Markets Were Counting On The Government Acting

Henry Blodget says the following on Huffington:

"And, as Paul Krugman notes, in part McCain's nosedive is the result of a critical decision by Bush Treasury Secretary Hank Paulson earlier this month: to let Lehman Brothers fail.

Two weeks ago, on September 14th, Paulson let Lehman croak--and the credit markets went haywire. In short order, this led to the failure of AIG, WaMu, Wachovia, and the chaos of the emergency Wall Street Bailout."

As Krugman says:

"But I found myself thinking about that sign when reading this terrific WSJ article about how the fall of Lehman triggered global panic. One lesson of the article is that Paulson messed up very badly by letting Lehman fail."

Here's from the WSJ:

"In hindsight, some critics say the systemic crisis that has emerged since the Lehman collapse could have been avoided if the government had stepped in. Before Lehman, federal officials had dealt with a series of financial brushfires in a way designed to keep troubled institutions such as Fannie Mae, Freddie Mac and Bear Stearns Cos. in business. Judging them as too big to fail, officials committed billions of taxpayer dollars to prop them up. Not so Lehman.

"I don't understand why they didn't understand that the markets would be completely spooked by this failure," says Richard Portes, professor of economics at London Business School and president of the Centre for Economic Policy Research. Rather than showing the government's resolve, he says, letting Lehman fail only exacerbated the central problem that has afflicted markets since the financial crisis began more than a year ago: Nobody knows which financial firms will be able to make good on their debts."

Doesn't this tell us that the credit markets going haywire and being spooked was because they were counting on government stepping in? I'm just asking.

So much for free markets, since the people playing the game don't even believe in it.