It was a brave decision. By abandoning Lehman Brothers, a 158-year-old piece of Wall Street furniture, and refusing to remove their hands from their pockets when Merrill Lynch came calling, Hank Paulson, US Treasury secretary, and Tim Geithner, governor of the Federal Reserve Bank of New York, had one of the busiest weekends of dispassion on record. There will be much fallout in financial markets over the next few weeks and even more uncertainty.

Two questions come immediately to mind. First, why give guarantees to JPMorgan Chase to help it to buy Bear Stearns in March 2008 but decline to do so six months later for Lehman, a larger institution? Second, will Lehman's bankruptcy make financial conditions better or worse? There is rhyme to the reasoning behind saying No to Lehman and, while things will get worse over the short term, the alternative might have been the same pain, drawn out for longer.

There were reasons for saying No to Lehman that were not there for Bear Stearns. First, there is the distinction between solvency and liquidity. The liquidity arrangements the US Federal Reserve put in place after the Bear Stearns collapse means that institutions that fail now are more likely to have a solvency problem than a temporary liquidity one. The policy mistake that contributed to a decade of missing growth in Japan in the 1990s was allowing insolvent institutions to limp along while praying for a revival in market prices that never came.