Lehman Was A Surprise

From this morning's WSJ:

"...[The Bear Stearns bailout] created a false imporession among investors that the government woudl step into rescue bondholders when the next bank ran into trouble. By letting Lehman fail, the government had suddenly disabused the market of that notion."

The government isn't under some general obligation to bail about investment banks. It does have a responsibility to set clear and predictable rules by which it will act. When it doesn't, there will be considerable confusion, and players will lose confidence in the overall system.

We know there is a lot of bad paper out there and that it's straining the system. It isn't clear to me, though, whether the most recent crisis reflects concern about those assets, or uncertainty about what Treasury will do in the next emergency. Nor do we know whether the markets could have sustained the Lehman fail if it had better understood Treasury's intentions and had more time to prepare.

These are important questions. The bailout bill places enormous confidence in Treasury's management of its large powers.