Larry Ball?s The Fed and Lehman Brothers: A Review Essay

Laurence Ball argues that the Federal Reserve (the Fed) could-and should-have bailed out Lehman Brothers so that it did not have to declare bankruptcy. He presents compelling evidence that it could have. I argue that the view that the Fed should not bail out Lehman is reasonable under the circumstances the Fed was in at the time. The Lehman bankruptcy is a case study in bailouts and the attendant moral hazard problem that expectations of bailouts create. The lessons learned imply a clear case for appropriate regulatory intervention to solve the problems created when governments cannot commit themselves to not undertake bailouts. (JEL D72, E32, E58, E63, G01, G24, G33)