The 2008 response to the acute phase of the Great Financial Crisis contributed directly to the death of truth.

Michiko Kakutani asked how did the death of truth happen?

How did truth and reason become such endangered species, and what does the threat to them portend for our public discourse and the future of our politics and governance? …

For decades now, objectivity – or even the idea that people can aspire toward ascertaining the best available truth – has been falling out of favour. Daniel Patrick Moynihan’s well-known observation that “Everyone is entitled to his own opinion, but not to his own facts” is more timely than ever: polarisation has grown so extreme that voters have a hard time even agreeing on the same facts.

Perhaps the greatest contributor to the death of truth was the Committee to Save the Banks (Hank Paulson, Ben Bernanke and Tim Geithner).  It made the decision to enter the fact free zone.  The Committee had the US government adopt a policy of lying about the true condition of the Too Big to Fail banks and the bankers’ actions.  This policy of lying was adopted by the EU and the UK governments too.

Each government quickly came to understand the meanings of Walter Scott’s phrase:  what a tangled web we weave when at first we practice to deceive.

In early 2009, the Committee to Save the Banks escalated the policy of lying about the condition of the Too Big to Fail banks with the first stress test.  In their own words, they subjected these banks to a “rigorous and comprehensive review” and pronounced them capable of lending and maintaining capital levels in excess of existing capital standards even if the economy performed worse than the Fed expected until the end of 2010.

To say this test was BS is to give BS a bad name.

First, banks do not need capital to lend.  [As the Bank of England observed, banks create a liability when they make a loan; hence, no capital needed.]

Second, bank capital is an easily manipulated accounting construct that even bank regulators have figured out how to manipulate bank capital by giving banks a pass on recognizing losses. [The Fed was already providing regulatory forbearance by allowing banks to engage in “pretend and extend” and suspension of mark to market accounting.  Both of these flow through and and keep bank capital accounts artificially high.]

So what exactly was being tested?  Nothing!

Everyone suspected the test was a lie, but the opacity of the banks prevented anyone other than the government from having access to the facts and knowing just how big a lie it was.  In any event, the lie involving this test was overlooked because at the time Mr. Bernanke also lied by saying announced the Treasury would put in as much capital as was needed to keep the banks solvent. [How could the Fed Chair promise this when it requires Congressional approval?]

Of course, once the government decided their lies about the Too Big to Fail banks were working, they also had to lie to cover-up all the bankers’ misbehavior.  For example, the bankers manipulated the price of money, also known as LIBOR, but Geithner and his counter-parts at the Bank of England turned a blind eye to this market rigging.  For example, the banks should have had to write down all of their bad assets, but Geithner et al instead championed a policy of “foaming the runway” to allow these write downs to occur over years (decades?).

In one of his final speeches as Fed Chairman, Ben Bernanke bragged acknowledged he had lied several years earlier.  He said at the time of the first stress test, the Fed did not have the information it needed to know if the banks passed the stress test let alone if they were solvent or not.  Instead, the Fed relied on the bankers self-serving assurances they passed and were solvent.  Mr. Bernanke did not see any problem with lying about the condition of the banks because he saw the stress tests as helping to end the acute stage of the global financial crisis.

Mr. Bernanke then went on to say the Fed still didn’t have the necessary information to independently run the Too Big to Fail bank stress tests.  By implication, he and the Fed were still operating in the fact free zone and had continued their pattern of lying when they announced the results of all the stress tests made prior to his speech.

Of course, the policy of lying wasn’t confined to just the Fed and the Treasury.  It also extended to the Department of Justice.  The Department of Justice officials could find no wrong doing to satisfy the Old Testament justice crowd or those of us who thought bankers rigging financial markets for their own benefit should disgorge their bonuses and face jail time.  The Department of Justice officials explained why they didn’t prosecute the bankers: fear of the consequences should bankers from a Too Big to Fail bank be sent to jail.  Their policy became known as Too Big to Jail.

The White House was also caught up.  As Obama observed, he was the only person standing between the bankers and the lynch mob.  And stand between the bankers and the mob he did.  With his post-presidency retirement secured, he then observed the bankers had misbehaved, but they hadn’t broken the law.  [This might have been more believable if his administration hadn’t unveiled one program after another that sounded like it would help the 99%, but was in reality another bailout for the banks.]

Of course, when governments are easily seen as lying, their credibility and the public discourse erodes and with it the pursuit of the best available facts.

————————-

You might think my statement the government is lying about the condition of the Too Big to Fail banks isn’t true.  Please ask yourself why does the government never say the banks passed the stress tests and make the  banks disclose their current exposure details so the market can confirm this finding.  You don’t have to be a lover of conspiracy theories to think it is highly suspicious the government doesn’t do this.  You simple have to observe our financial system is based on transparency.

Is the government worried the market won’t be able to duplicate its results?  In addition, why does the government continue to let bankers operate behind a veil of opacity?