Bernanke on the Rescue of Bear Stearns

Fed Chairman Bernanke testified before the US Joint Congressional Economic Committee that they had little choice but to rescue Bear Stearns:

Bernanke said that because the financial system is so interconnected, the sudden failure of Bear Stearns could have led to a "chaotic unwinding of positions" that could have shaken already fragile investor confidence and further undermined the economy.

A disorderly collapse could also have cast doubt on the financial positions of other firms that did business with Bear, he added.

"Given the current exceptional pressures on the global economy and financial system, the damage caused by a default by Bear Stearns could have been severe and extremely difficult to contain," Bernanke said.

"Moreover, the adverse effects would not have been confined to the financial system but would have been felt broadly in the real economy through its effects on asset values and credit availability."

My thoughts on that Monday, when the world came close to disaster is quite clear. I agree with the position of the Fed. Had they not acted would have sent markets spiraling out of control. It may or may not have been the nail in the coffin but it could have been the catalyst to an economic crisis that would have been far more difficult to contain, much less, untangle.