The Lehman Rescue Efforts: What Went Wrong; Was a Better Way Available?
By Yusuke Horiguchi October 7, 2014 1. In a systemic financial crisis, strong forces of contagion--a virulent form of negative externality--put even the solidest financial firms with no faults of their own at serious risk, because of other firms' plight. This is a notorious example of market failure, providing a justification for public intervention aimed at preventing the financial system's collapse, typically involving taxpayer money. This is a standard economic analysis, widely accepted, at least at this level of generality, and with a straightforward prescription on the general direction of policy to be followed when coping with severe system-wide financial stresses. It needs emphasis, however, that the prescription is applicable only to systemic crisis situations. 2. The situation of September 2008 and the ensuing few months was none other than that of an epochal systemic crisis. It in fact was the epitome of "unusual and exigent circumstances", in w...