Kai Ryssdal: Forty-six years ago Schwartz, and a guy named Milton Friedman, who’d later go on to win the Nobel Prize for economics, wrote a book on the topic. It was called “A Monetary History of the United States.” It’s on just about every list of the most important books on economic history… ever. When I sat down with her in her office in Manhattan last month, she made it clear she’s none too happy about all of Washington’s bailouts, or how the Fed and the Treasury chose who got one and who didn’t.
Schwartz: I think both Bush and the Obama administration have not been as hard headed with banks, it has been too lax. And instead if they had said if you cannot raise capital in the market, there is no reason for the government, the people of this country, to provide capital.
Liquidity moves markets!Follow the money. Find the profits!
Ryssdal: OK, but wait a minute. Didn’t we try that with Lehman Brothers last September? And there are people who will say that only made everything worse. Should we now say to Bank of America, and Citigroup and some of these other banks, “Hey, you can’t make your loans…”
Schwartz: No, the trouble with the way the Fed operated when it rescued Bear Stearns, the market then believed this was a signal of the way the Federal Reserve would perform. If the Fed and the Treasury made a candid statement to the market: We will help a bank, which basically is solvent. We will not do that for a bank, which is on the verge of bankruptcy. And then the market understands there are principles. That’s why when Lehman Brothers was permitted to fail, the market was simply bewildered. Because here you had treated Bear Stearns in this kindly fashion, and what reason was there not to do the same when Lehman Brothers arose?