Did government officials err when they failed to bail out Lehman Brothers? (For the first question, click here.)
“Years ago, when Gerry Corrigan was president of the New York Fed, he captured the essence of ‘too big to fail.’ He called it ‘constructive ambiguity.’ By that he meant that the markets should never be absolutely certain that any institution is going to be bailed out. What Lehman did is turn constructive ambiguity into destructive ambiguity. And bankers and others threw up their hands and said, ‘Screw it. I don’t know whether they’re going to bail them out or let them go. I’m going to sit on my cash, and I’m not going to give credit to anybody.’ Absolutely the government should have bailed out Lehman.”
