Getting Lehman Wrong a Second Time

US officials were wrong to let Lehman Brothers go bankrupt. Now they wrongly assume all banks are too big to fail

by Dean Baker

There are few economists who would defend the decision to allow Lehman Brothers to go bankrupt last September. Its collapse induced a worldwide panic that sent stock markets plummeting and caused credit to freeze up. In the subsequent months, the downturn went into over-drive, with the United States losing almost three million jobs from October through February.

This set of events has led almost everyone to conclude that the trio who let Lehman go under - Treasury secretary Henry Paulson, Federal Reserve chairman Ben Bernanke and the then-head of the New York Fed, Timothy Geithner - erred badly in this decision. That seems a reasonable judgment.