Unusual for an academic economist, Karl Smith understands Lehman

Karl Smith:

Perhaps, unusual for an academic economist, I watched the crisis unfold in real time.

He watched the Lehman crash and he understands the crisis:

Certainly, at the time it seemed that fragility was the issue. However, I would go further and say it wasn’t just that the government didn’t bail Lehman out, it was that Lehman experienced what looked like a run. Moreover, it seemed at the time that the run was spreading. The money markets were reportedly in turmoil.There was a rumor that Wachovia was offering 30% APR to roll over 7 day paper and could not find a buyer. From my perspective it seemed as if a liquidity crisis might be enveloping all of the major financial institutions in the United States. So much so, that warned my colleagues and contacts that we were “walking a fine line.” And, it was not inconceivable that the entire global transactions infrastructure was going to come undone. <...>

Instead, I at least, felt a general sense that actually bankruptcy and short term creditor losses just “weren’t going to be allowed to happen.” I am not sure exactly what I would have been expecting. Whether that meant a last minute buyer pressured by the Fed, or action by the Treasury or even something as fanciful as a private consortium of banks swooping in, in an effort to stave off systemic collapse, I can’t say. The fact that nothing happened, however, was a shock.

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