In the 10 years since Lehman Brothers filed for bankruptcy, debate continues to rage over many aspects of the crisis, such as the question of whether regulators could have bailed out Lehman if they wished to. But a standard narrative about the implications of not bailing Lehman out quickly took hold. According to this narrative, the failure to rescue Lehman was the defining event of the 2008 crisis, the match that started the conflagration. And its consequences show that, under the financial architecture in place at the time, bailouts were the only effective response to the financial distress of a systemically important financial institution.
In my view, this settled wisdom, which I have elsewhere called the “Lehman…