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Friday, March 13, 2009

Failing to Bailout Lehman Brothers was a Mistake

Lately, the idea that allowing Lehman Brothers to collapse was not the big disaster many have claimed it was has been heard with increasing frequency, especially among those opposed to government bailouts of the financial industry. For example, John Taylor recently said of the "bad turn" financial markets took after Lehman Brothers failed:

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers... A study of this event suggests that the answer is more complicated and lay elsewhere.

Here's a rebuttal of this idea, and of the evidence presented by Taylor:

Why letting Lehman go did crush the financial markets, by Sam Jones: For some time now, the folks over at Clusterstock - notably John Carney - have led a challenge to a particularly virulent piece of received wisdom: that the failure of Lehman was necessarily an inflection point that took the severity of the financial crisis to a whole new level.

And with that the implication that the government’s decision to let Lehman fail was, in itself, a failure.

Until now, that kind of debate might have seemed a little academic - a question for historians. But day by day; bailout by bailout, its pertinence to current events and future policy is growing: politicians and regulators are going to find themselves increasingly under pressure to account for the growing number of expensive opportunities they are being occasioned with to Save The World.

Loath as we are to turn again to the “Japanese Scenario” for appropriate lessons, it’s worth bearing in mind that in Japan, it was ultimately the weight of public opinion, as much as it was economic or financial considerations, that came to shape the way the crisis played out. Distaste for spending taxpayers’ money grew extreme: bailouts became taboo. The way Japan’s authorities consequently pussy-footed their way around problems rather than tackling them head on drew the crisis out for nigh on a decade - dare we now even say, two.

Back now, though, to the specifics of Lehman’s collapse. ... [...continue reading...] ...

    Posted by on Friday, March 13, 2009 at 02:34 AM in Economics, Financial System, Policy | Permalink  TrackBack (0)  Comments (29)

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