We’re All Asking the Wrong Question about the Lehman Brothers Collapse

On the 5th anniversary of the start of the 2008 financial crisis, Andrew Ross Sorkin is one of many people wondering “What if the U.S. had rescued Lehman?“. People keep asking this wrong-headed question for two reasons, one of which is entirely forgivable and the other of which is not.

Begin with the facts: Government’s reaction to the financial crisis did not start with the decision to let Lehman fail. It began six months earlier when the government chose to bail out a similar institution with similar financial problems: Bear Sterns. This signaled to Lehman that they could continue with business as usual and the taxpayer would be there to rescue the lions of capitalism whenever called upon.

Government policy was thus to bail out one investment bank and then six months later refuse to bail out a similar investment bank. Why do so many people only ask why the government didn’t bail out Lehman and so few ask why it bailed out Bear Stearns?

Let’s deal with forgivable reason first. Psychologically, it is easier to speculate about “what might have been” regarding something that did not happen than something that did. We know what happened when the government bailed out Bear Stearns; we will never know what would have happened if the government had bailed out Lehman. The absence of certain knowledge gives our imagination more running room. ‘Twas ever thus in the human mind, and therefore not to be castigated.

But the other reason is less forgivable: The sense of entitlement of the people who run Wall Street. In their world view, when they take risks for profit and end up losing, a taxpayer bailout is only right and just. The bailout of Bear Stearns thus requires no explanation, Indeed, second-guessing it would be an act of lese-majesty. On the other hand, if the government dares to hold the masters of the universe responsible for their stupidity and cupidity as it did at Lehman Brothers, then the bankers deserve an immediate explanation (accompanied of course with a forelock-tugging apology).

[Cross-posted at The Reality-based Community]

Keith Humphreys

Keith Humphreys is a professor of psychiatry at Stanford University. He served as a senior policy advisor at the White House Office of National Drug Control Policy from 2009 to 2010.