Jeremy Warner: The Lehman's collapse: not such a disaster really

Outlook: Better the catharsis of a major bust than an ugly situation left to fester

Allowing Lehman Brothers to go the wall was a disastrous policy error by Hank Paulson and his Treasury team that tipped the world into deep recession, right? This has become conventional wisdom on Wall Street and in the City, and it needs debunking.

There are a number of reasons for believing that Lehman's demise made no difference, or that ultimately we would have ended up in the same place anyway. On the weekend of Lehman's collapse, the entire banking system was under attack. If Lehman's had been rescued, the markets would simply have moved on to someone else, until eventually the US taxpayer had ended up bailing out the entire system.

You could argue that this is what happened anyway, and that by preserving Lehman, wider economic confidence could have been preserved. This I very much doubt. Bailing out banks individually would have been a profoundly more expensive approach to the collective one eventually decided on, while doing nothing to halt the deleveraging process which lies at the heart of the present economic hiatus. It might have taken a bit longer to get to where we are, but we were already by that stage irreversibly set on the road to ruin.

I would go even further to argue that by providing a wake-up call to the authorities to take urgent policy action, the Lehman's collapse might actually have been positively beneficial. Despite the gathering storm, central bankers and governments were in danger of sleepwalking into oblivion. There was still a marked reluctance to acknowledge quite how parlous the situation had become.

The aftermath of the Lehman collapse provided all the evidence needed. Nobody comes out of this crisis looking clever, but though Lehman's was undoubtedly the event that brought matters to a head, better the catharsis of a major bust than that an ugly situation all round is left to fester, as it was in Japan in the early 1990s, until it is too late to do anything about it.