Vincent Reinhart on Bear Stearns, Lehman Brothers, and the Financial Crisis

EconTalk

Library of Economics and Liberty

Ethics, Philosophy, Economics, Books, Science, Business, Courses, Social Sciences, Society & Culture, Interviews, Education, History

4.7 • 4.3K Ratings

🗓️ 28 March 2011

⏱️ 70 minutes

🔗️ Recording | iTunes | RSS

🧾️ Download transcript

Summary

Vincent Reinhart of the American Enterprise Institute talks with EconTalk host Russ Roberts about the government interventions and non-interventions into financial markets in 2008. Conventional wisdom holds that the failure to intervene in the collapse of Lehman Brothers precipitated the crisis. Reinhart argues that the key event occurred months earlier when the government engineered a shotgun marriage of Bear Stearns to JP Morgan Chase by guaranteeing billion of Bear's assets and sending a signal to creditors that risky lending might come without a cost. Reinhart argues that there is a wider menu of choices available to policy makers than simply rescue or no rescue, and that it is important to take action before the crisis comes to a head.

Transcript

Click on a timestamp to play from that location

0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	another information related to today's conversation. Our email address is mailadicontalk.org. We'd
0:33.6	love to hear from you. Today is March 14th, 2011, and my guest is Vincent Reinhart, resident
0:43.2	scholar at the American Enterprise Institute. Vincent, welcome to Econ Talk.
0:46.8	Thanks for having me. You recently published a provocative paper in the Journal of Economic
0:52.2	Perspectives, one of the main publications of the American Economic Association, and the
0:57.5	paper was entitled, A Year of Living Dangerously, the Management of the Financial Crisis
1:02.2	in 2008. The standard narrative of the financial crisis, which you challenge, the standard
1:07.5	narrative is the big mistake that the government made to precipitate of the crisis was the failure
1:12.5	to rescue Lehman Brothers. But you disagree with that, and you go back to the March 2000
1:18.2	state rescue of Bear Stearns, which by the way, I think we're on the third anniversary
1:22.2	to the day as we're taping this. That's right. Why do you think the Bear Stearns decision
1:28.5	was so important? Bear Stearns set an enormous precedent. Lehman was made possible by the
1:36.2	decision previously on Bear. Bear Stearns had many of the similar problems. It had been
1:43.4	seen to be in trouble for a while, so that you would have thought that the private sector
1:48.7	had time to control their risk to bear. It was a firm that had a very illiquid balance sheet
1:54.9	on the asset side, and very short-term liabilities. It was a classic run. The government, that is,
2:03.8	the Federal Reserve, with the content of the Treasury, hated Bear Stearns, that built
2:09.4	up the expectations that made Lehman possible. Let's go back to the history a little bit, and I'm
2:14.2	going to take you back a little further than this. Further than this, when we get a little
	...

Please login to see the full transcript.

Previous episode | Next episode

Disclaimer: The podcast and artwork embedded on this page are from Library of Economics and Liberty, and are the property of its owner and not affiliated with or endorsed by Tapesearch.

Generated transcripts are the property of Library of Economics and Liberty and are distributed freely under the Fair Use doctrine. Transcripts generated by Tapesearch are not guaranteed to be accurate.