John Cochrane writes

Runs don’t have a single cause, they have a straw that broke the camel’s back. Ask yourself, would simply bailing out Lehman have avoided this whole mess? Obviously not.  People saw Lehman go under — and Paulson’s speech, plus short-sale ban, plus everything else going on at the time — and asked themselves, "gee, my bank was investing in the same things Lehman was. I wonder how they’re doing? I’d better pull my money out just to be safe."   ("People" here means institutional investors in the shadow-banking system, i.e. prime-brokerage customers, repo investors, derivatives counterparties, asset-backed security investors.)

This gets it backwards. I’ll say more when I can figure out how to phrase it so as not to get death threats, but to be short the entire Lehman-TARP debacle exposed how little control Wall Street had over Washington and that deeply deeply frightening.

However, it was clear in August 2007 that this whole thing was going down on its own. The only question was when and how the Fed was going to stop it. But, they didn’t. They hemmed and hawed about tightropes.

Then in the shocker of shockers they let Lehman go down. At that point who knew what they wouldn’t allow to happen. It was insane.

But, don’t listen to me. Give this another listen, if you missed it the first time around, and then tell me whether or not you think Paulson’s  Oct 2008 testimony was what “clued people in” that there might be a problem here.


I agreed with Jim then and I still agree. You can call us supporters of crony capitalists, apologists for plutocracy, etc.

BUT, you might also want to mention the fact that we were right.