Vindication On Implicit Assumptions

Vindicated again. From the Financial Times:

"The pledge reflects the belief that the collapse of Lehman Brothers unleashed the latest devastating wave of financial panic. ..

Many creditors who suffered losses with Lehman did so in part because they believed that the Bear Stearns rescue in March meant that Lehman enjoyed an implicit guarantee – a guarantee that never materialised. A former senior policymaker said the market would press the authorities to provide more clarity and turn their implicit guarantees into explicit guarantees."

Excuse me, but this is exactly what I've been saying.

And more:

"The world’s leading industrialised nations have pledged to do everything in their power to prevent any more Lehman Brothers-style failures of systemically important financial institutions.

Experts said this remarkable commitment was the most concrete and far-reaching promise made in a weekend of international efforts to contain the escalating global financial crisis.

They said it came close to a G7-wide temporary implicit guarantee for many or all of the liabilities of systemically important financial firms."

Here's me:

The market’s reaction after the Lehman refusal showed that the markets and investors were expecting a bailout. In other words, there was an implicit government guarantee to intervene in a crisis such as this. In this instance, to try and go against the expectations of the market would be very hard and complicated. On the other hand, going forward, it will be clear that this implicit guarantee, which will now be explicit, was partly responsible for this crisis. I believe that this will come to be widely understood. Contrary to what you are saying, the moral hazards of this arrangement are more widely understood and accepted, and will finally have to be addressed.

I know that you’re not going to like hearing this, but the uncertainty was caused by the government not bailing out Lehman. The reaction of the credit markets showed that people were expecting a bailout, and when they didn’t get one, they started to panic. believing that they might be on their own. I’m not defending this belief or the bailout here, but simply calling attention to the real conditions under which the market and investors were operating. Sadly, a lot of people, including you, it seems, didn’t realize how far we’ve already gone done the road of government guaranteeing bailouts such as this one in a crisis. I’ve always been in this for the long run, so, although I agree we’re going to have to answer some hard questions about government intervention in the future, maybe this time will begin with a realistic assessment.

Now, again, Chapman is making great points going forward. But we need to settle this crisis with the cards that we have been dealt, i.e., the government had implicitly, for sure, and obviously, I think, guaranteed that it would intervene in a crisis such as this. So, for this time, game over.