He said it is unclear why Lehmans was allowed to fail but it is likely that policymakers thought the problems for the bank were specific and not endemic to the whole system.
He said: “It was a major mistake and it nearly brought the banking system to its knees. It was the first major failing of a counterparty for many years and brought home the concerns surrounding counterparty risk as financial institutions went into self-preservation mode and cut exposure to anything deemed at risk and the liquidity crisis started to appear and forced the Government to step in.”
Betteridge said the most fascinating part of the crisis is how it fed back into the real economy. “We talked ourselves into a recession very quickly by watching the news and hearing how the system was imploding and how our savings were not safe, so we decided to cut back and that led to discretionary items’ expenditure just stopping globally.
Betteridge said this is a modern crisis as instantaneous transmission of information, which had been a strength of the economy, became a weakness. He said: “The lack of confidence was transmitted instantly around the world and the de-stocking of that fall of discretionary expenditure exacerbated the fall in final demand, with exports of goods around Asia to feed the Western consumer stopping as well.”