An old meme in new clothing has been circulating recently: The Federal Reserve could have and should have saved Lehman Brothers. It had the resources, the legal authority and the obligation to do so; its failure to act let a modest financial fire become a full-blown credit crisis.
It is an interesting post-crisis theory from academia. But some of the claims are irrelevant, and almost all of them are wrong.
Larry Ball, chairman of the economics department at Johns Hopkins University and a researcher at the National Bureau of Economic Research, makes this argument in a new paper titled “The Fed and Lehman Brothers.” There are three issues here worth addressing, and one that time and space doesn’t allow for:
- Could the Fed have rescued Lehman?
- Was Lehman solvent?
- Was it capable of raising capital?
The issue I’m skipping for now (assuming the Fed could have rescued Lehman) is whether it should have done so. That’s a separate question.
Continues at Let’s Put the Lehman Bailout Debate to Rest