Did Lehman really have to fail? This is one of the least-attended but most critical issues of the first decade and a half of this century. My view is that Lehman could have been saved. The US authorities had the wherewithal to do so within their legal authority, contrary to the claims made by former Treasury Secretary Paulson and former Fed Chairman Bernanke. It is also my view, based on a standard economic reasoning, that Lehman should have been saved, given that Lehman's final days were unfolding in the midst of a deepening systemic financial crisis that seemed ready to unleash a tidal wave of contagion in the event of a major shock. Needless to say, it would not have been for the sake of Lehman but for the sake of safeguarding the financial system.
Why the US authorities' Lehman rescue efforts failed and what could have been done for a successful result are the main subjects of this article. It should be made clear at the outset that a successful Lehman rescue alone would not have shielded the US economy against a great recession like the one in 2008-9. In addition to a successful Lehman rescue, such an outcome would have required many, if not all, of the policy actions actually taken in the aftermath of Lehman's collapse. Some, or even many, would likely argue that, in the absence of Lehman's collapse and its unprecedented aftermath, it would have been politically impossible for the authorities to take the kinds of actions they actually took. Maybe so. But the lesson for the future is clear. All-out efforts in a consistent manner are what it takes to prevent a systemic financial crisis of considerable severity from morphing into a catastrophic one with an attendant macroeconomic calamity. Even a single misguided policy step, such as what the September 2008 Lehman rescue efforts exemplify, could inflict a huge damage to the whole crisis management strategy.
