Saving the American Financial System

This time last year we were in the midst of the apparent meltdown of the global financial system. A lengthy article by Pulitzer Prize winning journalist James B. Stewart in this week’s “New Yorker” (abstract only online here), deconstructs the eight day period from September 12, 2008 to September 19, 2008 during which Treasury Secretary Paulson, Fed Chair Bernanke, and New York Fed President Geithner struggled to prevent the complete collapse of the American economy.

Stewart, who interviewed most of the principals for this article, give an almost hour-by-hour account of the decision to allow Lehman Brothers to fail, to use federal funds to rescue A.I.G., and the many other steps that were (or were not taken) during that historic week. In the article’s epilogue, Stewart suggests that last year’s crisis will “redefine the nature of capitalism.”

Understanding how a plague of imprudent subprime mortgages triggered a chain of events that brought the world economy to the brink of collapse is critical to ensuring that it does not happen again. Stewart’s article makes an important contribution to the body of work that seeks to explain what happened.