From TPM Reader BW, disagreeing with a point I made yesterday …

“There seems to be a pretty clear consensus at this point that letting Lehmann fail in the way it did, for instance, was a category error.”

One might also question the conventional wisdom that says that letting Lehman go into bankruptcy was such a key factor.

It is true that market seems to have received a signal at the time of Lehman’s bankruptcy. But, given the actual and proximate consequences of Lehman’s bankruptcy, which were very mild, one probably ought to consider the possibility that AIG’s insolvency might have had something to do with what happened.

The problem that has frozen market trust is the uncertainty surrounding credit default swaps, and the huge cash and collateral demands that they can entail — demands on vivid display in the case of AIG, which was ruined, seemingly overnight.

AIG was rescued, but it doesn’t matter. What frightened the horses was just how much cash AIG has needed.

Lehman’s bankruptcy caused barely a ripple. The functioning parts of the Lehman investment bank were almost instantly absorbed at Barclays, with no operational disruption of the broker-dealer function, which is where one might fear an investment bank failure would impact the market. Geithner and Paulson may have been right. Lehman’s failure was so long anticipated that the market was well-prepared. No one was prepared for AIG.

I have little idea how the writers of narrative journalism, like the NY Times’ Andrew Ross Sorkin decide between Lehman and AIG, when both events occurred simultaneously, but I suspect they ask industry insiders. And, industry insiders have a strong interest in blaming the failure-to-bailout, since such blame is useful politically, in motivating future bailouts. But, as a matter of objective economics, it doesn’t make all that much sense. And, as a basis for criticizing Geithner’s competence? Please.

And quite a few disagreements with BW …

From TPM Reder JS …

I wouldn’t put BW on your short list for the financial reporter/blogger position. someone who writes “Lehman’s bankruptcy caused barely a ripple” has no idea what is going on in the financial system.

Allowing Lehman to file for bankruptcy had two immediate consequences. It caused a big default in the commercial paper market and required the writers of credit default swap protection for Lehman debt to post collateral. The violent response in short-term funding markets suggests that market participants were -not- anticipating a Lehman bankruptcy. At my firm we certainly were not. What resulted was a “run” on the commercial paper market and a desperate grab for U.S. Treasurys among the hedge funds and banks who wrote Lehman credit default swaps. And, after a few days of metastasization, there you have your short-term funding crisis. AIG had almost nothing to do with it.

It is quite possible that something else would have triggered such a crisis, since the preconditions were there. But the Lehman failure was in fact the trigger. Those who made the decision to let Lehman fail must bear some responsibility for what followed.

And TPM Reader GG …

Lehman’s failure affected the system in three ways which your reader underplays. First, the Reserve Fund’s writedown of its Lehman bonds forced them to break the buck and suspend redemptions, which led to a fairly scary run on money market funds generally. These funds are the bread and butter buyers of commercial paper (short term bonds), so when they started hoarding cash to meet redemptions, the banking system stress was almost immediately transmitted to the real economy. Second, several billion dollars of hedge fund assets were locked up in the UK division of Lehman. Depression era laws prevented that in the U.S. Third, global trade is (still) largely conducted via letter of credit. With the possibility of well-known names disappearing, that system has broken down catastrophically. (Pull up the Dry Goods Shipping Index for confirmation.)

The Hoover wing of the Republican Party is not only alive and well, it’s currently in charge of the GOP:

The [Obama economic stimulus] plans brought a quick retort from House Republican Leader John Boehner of Ohio. He said lawmakers “should start listening to the American people, who do not believe increasing government spending is the best way to put our economy back on track.” He proposed eliminating the capital gains tax, which is currently 15%, as well as other tax cuts.

You’ve probably noticed Mark Halperin’s claim that the level of pro-Obama bias in the election coverage this year was so bad it was “disgusting.” I’ll leave it to others to analyze what “disgusting” means when deployed by someone who takes his journalistic cues from Matt Drudge. But whatever Halperin says, the financial crisis has taken so much of the oxygen from post-mortem discussions of the campaign that a few commentators do seem to be putting together a conventional wisdom that the political press this past year was wildly pro-Obama.

It’s amazing how quickly political amnesia takes effect. Going into this year, there was probably no national politician more liked or more favorably covered in the nation than John McCain. Remember, the DC press corps was McCain’s “base.” For virtually the entire election cycle, national political reporters continued to grade McCain on a curve. There are numerous examples.

Toward the end of the campaign, basically in September, McCain took a series of steps that began to crack his credibility and reputation. He and his campaign told a series of falsehoods that were so outside the bounds even by the normal standards of political lying and took a number of steps that where so erratic and reckless (Palin, campaign suspension, etc.) that the nature of his coverage finally began to change.

McCain did that. Halperin should stop complaining, put some limits on pandering to the curdled resentment of the right.

They’re still counting votes in the Minnesota Senate race, where the Al Franken camp claims it’s now behind by only 84 votes.

An online petition seeking to rally support for a presidential pardon for convicted Rep. Duke Cunningham (R-CA) has 13 signatures — after three years.

For your holiday viewing pleasure, we’re preparing a video reel of the best moments of the 2008 election cycle. We’ll probably do one for the primaries and another for the general election. Now, by “best”, sometimes that will mean the worst, the weirdest, in addition to the truly great moments. But we’re looking for those key moments on video that you simply could not leave if you expected any 2008 election retrospective to be complete.

So, our team is hunting through the TPMtv archives. But we need your help too. What were the key, can’t-do-without moments? Send us your choices at the comments email with the subject heading “Best of 2008.”

It’s that time of year again! In today’s episode of TPMtv we bring you up to speed on the upcoming 2nd Annual Golden Duke Awards …

Full-size video at TPMtv.com.

I think I’ve officially seen a few million online picture books of Obama from over the last several weeks of the campaign. But this one from the Boston Globe’s website has to be the best.

Barack Obama will hold yet another press conference on the economy today, in his effort to calm the markets by providing some kind of national leadership for the lame-duck period. That and other political news in today’s Election Central Morning Roundup.