After Lehman: How US Debt Exploded

1. Five years ago, U.S. policymakers made one of the most expensive mistakes in financial history. On September 14, 2008, they decided to let Lehman Brothers go into disorderly bankruptcy.

2. Instead of winding the bank down in an orderly fashion, as they had done with equally stricken Bear Stearns six months before, Lehman was allowed to collapse.

3. Putting taxpayers’ money at risk to backstop a bank was unpopular and against textbook doctrine. The government refused to offer guarantees for any private takeover.

4. On September 15, 2008, the global financial market imploded, turning a small U.S. recession into the worst in the developed world since the Great Depression.

5. Ironically, the decision not to put up taxpayer money to guarantee one bank led to much costlier bailouts and loss of revenue, and in particular exploding US debt, UK debt and eurozone debts.

6. Public debt levels associated with the bailouts and recessions alone (i.e. excluding existing spending trends) were $4.3 trillion in the US, £660 billion in the UK and €2.2 trillion in the eurozone by the end of 2012.

7. Some rise in public debt was inevitable from the collapse of housing in the US, the UK, Spain and Ireland. But even if we call a third of the debt increase inevitable, a very high estimate, the costs of the Lehman blunder remain horrendous.

8. The Lehman saga holds a clear lesson: neglecting contagion risks in financial crises can be very expensive.

From Lehman: The Horrendous Costs of One Big Policy Mistake by Holger Schmieding (Berenberg)