I would say: "policy was fantastic between Lehman and the...

I would say: "policy was fantastic between Lehman and the trough, grossly subpar after the trough, and ���if you believe the Fed���criminally negligent before Lehman": Niccola Gennaioli and Andrei Shleifer: A Crisis of Beliefs: Investor Psychology and Financial Fragility: "Instability from Beliefs...

...1. Excess optimism, excess lending and investment. 2. Correction of expectations (due to bad news or waning of optimism)/ 3. Recession (impaired intermediation or excess pessimism). Crises are due to non-rational beliefs, which may be amplified by traditional mechanisms. See Minsky (1977), Kindleberger (1978)....

Why was Lehman so pivotal? ��� Tail risks neglected by both investors and policymakers. ��� Liquidity interventions, but no aggressive attempts to get banks to raise capital. ��� Markets learn the system was more interconnected���through derivative contracts and fire sales���than believed. ��� Lehman was a huge dislocation because markets and
regulators learned they were wrong. Alternative Theory I: Moral Hazard ��� Banks are too big to fail and knowingly took risks of housing exposure. Alternative Theory II: Bank Runs ��� Lehman crisis was the result of a Diamond-Dybvig bank run. In a 2015 speech at the National Bureau of Economic Research,
Bernanke stated that ���the Diamond-Dybvig model describes what
happened in the financial crisis extremely well.���...

Hard to see Lehman as a non-fundamental sunspot. ��� Need more sophisticated theories like Goldstein-Pauzner. ��� But then the question of policy passivity comes back. ��� The fragility of the financial sector cannot be surprising in the summer of 2008. ��� Errors in expectations are critical.

Extrapolative expectations central to the housing bubble. ��� Continued neglect of downside risks central to understanding 2007-2008. ��� Policy was fantastic after Lehman, behind the curve before Lehman. ��� Hard to tell the story of the crisis without beliefs.

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