Should investment bank Lehman Brothers have been allowed to fail?

The collapse of Lehman Brothers caused a shock throughout the global economy. Saving the bank might have saved the world economy from plunging into the worst recession since the 1930s Great Depression. Was it worth letting Lehman fail when the US government has been willing to save other banks that threatened to go under - should the US government have allowed Lehman to fail?


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Should investment bank Lehman Brothers have been allowed to fail?
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Should investment bank Lehman Brothers have been allowed to fail?
Yes because...

A shock to the system was necessary

A collapse was needed to demonstrate how damaged the system had become
Lehman's collapse was necessary as it demonstrated the extent of the malaise in the world financial system.

Prior to Lehman's collapse, banks around the world had admitted that they had too much exposure to the subprime mortgage sector and there had been warnings that the housing bubble of inflated prices would pop.

Lehman's collapse does appear to have panicked banks into halting lending, endangering the system, but a shock on the scale of the Lehman's collapse was needed to shake the financial system into the realisation that it was sick, poisoned by toxic assets made up of securitised subprime mortgages.

No because...
Should investment bank Lehman Brothers have been allowed to fail?
Yes because...

Lehman was the right choice for a collapse

Lehman Brothers was an investment bank and its collapse would not endanger 'ordinary' people. Governments have stepped in when really necessary - the US government stepped in to rescue Fannie Mae and Freddie Mac which controlled the mortgages of ordinary Americans, and in Europe governments stepped in to guarantee retail deposits (in some cases all, in others only part).

The banking system itself was not allowed to fail, while the investment banks - which have been the worst offenders in terms of how the world economy arrived at the crisis point - have been chastened by Lehman's collapse.

No because...
Should investment bank Lehman Brothers have been allowed to fail?
Yes because...

The bank's failure is part of the political system

The Western banking system prides itself on its adherence to freemarket capitalism - an ideology that says inefficient concerns will go under, replaced by more efficient ones. Lehman's collapse was simply capitalism in action.

No because...
Should investment bank Lehman Brothers have been allowed to fail?
Yes because...

Saving Lehman would have sanctioned risky investments

Government action to save troubled banks promotes 'moral hazard' - where investors feel that they will be protected from the fallout of their investments - at the expense of the taxpayer.

Moral hazard creates a distortion and encourages the kind of investments that got the economy into this mess in the first place.

No because...
Should investment bank Lehman Brothers have been allowed to fail?
No because...

Moral hazard be damned

Governments must accept that some concerns are just 'too big to fail'. Afterall, just a day after Lehman's collapse, the government bailed out AIG. Lehman's collapse has led to over $1.6t trillion in losses in the global economy, the fallout has been catastrophic not just for wealthy investors but in terms of collapsing businesses, job losses and repossessions.

This is not to say that the financial sector was not in need of reform, simply that the fallout from Lehman's collapse was not worth allowing the bank to go under.

Yes because...
Should investment bank Lehman Brothers have been allowed to fail?
No because...

The financial sector is a special case

The financial sector is integral to how we live out lives - keeping out money safe and allowing us access to it. It also performs a service in terms of making loans, without which economic growth would not be possible.

The build up to the crisis was marked by the complicity of governments in the erosion of regulation and the financial crisis has prompted governments to reassess their role as it relates to the financial sector - in terms of regulation and, as in cases such as Northern Rock in Britain, how banks are run. The government had a responsibility, that it did not acknowledge, to save Lehman from collapse.

Yes because...


Should investment bank Lehman Brothers have been allowed to fail?

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