It is so easy to blame the private sector. And, the government can hide behind “good intentions” and “the public interest.”

For a different view, read the article by John Cochrane and Luigi Zingales who write on “Lehman and the Financial Crisis” in the Wall Street Journal, The argument is presented here that it was not the failure of Lehman Brothers that set off the financial crisis. It was the panic move by Ben Bernanke and Hank Paulson that resulted in the financial crisis. This mirrors something I wrote last fall on November 16 titled “The Bailout Plan: Did Bernanke Panic?”:

As Cochrane and Zingales write, Fannie Mae and Freddie Mac were taken over on September 7, 2008. Lehman Brothers filed for bankruptcy on September 15. AIG was bailed out on September 16. I believe, as I say in the post above, that everything changed that Tuesday evening when the bailout of AIG was announced.

Bernanke called Paulson on Wednesday September 17. As reported later in the Wall Street Journal, and I quote from my post: The Wall Street Journal article reports that by Wednesday afternoon “Bernanke reached the end of his rope.” He called Paulson and “with an occasional quaver in his voice” he spoke “unusually bluntly” to the Treasury Secretary. Paulson did not move immediately. He had to sleep on it, and on Thursday morning, he committed.

Friday evening Bernanke and Paulson met with Congressional leaders and again I quote from the earlier post: Paulson called the leadership in Congress and asked them to have a meeting with himself and Bernanke on Friday evening. The few members of Congress that talked with the press after that meeting said that Bernanke did most of the talking and “scared the daylights out of everyone.” Bernanke knew his history of the Great Depression and he knew currents events. He was very logical and very articulate. The leaders were told that they had to act and they had to act fast. The plan was to have a bill before Congress on Monday seeking Congressional approval (of both houses) by the following Friday. The Treasury Department had a bill ready (three pages long) by midnight Saturday evening. The price tag – $700 billion. Why $700 billion? Because it was a big number!

But, Cochrane and Zingales state that on Monday September 22, “bank credit-default swap (CDS) spreads were at the same level as on September 12…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 September 23 to September 25, after the TARP testimony.” That is Bernanke and Paulson appeared in front of Congress on September 23 and 24 and gave speeches on the need for the TARP funding.

The reason for the subsequent market activity? Cochrane and Zingales claim that “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.” The authors conclude with “That’s a pretty good way to start a financial crisis.”

The conclusion: putting all the blame on the Lehman failure takes the focus off the main story. The main story is not that there was just one policy failure at this time. The main story is that the government continued to screw up after creating the financial environment and credit inflation that resulted in the asset bubble of earlier in the decade. It continued to screw up in the series of band aids that the Fed and the Treasury imposed on the economy and financial system beginning in December 2007. And, in doing so, the government continued to build up the moral hazard in existence in the system and continued to expand the federal debt outstanding to met ever larger needs for financial bailouts.

By not focusing on the main story, we risk an even larger series of policy failures in the future. That is, the federal government now is doing pretty much what the federal government did last year and the year before and is creating even more massive amounts of debt in the process.