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Larry Ball’s The Fed and Lehman Brothers: A Review Essay

V. V. Chari

University of Minnesota and Federal Reserve Bank of Minneapolis.

Laurence Ball argues that the Federal Reserve (the Fed) could—and should—have bailed out Lehman Brothers so that it did not have to declare bankruptcy. He presents compelling evidence that it could have. I argue that the view that the Fed should not bail out Lehman is reasonable under the circumstances the Fed was in at the time. The Lehman bankruptcy is a case study in bailouts and the attendant moral hazard problem that expectations of bailouts create. The lessons learned imply a clear case for appropriate regulatory intervention to solve the problems created when governments cannot commit themselves to not undertake bailouts. (JEL D72, E32, E58, E63, G01, G24, G33)

DOI

10.1257/jel.20221515

Volume

60 (4)

Pages

1503-1508

Language

en

Export

BibTeX

Sources

crossref openalex