The New Yorker

John Cassidy, "Anatomy of a Meltdown: Ben Bernanke and the financial crisis", The New Yorker, 12.01.2008, 53-61.

As house prices soared, many Americans took out home-equity loans to finance their spending. The personal savings rate dipped below zero, and the trade deficit, which the United States financed by borrowing heavily from abroad, expanded greatly. Some experts warned that the economy was on an unsustainable course; Bernanke disagreed. In a much discussed speech in March, 2005, he argued that the main source of imbalance in the global economy was not excess spending at home but, rather, excess saving in China and other developing countries, where consumption was artificially low. Lax American policy was helping to mop up a 'global savings glut.'

'Bernanke provided the intellectual justification for the Fed's hands-off approach to asset bubbles,' Stephen S. Roach, the chairman of Morgan Stanley Asia, who was among the economists urging the Fed to adjust its policy, told me. 'He also played a key role in the development of the 'global savings glut' theory, which the Fed used as a very convenient excuse to say we are doing the world a big favor in maintaining demand. In retrospect, we didn't have a global savings glut - we had an American consumption glut. In both of those cases, Bernanke was complicit in massive policy blunders on the part of the Fed.'
...
In May, 2006, Bernanke rejected calls for direct regulation of hedge funds, saying that such a move would 'stifle innovation.' The following month, in a speech on bank supervision, he expressed support for allowing banks, rather than government officials, to determine how much risk they could take on, using complicated mathematical models of their own devision - a policy that had been in place for a number of years. 'The ongoing work on this framework has already led large, complex banking organizations to improve their systems for identifying, measuring and managing their risks,' Bernanke said.

It is now evident that self-regulation failed. By extending mortgages to unqualified lenders and accumulating large inventories of subprime securities, banks and other financial institutions took on enormous risks, often without realizing. Their mathematical models failed to alert them to potential perils. Regulators - including successive Fed chairmen - failed, too.
...
One of the supposed advantages of securitizing mortgages was that it allowed the risk of homeowners' defaulting on their mortgages to be transferred from banks to investors. However, as the market for mortgage securities deteriorated, many banks ended up accumulating big inventories of these assets, some of which they parked in off-balance-sheet vehicles called conduits. 'We knew that banks were creating conduits,' Don Kohn, the Fed's vice-chairman, told me. 'I don't think we could have recognized the extent to which that could come back onto the banks' balance sheets when confidence in the underlying securities - the subprime loans - began to erode.
...
A senior Fed official recalled, 'The problem wasn't the size of Bear Stearns - it wasn't the fact that some creditors would have borne losses. The problem was - people use the term 'too interconnected to fail.' That's not totally accurate, but it's close enough.' In the repot market, for example, Bear Stearns had borrowed heavily from money-market mutual funds. 'If Bear had failed,' the senior official went on, 'all these money-market mutual funds, instead of getting their money back on Monday morning, would have found themselves with all kinds of illiquid collateral, including CDOs and God knows what else. It would have caused a run on the entire market. That, in turn, would have made it impossible for other investment banks to fund themselves.
...
Bernanke couldn't say so publicly, but he agreed with some of the critics. For years, the Fed had warned that Fannie and Freddi were squeezing out competitors and engaging in risky mortgage lending practices. Bernanke would have liked to combine a rescue package with extensive reforms, but he realized that an overhaul of the companies was not politically feasible. Despite their financial problems, Fannie and Freddi still had many powerful allies in Congress.