Jim Surowiecki has an interesting response to Joe Nocera’s contrarian idea that letting Lehman fail, far from precipitating the worst of the financial crisis, actually enabled the government to bail out AIG and otherwise increase its intervention to something approaching the needed level.
In the months between Bear Stearns and Lehman Brothers, Mr. Paulson and Mr. Bernanke had approached Congressional leaders about the need to pass legislation that would give them a handful of additional tools to help them deal with a larger crisis, should one ensue. But they quickly realized there was simply no political will to get anything done. After Lehman, however, Mr. Paulson and Mr. Bernanke were able to persuade Congress to pass a bill that gave the Treasury Department $700 billion in potential bailout money — which Mr. Paulson then used to shore up the system, and help ease the crisis. Even then, it wasn’t easy; it took two tries in the House to pass the legislation. Without the crisis prompted by the Lehman default, it would have been impossible to pass a bill like that.
And here’s Surowiecki:
What if Congress had passed the TARP bill the first time around, instead of voting it down on September 29th? While it’s certainly true that Lehman’s failure provoked a global panic, and in the days immediately after it went under we saw credit markets start to freeze up, stock-market sell-offs, and the like, it’s also true that the news that the U.S. government was working on a toxic-asset bailout plan for the banks actually did stabilize the markets. By Friday, September 26th, for instance, the S&P 500 Index was trading only slightly below where it had been before Lehman went under. At that point, it seemed, investors were reasonably confident that the government’s actions would bring some order to the chaos in the system.
That confidence disappeared, obviously, on September 29th, when the House of Representatives voted down the TARP.
Is it then the House Republicans, rather than Hank Paulson, who deserve most of the blame for failing to respond strongly enough to the financial crisis? Might we have muddled through fine if they’d just passed the TARP bill the first time around? After all, September 29 came after the AIG bailout, so clearly the stomach-churning stock-market implosion we saw thereafter was not necessary for the enaction of further multi-billion-dollar bailouts.
One thing worth remembering here though is that it’s pretty spectacularly unhelpful to look at the stock market as an indicator of financial well-being over the course of the crisis. The Dow hit its all-time high long after the crisis had already begun, and from then on in it was a decidedly lagging indicator. The fact that it only took a couple of weeks to implode in the wake of the Lehman bankruptcy could actually be a sign of the stock market reacting much more quickly than it had done previously.
In any case, even if Nocera is right and Lehman’s failure was in hindsight a good thing, it was at the same time a chaotic thing, and any silver lining came more through luck than judgment. I still think we’d have been better off saving both Lehman and AIG this time last year — and I still think that if Paulson had wanted to do that, he would have found a way.