Although the conventional wisdom now holds firmly to the idea that letting Lehman go into bankruptcy was a huge mistake on the part of the Treasury, we remain sceptical. With the passing of time we find ourselves growing even more sceptical. It increasingly seems like the credit problems the supposedly resulted from Lehman’s collapse were merely anticipating the deeper difficulties in our economy. If anything, Lehman’s bankruptcy may have provided useful signalling information to the markets and allowed investors to adjust behaviour before things got even worse.
This has been a lonely position for quite some time. This morning, however, we’re joined by Jeremy Warner of the Times of London. He’s not yet reached our position that letting Lehman go bankrupt was beneficial. But at least he’s come to the conclusion that it wasn’t a disaster.
There are a number of reasons for believing that Lehman’s demise made no difference, or that ultimately we would have ended up in the same place anyway. On the weekend of Lehman’s collapse, the entire banking system was under attack. If Lehman’s had been rescued, the markets would simply have moved on to someone else, until eventually the US taxpayer had ended up bailing out the entire system.
You could argue that this is what happened anyway, and that by preserving Lehman, wider economic confidence could have been preserved. This I very much doubt. Bailing out banks individually would have been a profoundly more expensive approach to the collective one eventually decided on, while doing nothing to halt the deleveraging process which lies at the heart of the present economic hiatus. It might have taken a bit longer to get to where we are, but we were already by that stage irreversibly set on the road to ruin.
I would go even further to argue that by providing a wake-up call to the authorities to take urgent policy action, the Lehman’s collapse might actually have been positively beneficial. Despite the gathering storm, central bankers and governments were in danger of sleepwalking into oblivion. There was still a marked reluctance to acknowledge quite how parlous the situation had become.