Over at Marginal Revolution, George Mason University’s Tyler Cowen debates EconLog’s David Henderson, among others, on the question of what the Fed should have or shouldn’t have done during this financial crisis.

In highsight, Cowen views Bernanke’s intervention was the right one. He writes:

On the right and wrong of the matter I side with Bernanke and the bailing out of at least some of the insolvent banks. I also think that the more modest Friedman recipe is still fine for most “panics,” just not this one.
I side with Bernanke because an economy can withstand only so much major bank insolvency at once. Lots of major banks were levered up 30-1 or so. Their assets fell in value more than a modest amount and then they were insolvent, sometimes grossly so. (A three percent decline in asset values already puts you into insolvency range.)

It is worth reading the whole post. But please make sure to also read this remarkable post by George Mason University’s Peter Boettke in response to Cowen’s position here. There is no way the bailout was a good idea, Boettke explains:

The basic point I would like to make is that those long-run negative consequences that Tyler admits in his post might cause problems (perhaps even serious ones) are in fact problems. The cycle of deficits, debt, debasement doesn’t just cause economic disturbances against a long-term growth trend, it has historically destroyed the economies of nations. If what the bailout and shift in both the traditional role of the Fed and Treasury perform have done is unleash this cycle of deficits, debt and debasement rather than constrain it (as it obviously has done!), then we have sent our national economic policies on a path of ruin that may well set us back for decades.

He goes on to show that that “government activism isn’t the cure for the crisis, it is the cause.”

Read it; it’s great.