Economy

Bernanke: Too-Big-To-Fail Problem Will Fade

Ben Bernanke

Federal Reserve Chairman Ben Bernanke at  the Financial Crisis Inquiry Commission hearing on Capitol Hill, September 2, 2010. Brendan Smialowski/Getty Images hide caption

itoggle caption Brendan Smialowski/Getty Images

In his appearance Thursday before the Financial Crisis Inquiry Commission, Federal Reserve Chairman Ben Bernanke covered ground familiar to anyone who's paid attention to his past testimony about why the central bank didn't save Lehman Brothers.

Lehman just wasn't a good candidate for a bailout because it didn't have enough collateral, he has said in the past and repeated Thursday. The defunct investment bank was just too far gone; it had to be allowed to die.

Of course, some point to that decision in 2008 as the moment when global financial markets came unglued because money markets froze up right after that, making it impossible for many companies to raise money.

Bernanke has a well-known tendency towards optimism. Like many consumers, for instance, he had gotten into an adjustable rate mortgage when it looked like home prices had more room to soar and refinanced after the real estate bubble burst. And the decision that Lehman's demise could be contained certainly fit that profile, too.

That optimistic trait was also apparent in something else Bernanke said Thursday.

NPR's Tamara Keith reported on All Things Considered that Bernanke said the marketplace will likely take care of "the too big too fail" problem of gargantuan, overly complex financial institutions.

An excerpt from Tamara's report on the testimony by Bernanke and FDIC Chair Sheila Bair:

TAMARA: Once the market comes to understand that big banks really can fail - Bair and Bernanke both expect that these large firms will start getting smaller.

BERNANKE: My projection is that even without direct intervention by the government, that over time we're going to see some breakups and some reduction in size and complexity as they respond to market incentives and regulatory pressures as well.

TAMARA: As the hearing wore on, it became clear the commissioners remained unconvinced that "too big to fail" is truly history.

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