MAYBE A BIG BANK HAD TO FAIL. The Economist article argues that it took a Lehman bankruptcy to “galvanize” policy makers: “Only when faced with the post-Lehman, post-AIG chaos did Congress pass the $700 billion Troubled Asset Relief Programme (and even then, after an initial rejection).” (In the period right after the Lehman bankruptcy it was not clear there would be decisive action and I posted here on my hope that dramatic action would be taken.) The Economist article also presents the conclusion of Professor Kenneth Rogoff based on his study of eight centuries of financial crises. Professor Rogoff takes the view that historically it requires the failure of a big bank before political action is taken: “Mr Rogoff maintains that at some point political pressures would have required a big firm to go bust. ‘If you look at financial crises, the standard playbook is to let the fourth or fifth largest bank go under and you save everybody else….’” In other words, Lehman was just the right size.

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