were worthy of being rescued and which ones were not.

And that's the kind of procedure that I believe the Fed should have adopted at the beginning of this credit

crisis. If the market was uncertain about which firms

really sound and which warrant't, the only way to determine the answer was to send a group of examiners to inspect the portfolios these firms and to record the values that they would have assigned to the assets in the portfolios and determine

...