Exactly a year ago, Lehman Brothers filed for bankruptcy.
I shall avoid the temptation of pontificating on the subject as many, many others, far better qualified, will be doing so!
But two published articles seem to me to be worth visiting, one from October of 2008 from The Economist, and one from The New York Times.
Lastly, a personal comment from friend Dan that shows powerfully how the last year has affected him.
The Economist article suggests that the timing of the decision to let Lehman burn was wrong:
The price of failure
Oct 2nd 2008 | NEW YORKCONFRONTED by blaze after blaze in recent weeks, America’s financial firemen have rushed to douse the flames—with one exception. Unable to persuade any rival to take on a battered Lehman Brothers, the government was left with a hard choice: spray the investment bank with public money or let it burn. In choosing destruction, the government has provided a painful lesson in the dangers of doing the right thing at the wrong time.
In a sense, Lehman’s misfortune was not to have hit trouble earlier. After broking the sale of Bear Stearns, another Wall Street firm, and nationalising the country’s mortgage agencies, officials felt an example needed to be made so as to combat “moral hazard”, or the risk that banks will act recklessly if they know they will be bailed out when their bets sour. Hank Paulson, the treasury secretary, believed Lehman’s problems were sufficiently well advertised to have given derivatives markets time to prepare for the worst.
Paul Krugman, writing in the New York Times on September 2nd, 2009, takes a much deeper perspective.
How Did Economists Get It So Wrong?
By PAUL KRUGMAN
Published: September 2, 2009
… Last year, everything came apart.
Few economists saw our current crisis coming, but this predictive failure was the least of the field’s problems. More important was the profession’s blindness to the very possibility of catastrophic failures in
a market economy. During the golden years, financial economists came to believe that markets were inherently stable — indeed, that stocks and other assets were always priced just right.
There was nothing in the prevailing models suggesting the possibility of the kind of collapse that happened last year. Meanwhile, macroeconomists were divided in their views. But the main division was between those who insisted that free-market economies never go astray and those who believed that economies may stray now and then but that any major deviations from the path of prosperity could and would be corrected by the all-powerful Fed. Neither side was prepared to cope with an economy that went off the rails despite the Fed’s best efforts.
Do follow the link to the complete article. Its a long one but a rich one.
I forwarded the article to Dan, a close buddy of nearly 30 years. This is how he replied:
Wow! This blew me away! I must read and re-read it over some time to digest it…..For me, at least at first blush, it’s the irrationality factor that Krugman brings to life in “behavioral economics” that is really a watershed position or theory. He’s right on.
Sections 5 and 8 were extremely interesting. Schiller, Roubini and probably Krugman recognized that “euphoric behaviors” played a key role in the economic meltdown. It’s what you and I are talking about every week – the emotional, capricious nature of man and the “power-of-the-pack” mentality. The consequential results of decisions made by powerful men at critical, emotional moments (e.g., Lehman CEO and Bush’s ex Sec. of Treasury, Paulson vis a vis decision to let Lehman go to bankruptcy) cannot be understated.
The one big thing missing or at least I may have missed it, is the corruption of government oversight in all this mess. I say this because of my assertion (and some other, much smarter people) that government mismanagement of Fannie Mae and Freddie Mac, in permitting sub-prime loans matched with the spectacular and almost never mentioned deletion of the “Glass-Steagall Act”, are what finally pushed the pig off the wall.
I still think that if the powerful investment bank community was not successful in getting Clinton to repeal that bit of legislation, the incredible, exotic financial products that were ultimately put into international play, would never have existed in their complex, ultimately non-viable form. It was really the last 8-9 years where the “euphoria acceleration” of the crisis occurred and subsequently crashed.
At the end of the day, it was the millions of investors like you and me all around the world, who worked hard all our lives believing that the checks and balances of reliable government oversight and an honest capitalistic system would protect us. Of course, we found out too late that some thousands of global, corrupt banker/capitalists and another lorry-load of corrupt and/or incompetent government functionaries teamed together in an unlikely and unpredictable scenario to sink all our ships – literally overnight. I don’t think I’ll really ever be the same investor that I was prior to this event, even without considering my age and natural proclivity towards more conservative financial solutions. And, I’m angry at the failure of our system and our politicians, all politicians – forever and ever and ever…..
Crazy world, dude!
Exactly so!
Wonder where we will be in another year’s time?
By Paul Handover
Learning from Dogs 