Busch: The Bernanke Mendoza Line

What a difference a year can make! In 2008 at the heralded Fed Jackson Hole meetings in the Grand Tetons, economists gathered to discuss the global economic picture and the troubled US financial system. The solvency of Lehman Brotherswas discussed and debated. Should they be allowed to fail or should they be saved like Bear Stearns? After all, Lehman was twice the size of Bear and would have potentially larger ramifications should it fail. Many were saying let Lehman fail and let the markets deal with it.

Bernanke said, "I was unpersuaded. I believed that a failure of a major institution in the midst of a financial crisis would not only create contagion through effects on counterparties, but would likely have a tremendous negative effect on broader market confidence." Bernanke sagacious opinion hit the bulls-eye. Yet, Lehman was still allowed to fail. Why?

In a phrase, no-plan-B. Despite the threats and arm twisting by Paulson, Bernanke, and Geithner, no buyer in the United States could step up to take on the mess. The three had to look to the UK and to Barclaysfor a deal. Barclays had to guarantee all of Lehman's liabilities so Lehman could open for business on Monday. However, a technical issue of a requirement that Barclays put the vote to the shareholders to obtain the guarantee killed the deal. This critical fact escaped everyone.

David Wessel in his book, "In Fed We Trust: Ben Bernanke's War on the Great Panic" said this, "But in what would prove a colossal mistake, they (Bernanke, Paulson, Geithner) hadn't come prepared with a plan to prevent a bankruptcy if they couldn't sell Lehman as they had managed to sell Bear Stearns." This ability to see the danger and yet not being prepared to stop it is truly troubling.

However, this is not why Ben Bernanke may lose his job. It will be due to someone taking the fall for the crisis and for why the unemployment rate remains above 9.5%. This is Bernanke's Mendoza Line. This is what Moody's John Lonski and I agreed upon last night on the Kudlow Report: Bernanke can be the fall guy for a weak US economy.

Envision a political world for President Obama in which he's not getting his major pieces of legislation through Congress. Imagine then, he's also got an economy that is not rebounding enough to generate job gains and an economy that may be experiencing a strange form of commodity inflation leading to higher gasoline prices. Something has to change and that change could cost Bernanke his job.

If we've learned anything from last fall, we know that what was once deemed rock solid can crumble away amidst the pressure of an outside force.


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Andrew Busch
Andrew Busch


Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter athttp://twitter.com/abusch .