"It [the credit boom] involved a substantial increase in risk-taking," Mr. Bernanke said, as well as marginally useful financial innovations, a deterioration of lending standards, failed efforts by supervisors to address the problems, difficulty getting even the safest assets financed, increased distrust by counterparties and "a strong aversion to . . . even liquidity risk as opposed to credit risk." The kicker is worth noting too: "Under more robust conditions, we might have come to a different decision about Bear Stearns."
We don't doubt that on hearing the details of Bear's liquidity problem that Thursday evening, Mr. Bernanke and New York Fed President Timothy Geithner might have felt they were staring into a financial abyss. One may hope that in corners of the Fed brain-trust, some are asking if the decision to push its interest rate to 1% in 2003 contributed to the mess Mr. Bernanke described yesterday.
Greenspan was the ringleader in 2003, but Bernanke a significant accessory at his side. Here's one of many of my regretful posts on Greenspan from last year.
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