Op-Ed: The Lehman Collapse Didn't Start The Crisis

A year after the start of the financial crisis, economists are starting to write their histories of what went wrong. And they're not all converging on the same plot points.

The other week, Luigi Zingales and John Cochrane from the University of Chicago challenged the familiar storyline that things really came unglued after the government let Lehman Brothers fail.

Zingales and Cochrane looked at some data (basically one of our favorite indicators, the Ted Spread) and argue the dramatic market freak out happened not after Lehman, but later, when Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson opened their mouths. Zingales and Cochrane write in the Wall Street Journal:

In effect, these speeches amounted to "The financial system is about to collapse. We can't tell you why. We need $700 billion. We can't tell you what we're going to do with it." That's a pretty good way to start a financial crisis.

I made some calls to look into their claim. Mark Gertler at NYU, who has worked with Bernanke, wasn't buying it. He told me:

To me, this line of reasoning is like, 'OK, the fire department gets word the fire is spreading. The fire department rushes to the scene. The fire starts to spread. Then you look at the timing of the events and say "Boy, if the fire dept hadn't rushed to the scene.."

There's also this rebuttal from economist Richard Robb in the Financial Times. He argues it's clear that Lehman's failure changed everything.

"Sometimes things that are obvious turn out to be true," he writes.

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