When the government let Lehman fail, we assumed it was because Paulson & Co. wanted to break the Bear Stearns precedent, and they calculated they could get away with it.
The difficulties at Lehman and AIG raised different issues. Like the GSEs, both companies were large, complex, and deeply embedded in our financial system. In both cases, the Treasury and the Federal Reserve sought private-sector solutions, but none was forthcoming. A public-sector solution for Lehman proved infeasible, as the firm could not post sufficient collateral to provide reasonable assurance that a loan from the Federal Reserve would be repaid, and the Treasury did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm.
Salmon’s view: Bernanke is a disingenuous revisionist, and that there’s no reason a Bear Stearns-like arrangement wouldn’t have worked with Lehman.
But we’re curious: Is it that important that the taxpayer be “made whole”? Is that really that important? We’ve already argued that the whole notion of making the taxpayer whole is dangerous nonsense. The taxpayers aren’t going to get a dividend, and historically, there’s no connection between tax rates and government expenditures — so it’s not as though an influx in revenue from these “investments” will lead to lower taxes.
What, again, is the purpose of all this government intervention? It’s to prevent a systemic collapse of our financial system. Assuming the government can manage this task — and that’s very much in question (see: today) — it’s dangerous to hamstring the government by this “make the taxpayer whole” requirement.
Seriously, if the alternative really is a life-time of stir-fried cardboard for dinner, don’t get bent out of shape over paying us back.