By James Surowiecki

By this point, its become conventional wisdom that the failure of Lehman Brothers last September was the catalyst for a massive selloff in the credit and stock markets and a general flight to safety from which the markets have yet to recover. Had the government found a way to save Lehman, the assumption has been, things today would still be pretty terrible, but we probably would not have seen the economy fall off a cliff, as Warren Buffett said this weekend.

Now, as soon as Lehman failed, market participantsthat is, the people who were actually making the decisions that matteredwere near-unanimous in their assertions that it would have disastrous effects. So in effect, Taylor is saying that even though the people who were setting prices for things like LIBOR and the like believed that Lehmans failure really mattered, they were in fact wrong. The problem is that the graph that Taylor relies on as his only piece of evidence (its on p. 16 of his paper) doesnt demonstrate what he thinks it does. In fact, LIBOR rose sharply in the days just before Lehman failedevidence that even the prospect of Lehman going under had people worried. It then dropped a little when AIG was rescued, but then went straight up again, so that in the seven days leading up to and just after Lehmans failure, LIBOR nearly doubled. Thats hardly a sign of the market shrugging off the incident.

More important, Taylors assumption in his paper is that investors would have known right away how severe the repercussions of Lehmans bankruptcy would be. But this is simply untruefor whatever reasons (some suggest fraud, others panic), the hole in Lehmans balance sheet was much bigger than people initially thought it would be, which meant that the losses its lenders suffered were much bigger than anticipated. (One study suggests that the chaotic nature of Lehmans bankruptcy alone cost creditors tens of billions of dollars.) As the magnitude of the losses became clearer, so too did banks risk aversion, since Lehmans failure seemed to demonstrate starkly the risks of lending to any other big financial institution.

In any case, no one is arguing that Lehmans failure alone was responsible for investors flight from riskCongresss failure to pass the first version of the Treasurys bailout plan certainly made things much worse. But it was the first, and crucial, moment in last falls market panic, a panic that crushed stock and bond prices and set off a negative cascade that spread to the real economy and which we are still suffering the consequences of. In this case, then, conventional wisdom seems to be right. And in thinking about what Lehmans failure tells us about how we should deal with tottering financial institutions today, I think Paul Krugman put it well a couple of weeks ago: The collapse of Lehman Brothers almost destroyed the world financial system, and we cant risk letting much bigger institutions like Citigroup or Bank of America implode.

This may seem like an academic debate. But its not, because those who want to convince us that Lehmans failure was not a big deal are doing so in order to shape future policy. In other words, they are arguing that when it comes to institutions like, say, Citigroup, the government can, in fact, let them implodewhich means, in practical terms, allow their creditors to be wiped outwithout any disastrous effects. Maybe theyre right, but its an awfully big gamble to take on the basis of a single dubiously interpreted graph.

James Surowiecki is the author of “The Wisdom of Crowds” and writes about economics, business, and finance for the magazine.