I hate to disagree with Jim Surowiecki of The New Yorker, who is an astute commentator, but his blithe statement that the US government’s refusal to rescue Lehman Brothers was “clearly an abysmally bad decision” demands to be corrected.
As noted before, I have a dog in this fight since I recommended before the event that Hank Paulson, the Treasury Secretary, refrain from bailing out Lehman. Since then the general consensus has emerged that Lehman’s failure precipitated the most extreme phase of the financial crisis.I am not convinced that, even if Lehman had been rescued, that would have averted the problem since the weight of selling and panic would have moved on to the next financial institution and then the next. So the world would probably have ended up in the same position it is in today, with a broad financial sector bail-out.
However, even if a Lehman bail-out would have changed matters, the fact that Mr Paulson and the Federal Reserve were wrong does not make their decision “abysmally bad”. They simply made a calculated bet that failed, which is a different matter.
The authorities clearly hoped that Lehman’s failure would be absorbed by the market and that would provide a fire-break against the panic following the rescues of Fannie Mae and Freddie Mac, the US mortgage agencies. If it had worked, it would have be preferable to laying out $700bn of taxpayers’ money to prop up the financial system.
Lots of decisions are made on the balance of probabilities. Some work out and some do not. But saying that the Lehman decision was “abysmally bad” suggests that any gamble that does not pay off is by definition unwise. That is simply untrue.
