Historic mistake
Wednesday, October 8th, 2008When the Feds decided not to bail out Lehman they sent the message to creditors and the bond market to stop lending to each other. That will be seen as the tipping point that froze up the credit markets and could lead to the worst financial condition we’ve seen.
The markets work by calculating risk and this can best be calculated when the rules of the game are well understood. You have to pick a philosophy and stick to it. Either you’re going to shore up the financial system by bailing out large financial players or not. You can’t send the signal that we won’t allow large players to fail and disrupt the system by helping Bear Sterns, Fannie, and Freddie and then switch gears and imply that the rules are changed and now your all on your own.
This situation has led to widespread distrust among banks, which have stopped lending money to each other for fears of shattered balance sheets arising from the credit crisis.
The global banking system for all its faults is a huge but delicate balancing act of agreements between parties that collectively allow the smooth flow of money around the world. When a large player suddenly drops the ball the rest of the team just stops playing.
So I think in the future historians will point to the abandonment of Lehman as one of the biggest mistakes by the Treasury of the United States which will have a huge impact on the foreseeable future.