Arrogance

Q: If eventually the Banking system had to be "bailed out" then why Bear Sterns and Lehman Brothers were allowed to go bankrupt in the first place?

A: It was a sort of moral posturing by the Fed that eventually failed. The Fed was perceiving it as a creative destruction process which was expected to remove the imbalances in the system. After all it is the absence of state intervention in the markets that makes America different from other developed or large economies like Japan and China. But the gambit failed because the next day when Merrill Lynch was staring at the same fate, BoA had to buy it.

Q: But aren't the treasury guilty of another crime. That of running a low interest rate economy which led to excess liquidity and consequent high inflation and finally stock market bubble?

A: Yes, the Bush administration ran unprecedented fiscal and current account deficits to finance- wars, tax cuts and public over consumption, all fuelled by debt. And until 2007 i.e before the crash, all of this excess liquidity was absorbed by asset price ( about $8 tn) and commodity price inflation ( especially oil prices, $3 tn). But why blame the treasury. It is only the supplier of credit. Aren't the borrowers ( like banks, industry and consumers) equally culpable of succumbing to the temptation.