Doug French

The world of high finance was still in full flight in February 2007. The cracks in the mortgage market had not yet begun to show and Stephen Schwarzman's Blackstone Group had just completed its $39 billion purchase of Equity Office Properties in what was the largest leveraged buyout ever.

(Editor's note: This article was orginally published on August 23, 2011) 

There was plenty to celebrate, so Schwarzman threw himself a party for his 60th birthday, a 3 million dollar affair for 350 of the billionaire's closest friends, including Barbara Walters, CNBC money honey Maria Bartiromo, the Donald, Cardinal Edward Egan, and former New York governor George Pataki.

It was lobster, filet mignon, and baked Alaska for everyone, washed down with expensive vino, with comedian Martin Short as emcee. Composer-pianist Marvin Hamlisch played a number from A Chorus Line. Patti LaBelle sang a song written for the birthday boy, and Rod Stewart sang a medley of his hits, reportedly for a fee of a million dollars.

A year and half later, in September of 2008, it appeared the financial world was coming to an end. Lehman Brothers filed for bankruptcy, the once "bullish on America" Merrill Lynch fell into the arms of Bank of America, and AIG held out its tin cup in need of a quick $40 billion from the Federal Reserve.

The nation's M2 money supply was an unadjusted $7.8 trillion that month while Ben Bernanke, Tim Geithner, and Hank Paulson were working weekends to patch up their wounded Wall Street friends. Meanwhile, it didn't seem all that bad on Main Street with unemployment at 6.1 percent, despite the economy losing 605,000 jobs in the first eight months of the year. Home values had fallen 7.1 percent from the previous year, but few were underwater yet.

But the Fed chair was not interested in Main Street. On September 10, 2008, the Fed's balance sheet totaled $927 billion; by October 1 it had grown to $1.5 trillion; and on New Years Eve, the Fed rang in the New Year with $2.2 trillion in assets.

All this purportedly so that when normal folks used an ATM machine, their money would spit out on command. It all worked so well that Bernanke was TIME's Person of the Year for 2009, "providing creative leadership [that] helped ensure that 2009 was a period of weak recovery rather than catastrophic depression," Michael Grunwald wrote.

Two years on, one wonders if Grunwald realized that the weakness would continue indefinitely.


Doug French

Doug French is is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply and Walk Away: The Rise and Fall of the Home-Ownership Myth

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