They myth of Lehman, part two

September 15, 2009

John Taylor has maintained that it was the government’s reaction to Lehman that freaked out financial markets. Now Luigi Zingales and John Cochrane make a similar pitch in the WSJ:

On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. (CDS spreads are the cost of buying insurance against default.) On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS spread—which captures the perceived riskiness of short-term interbank lending—rose only 18 points the day of Lehman’s collapse, while it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony. (Libor—the London Interbank Offer Rate—is the rate at which banks can borrow unsecured for three months.)

Why? 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.

One comment

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Dear friend,
Let allow me boasting of myself in regard to articles.
Major of your articles on pure economics are very interesting,grasping and reaches to high school of thoughts.
Here,you have narrated Lehman part two,
Everywhere, after shock of Lehman brothers, financial organisations closure and its impact.
Instead of forgetting these worst financial disaster,you-means journalists and famous world news channels,websites and newspapers had almost conducting ritual ceremony to this closure.
To conclude here,we need 700 million dollars for recovery and for running financial system.
This financial journey is very hard,roads are in bad conditions and lot of confusions, daily more statements on this subject by world leaders,economists, blogs are common on now a days.
I am typing one semi real solace sentences for more interests and for correct solution finding exercises from famous schools of economic theories.
Economic roads are very rough ,but we will overcome from known hurdles with future years.

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