They did allow Lehman go bankrupt right.
Bankruptcies risk starting a run on banks, first from investors,
That is not a problem. The investors only hold securities in the secondary markets. The stock can go all the way to zero without impairing the function of the company proper.
then from the general public,
Their deposits were and are guaranteed.
The problem with that was that they failed to separate the important stuff from the shitpile. The important stuff (the overnight commercial paper, mainly) should have been preserved at the cost of wiping out every other creditor, if necessary. That's the whole point of doing a Good Bank/Bad Bank exercise: You get to decide which creditors are wiped out, so you can concentrate the losses in places where losses don't matter.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Deposits were are and will never be guaranteed - see my post above.
Sometimes you can't just do the separation. Not even the people in question cant. Welcome to the Derivatives world. Free at last! Free at last! Thank God Almighty, we are free at last! (Martin Luther King)
Sometimes, the decision as to whether a particular instrument is one or the other will be a judgement call. But that does not mean that you cannot separate the two, any more than the existence of shades of grey mean that you cannot tell white from black.
It is indeed a matter of confidence. And the only people whose confidence matter are the ones operating the clearing system. That's why you want to protect the short-term secured commercial paper market.
But fuck the Dow, and fuck Wall Street. They are not system-critical.
Wall Street does not produce steel, it does not produce ball bearings, it does not build ships, it does not grow food, it does not manufacture chemicals, it does not mine copper, it does not smelt lead, and so on and so forth and etcetera.
Ergo, Wall Street is not the system that needs to be saved.
Now, Wall Street may hold hostage some part of the strategic infrastructure that we need in order to save the system. The solution to that problem is to shoot Wall Street in the back of the head, take the strategic infrastructure from its cold, dead hands and then dump it in a shallow grave.
And btw it's not a case of either Public = State or Private = Corporation. It's quite possible to bring both within a partnership framework. Glasgow now has four genuinely municipal partnerships with private sector partners. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
