Could the Fed Have Saved Lehman?

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:

  1. Could the Fed have rescued Lehman?
  2. Was Lehman solvent?
  3. 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