Contributing to Regime Uncertainty

"But rescuing insolvent firms is the least of it. The real damage comes from the Treasury’s utter lack of any consistent last-resort lending rule. The recently enacted financial institutions bailout bill does little to clarify this."

Exactly. We can no longer accept the system of implicit guarantees. We need to debate and have publicly declared what, if any, the explicit guarantees are by the government for intervention.

The main cause of the current crisis is the system of implicit guarantees that investors were counting on in a crisis, which led to a whole host of otherwise very risky investments. The whole point is to understand what the conditions the investors believed that they were actually investing under, and the Lehman response shows that clearly.