As we passed the tenth anniversary of Lehman Brothers’ collapse and the NY Fed acknowledging in an internal email Goldman Sachs is toast, I keep being reminded of this famous comment.

The Big Lie:  the banks had to be saved to prevent a second Great Depression.

Thanks to Yahoo! Finance, we were treated to a repeat of the big lie.

And a chain reaction that started with Wall Street figuring out how to foist trashy loans on overconfident homebuyers — then repackaging and profiting from those loans again and again — now threatened the insurance giant A.I.G., whose failure, a New York Times op-ed predicted on Sept. 15, 2008, could bring on a worldwide financial “collapse [that] would be as close to an extinction-level event as the financial markets have seen since the Great Depression.”…

And just what would have gone extinct?

Why the very large Wall Street banks that packaged and profited from selling trashy loans in opaque securities.

Within 72 hours, President George W. Bush and his team had briefed Congress on the danger ahead — at the same time unveiling their politically radioactive plan to prevent another decade of Depression-era breadlines and dust bowls by bailing out the big banks with $700 billion in taxpayer money.

“If we don’t do this, we may not have an economy on Monday,” Federal Reserve Chairman Ben Bernanke told the shellshocked lawmakers.

A key part of the Big Lie is reminding everyone Bernanke was a Great Depression scholar.  After all, if anyone should know if another Great Depression was possible, it should have been him, right?

Of course, there is ample reason to believe Bernanke didn’t study the part of the Great Depression that would have shown without the bailouts there would still have been an economy on Monday.

The policymakers who lived through the Great Depression took steps to prevent another one from ever occurring.

Bernanke simply didn’t know what steps were they had taken (I say this because he isn’t a detail sort of guy; he once claimed not to listen to the bank supervision portion of the FOMC meetings because he found the details tedious).

What Bernanke appears not to know, or perhaps preferred not to tell Congress, was the financial system was designed so the insolvent banks could continue in operation supporting the real economy indefinitely.  They could do so because of the combination of deposit insurance and the Fed as a lender of last resort.

This combination was intentional.  It made each existing bank dependent on the US, but the US wasn’t dependent on the survival of any of its existing banks.

What would have gone away in the extinction level event was the current banks (yes, it would have taken several years to wind them down to minimize losses to the deposit insurance fund).

What would not have gone away was the real economy.