Today’s anniversary of the collapse of Lehman Brothers is bringing about some helpful rethinking of the mythology that has come to surround the events and what followed. In particular, many believe that the decision not to rescue Lehman was a horrendous mistake that triggered a huge market crises.
Joe Nocera writes in yesterday’s paper that he has begun to question this conventional wisdom.
Yes, the fall of Lehman Brothers set off a contagion of panic. And I’m still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But I’ve become convinced that, if Lehman had been saved, the collapse would have occurred anyway.
John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realised it at the time, Lehman Brothers had to die for the rest of Wall Street to live
The argument Nocera makes is that it took the collapse of Lehman to make the markets and the government sit up and take notice about how sick the financial sector had become. In the months between the collapse of Bear Stearns and Lehman, the markets and government had been in denial, thanks in part because JP Morgan’s goverenment backed acquisition of Bear had made it look like their was an easy way out. Lehman’s collapse was the signal that finally made the world realise that the finacial system was in deep distress, packed with too much risk and teetering on the edge of oblivion.
As Nocera writes:
If Lehman had been sold to Bank of America, as originally planned, some other firm — no doubt bigger, and posing more danger to the global financial system — would have failed instead. By then, there was simply too much panic in the air. A crisis of some sort was inevitable.
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