The Collapse

Barack Obama had the following to say regarding the collapse of Lehman Brothers:

I certainly don't fault Senator McCain for these problems, but I do fault the economic philosophy he subscribes to. It's a philosophy we've had for the last eight years - one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else.

Trickle down economics had nothing to do with the financial collapse. It was not the government's fault that Lehman, Bear Sterns, Lynch, et al, grossly mispriced the risk of lending money to people with poor credit. It was not the goverment's fault that these institutions grossly mispriced the risk of lending too much money to people with good credit.

To be fair, McCain's statement on the collapse is equally bothersome, although for different reasons, but he is right to applaud the government for not coming to the rescue of Lehman. The government had to do something to counter the moral hazard of bailing out all these institutions (Bear, Fannie, Freddie). Letting Lehman fall on its face does just that. And should Lehman dissolve in a somewhat orderly fashion it'll provide the market with reassurance that it can survive a huge insolvency, which is equally important.

But it's really just a shot in the dark. Still, it was the right shot (I think; others disagree).

Tuesday, September 16, 2008