John H. Cochrane and Luigi Zingales
Wall Street Journal, September 15, 2009
One year ago today Lehman Brothers filed for bankruptcy. The weeks that followed are among the most dramatic in U.S. history. They led to a massive government intervention in the financial system—an intervention that will likely change that system forever.
Many people say that letting Lehman fail was the mistake that caused the financial crisis. To them, the lesson is that the government should never allow any “systemically important” financial institution to fail. If only Lehman had been bailed out, the story goes, we could have avoided much of a 45% drop in the S&P 500, a 4% drop in output, the rise in unemployment to 9.7% from 6.2%, and the $784 billion “stimulus” to top off a $1.59 trillion deficit.
This story is false.
