When Lehman Bros. collapsed in bankruptcy a year ago, many bailout-weary observers (including this page) welcomed the unhappy ending for one of Wall Street's most powerful firms. It was a good reminder for the financial industry that the government wouldn't mop up after every messy mistake -- especially in light of Washington's frantic efforts to help Bear Stearns, Merrill Lynch, Fannie Mae and Freddie Mac. As it turned out, however, the reaction to Lehman's default was well-nigh apocalyptic.
The global financial industry went into seizure, with credit evaporating, stock markets plummeting and depositors fleeing even low-risk money-market funds. Washington responded with a series of even larger governmental interventions in the economy, including the $700-billion Troubled Asset Relief Program. It's hard to measure how much those actions helped, just as it's hard to deny that things would have been considerably worse had Congress, the Treasury Department and the Federal Reserve not gone to extraordinary lengths to restore the credit markets. One thing is certain, though: By acting as Wall Street's backstop, the federal government has dangerously blurred the lines between the public and private sectors. It has to make them clear again.