Articles Archive for September 2009

The year after Lehman Brothers

14 September 2009 Sören Zschoche 27 Comments Economy

Luigi Zingales Source: think, it was the most influential and most wide-raging decision the treasury department ever made. Till now scientists can´t agree if the decision of letting Lehman fall was right or not. The scientist Luigi Zingales for examples considers that the fall of Lehman was right, because barley regulated credit institutions have to face the risk of a bankruptcy permanently. Also Mr. Zingales accents that Lehman was a symptom of the crisis and not the cause.

That´s right and of course it´s not acceptable to endow incompetence, but in my opinion letting Lehman fall was the biggest failure the treasury department ever made. It seems like some of these people need to go back for further education to get an accounting degree. I hold this opinion because of several reasons. The rescue of Lehman would have cost the taxpayer 20 to perhaps 40 billion USD. Till the end of 2009 the financial crisis the fall of Lehman triggered and caused the destruction of 10,5 trillion USD. Of course, also without the fall of Lehman this destruction of assets would have been high because Lehman wouldn´t have been the only institution the treasury department had to rescue and that also wouldn´t had stopped the economic downturn. But the whole process of the economic downturn would have been clearly more controlled and the government had won what would have been most of value: time. But instead of that the government had to wave through a 700 USD bailout plan immediately in order to save system from a total collapse.

Lehman Brothers source: point is that the fall of Lehman caused a shock which lead into a collateral situation in which the whole bank lending froze. This situation was extremely dangerous and threatened the international financial system in a massive way. Banks didn´t trust each other anymore and didn´t lend money to anyone anymore because they were afraid that they wouldn´t get their money back again. The danger that the credit flow dried up grew which also had lead into a total collapse of the financial system. So the FED had no choice but to lower the base rate historic value of 0 %. But even this was not enough to stabilize the financial system. Again the FED widened the central bank credit to a incredible extent and pumped 100 of billions of dollars into the financial system.

So in my opinion the way the treasury department saved the financial system was O.K. but it also would have worked in a much much cheaper way for the taxpayers around the globe. But I also think that Henry Paulson knew this but he had no choice. In times of elections it´s not good to endow the incompetence of greedy bankers, also you can´t bring though a billion dollar bailout plan if the financial system doesn´t stand on the total brink. At least we also have to mention that the consultants of Paulson came from the Goldman Sachs faction and in my opinion they were happy with the decision of letting Lehman fall. Also Paulson came from this faction and he and Richard Fuld the former CEO of Lehman weren´t the best friends so this could also have lead to this tragical decision.

Well, to sum up the facts in the end the incompetence of the banking sector had been endowed yet again and in my opinion the world has learned nothing. Stock quotes of AIG, Fannie MAE, Freddie MAC are starting to rise again, when I wrote “Facing a world economic crisis” one year ago I thought the government had decided to choose the quick and painful way to solve the huge macroeconomic imbalances . However instead of choosing this way it seems that the governments decided to solve the macroeconomic imbalances not a bit.

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