Bernanke's Fairy Tale Recession Story for Kids; Records Show Fed Had No Coherent Strategy for Bank Bailouts

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Byline: Vern McKinley and Tom Fitton, SPECIAL TO THE WASHINGTON TIMES

It's an oldie but a goodie for our Federal Reserve chairman. In one of his recent lectures at George Washington University (GWU), Ben S. Bernanke made the self-congratulatory assertion that the forceful policy response led by the Federal Reserve in 2008 helped avoid a more serious economic downturn.

This rhetoric is nothing new. Mr. Bernanke has made similar remarks in the past. As he confided in one interview, I was not going to be the Federal Reserve chairman who presided over the second Great Depression. It is clear that like Treasury Secretary Timothy F. Geithner, who recently trumpeted the fourth anniversary of his role in the Bear Stearns bailout, Mr. Bernanke is aggressively using the GWU lectures to shape his legacy before he steps down.

During the chairman's one-hour-plus lecture, he dedicated five full minutes (and four PowerPoint slides) to a case study on AIG. In the classic dour assessments reminiscent of 2008, Mr. Bernanke used Chicken Little hyperbole, noting that the failure of AIG, in our estimation, would have been basically the end. The chairman did not elaborate for the benefit of the students in attendance what he meant by the end or the precise connection between the failure of AIG and the end of financial life as we know it, but it certainly made for a dramatic moment during the lecture.

Interestingly enough, one of the GWU students pressed the chairman for more details on the decision-making process underlying interventions like what occurred with AIG. The student, identified by Mr. Bernanke as Max, boldly questioned the chairman's methods: Where do you draw the line between bailing out a bank and allowing it to fail? Is it arbitrary or is there some sort of methodology? Mr. Bernanke meandered a bit in responding to Max and eventually admitted that the process was somewhere in between arbitrary and a set methodology, noting that it was a case-by-case process and somewhat ad hoc.

Let's suppose for a moment that Max wasn't satisfied with the chairman's ill-defined response and he decided to do a more in-depth analysis of the Fed's bailout of AIG for the semester's final term paper. Surely, there would be an abundance of documents available supporting the Fed's approach in the AIG case. …