November 16, 2018

Government Bailouts Shouldn’t Only Be for Banks

The music stopped as the investment giant Lehman Brothers filed for bankruptcy 10 years ago Sept. 15. It was a tipping point in the sequence of events that soon became known as the global financial crisis. The event upended American economic complacency and set in motion a wave of populist animus against finance. While the crisis was arrested—albeit in a way that would sow future problems—the populist flames burn away.

Should the U.S. government have saved Lehman? Prices of Lehman debt before the bankruptcy indicated some combination of overly sanguine investor views of the firm’s condition and a belief that a bailout was likely. Several commentators, including Alan Blinder on these pages, have identified the failure to intervene on Lehman’s behalf as a key policy error.

But the questions that should take center stage today are broader. First, how much flexibility should policy makers have to bail out ailing financial firms? Second, what types of intervention do least to undermine public support for a well-functioning financial system?

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