I’m puzzled: shouldn’t the papers this morning be full of retrospectives about The Event That Ended The Economy As We Knew It? (Not to mention the event that guaranteed an Obama election win.)While this is a short post on Krugman's part, nonetheless it is full of the usual fallacies he likes to promote. First, and most important, the economy did not go down because Lehman failed; Lehman failed because it had been a major player in promoting an unsustainable boom, and during the boom, it profited well, and when that toga party came to an end, so did Lehman's profitability.
Or have the financial media decided to go along with the prevailing public view that none of this happened until after Obama was inaugurated?
Second, a rescue of Lehman by stuffing its assets full of funny money from the Federal Reserve System would not have changed the fundamental picture a whit. Wall Street was in trouble because its balance sheets were unbalanced, not because the Fed had failed to create enough new dollars. Lehman had bet the house on the housing market and lost.
Furthermore, had the Fed and the Bush administration let the banks and financial houses that were unsound go under, yes, the original economic downturn would have been steeper than it was. However, there were healthy financial houses and there were a lot of healthy assets in the economy, and they would be leading us in a recovery right now.
Instead, the government, first under Bush and then under Obama, decided to paper over the holes in the asset framework with Monopoly Money as though there had not been a massive amount of malinvestment occurring. As we have seen, we now have no recovery and the future is grim.
So, Happy Lehman Day to all of us. It would have been happy had Henry Paulson not demanded that taxpayers and the Fed bail out his good friends.