It’s highly technical. And it’s really hard even for the experts to figure out, let alone those of us who stick to simple addition and occasional division. But with all the conversation about AIG, it’s worth focusing our attention back on just how much of the current debate — and the approach we’re taking — revolves around what happened to Lehman Brothers.
In short, last September, the Fed & Treasury ‘allowed’ Lehman to collapse into bankruptcy and global credit markets seized up into a global spasm that kicked the global financial crisis into really high gear. We hovered on the edge of real cataclysm and managed to work our way back to mere global crisis over a period of a couple months.
It’s the Lehman experience which is behind the widespread and possibly accurate assumption that we have no choice but to pay back all the creditors and counter-parties of the big — and probably insolvent — banks at full dollar value.
But is the assumption correct?
There’s one debate about whether it was really Lehman’s collapse or the Treasury’s reaction to it that caused the crisis. In as much as I’m able to understand the different arguments, this one seems pretty unconvincing.
But that’s not the only question.
Lehman went under when there was much less widespread recognition of the extent of the financial crisis. And — perhaps much more importantly — it was done in a totally uncontrolled way. There was no effort to engineer some sort of managed receivership.
Now, a number of the smartest economists I know and whose judgments and values I really trust, think that the abyss we were looking into was so deep and vast, that it’s just not worth chancing it. But there are very sharp people who make contrary arguments.
I don’t have any answers on this one. But for those of us who are spectators and involuntary stakeholders in the drama, it is worth remembering just how many dollars ride on interpretations of the Lehman experience.
Josh Marshall is editor and publisher of TalkingPointsMemo.com.