Foolish

From an email I sent, dated 9/12/2008

I just can’t see the Fed and the Treasury sitting idly by while Lehman starts to go into default. The argument for inaction would be that they don’t want to create incentives for risky behavior in the future, and certainly (if it comes to a bailout) they will try to hit the equity as hard as they can. But letting Lehman fail would create even worse incentives, in that people will be afraid to do business with major investment banks. There is some point at which the issue becomes not “Do you trust Institution X” but “Do you trust the system.” (I’m recalling the old anti-freeze slogan, “If you can’t trust Prestone, who can you trust?”) I think Lehman is big enough to be over that line. Most of the casualties of a Lehman failure would be “innocent bystanders” rather than entities that could reasonably have been expected to realize they were taking excessive risks. And at this particular time, with the Fed running out of monetary policy ammunition and commodity prices falling, I think they would be foolish (and they know it) to risk the kind of economic effects that might follow a further loss of confidence in the financial system.

From another email I sent, dated 9/15/2008

Guess I was wrong about that.

I still don't think I was wrong about the "they would be foolish" part, but clearly I was wrong about the "they know it" part.

From the Wall Street Journal, front page, column 1, dated 9/29/2008

The consequences of the government's decision two weeks ago not to step in to prop up Lehman Brothers Holdings but instead let it collapse look more dire than almost anyone imagined.

I guess the bailout bill, as it turned out, was not nearly as bad as I imagined it might be. But I kind of wish somebody other than Henry Paulson were managing the fund.