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Journal of Economic Perspectives

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JEP - Winter 2011

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Journal of Economic Perspectives

Vol. 25, No. 1, Winter 2011

A Year of Living Dangerously: The Management of the Financial Crisis in 2008 Vincent Reinhart
Article Citation
Reinhart, Vincent 2011. "A Year of Living Dangerously: The Management of the Financial Crisis in 2008." Journal of Economic Perspectives, 25(1): 71–90.
DOI:10.1257/jep.25.1.71
Abstract
There are many reasons to regret the decision of U.S. financial authorities to insert the government into the resolution of the investment bank Bear Stearns in March 2008. The Federal Reserve's use of its discount window built up false hope of future rescues. Paying off the uninsured creditors of Bear Stearns overcompensated them at the time and invited speculative attacks on the equity of similarly situated firms. I will argue that the market seizure after Lehman Brothers' decision to seek the protection of bankruptcy was an echo of the prior official decision to protect Bear Stearns.

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Authors

Reinhart, Vincent (American Enterprise Institute, Washington, DC)

JEL Classifications

E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
G01: Financial Crises
G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
G33: Bankruptcy; Liquidation