(NOTE: This article appears in the current issue of the magazine Treasury & Risk)

By Dave Lindorff

Key members of Congress were stunned to hear Federal Reserve Board
Chairman Ben Bernanke and Treasury Secretary Hank Paulson say on Sept.
18 in a closed-door meeting on Capitol Hill that the country was “days
away” from a complete financial meltdown—one that could lead to
Depression-like runs on banks, widespread violence and ultimately even
to a possible declaration of martial law. It was a vision of
Armageddon, but, of course, 10 days later, the House rejected a Wall
Street bailout package sent over by Paulson, only to pass one in a more
limited form—the Emergency Economic Stabilization Act—a week later that
gave Paulson less power and only half the money he wanted.

Meanwhile, the financial system did not collapse and while a few
banks were failing, there were no runs on them, and martial law wasn’t
invoked. One reason things didn’t fall apart when Congress didn’t
immediately act as Paulson and Bernanke demanded, may be that there
wasn’t any danger of a meltdown in the first place. So say three senior
economists working at the Federal Reserve Bank of Minneapolis, who in
October examined the Fed’s own data, and concluded in an article titled
Facts and Myths About the Financial Crisis of 2008 that the claims that
interbank lending and commercial lending had seized up were simply not
true. “Bank lending to consumers and to non-financial companies had not
ceased, and banks were lending to each other at record levels,” says
V.V. Charri, an economist at the Minneapolis Fed. “Maybe Bernanke and
Paulson had information that they were not making public, but the
available data simply did not support what they were saying.” Charri
and his colleagues and co-authors Lawrence Christiano and Patrick Kehoe
agree that with companies like Lehman Brothers, AIG and Citigroup
foundering because of toxic debt instruments, there was a sense of a
financial crisis brewing, but they say it wasn’t a credit freeze. “This
was a lot like the run-up to the Iraq invasion in 2003,” says Charri.
“You had people in government saying: 'We’re smart guys, trust us.’ But
they were either wrong or they were lying.”

Adds Kehoe: “Normally, when you’re going to spend a lot of money,
you present the data and the economic theory to support it, yet here’s
the biggest non-military government intervention in history since the
Great Depression, and there was no evidence presented to support it,
and no detailed economic argument made about what market failures this
$700 billion was going to fix.”

(For the rest of this article, please go to Treasury & Risk magazine.