Where to draw the bailout line

last updated 8 January 2015

Bankrupt Lehman Brothers and sold-off Merrill Lynch “will be missed,” said Vincent Reinhart in The Wall Street Journal, but after bailing out Bear Stearns, Fannie Mae, and Freddie Mac with our “vast, but not unlimited” resources, “this was the right time for the government to draw the line” on another taxpayer bailout.

The next firm to knock will likely be insurance giant AIG, said Megan McArdle in TheAtlantic.com, and Fed Chairman Ben Bernanke “is in a tough place” with that one. If it opens its loan window to insurance firms, not just banks, the Fed will take on a lot more risk. But if AIG falls, it will drag down solvent banks, who will then come with “their beggar’s bowls out.”

So “what might the Fed do next?” said John M. Berry in Bloomberg. “Whatever is needed to prevent a market meltdown.” Bernanke and Treasury Secretary Henry Paulson let Lehman fail because a taxpayer bailout “just wasn’t needed.” But expect them to do “whatever it takes”—rate cuts, pumping cash into the market, maybe another bailout—to protect the financial system.