I’ve generally been ignoring the anniversary of the financial crisis — the subject tires me — but the Lehman myth is irritating, so it’s good to see it being addressed. In short, it is a myth that preventing Lehman from failing would have saved us from the consequences of the last year:
… by making everyone aware of the catastrophic consequences of a banking collapse, Lehman provided a wake-up call to policymakers, cementing the political backing necessary for the unprecedented monetary, fiscal and financial-industry support that was swiftly put in place. Far from causing a second Great Depression, the Lehman collapse may actually have succeeded in preventing it. Surveys of business and consumer confidence show that the US economy was slipping fast well before the Lehman debacle, thanks as much to sky-high oil prices as the gathering financial storm. The American public had taken a look at prices at the pumps and decided to stop spending.
More importantly, the world economy had come to resemble Europe before the First World War. It was awash with tensions and potential flashpoints, from burgeoning trade and capital imbalances to excessive credit and an unsafe banking system. To believe disaster could have been averted is to ignore the lessons of history, which are that an extreme excess of credit will always result in a massive misallocation of capital, and therefore an eventual recession as the bad debt is worked out of the system.
More here.
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