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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  • Ewiak Ryszard said:

    The global financial crisis is not accidental. The Bible says: “At the appointed time [the king of the north = Russia] will return and come into the south, but it will not be as the former or as the latter. For shall come against him the dwellers of coastlands of Kittim [the West], and he will be humbled, and will return.” (Daniel 11:29,30a) What logical conclusions can be drawn from this forecast? If the Heavens planned a great return of Russia (and much suggests this) the present economic crisis will deepen, making it possible for Russia to regain the influence, which it lost after the break-up of the Soviet Union. In relationship to this, unavoidable will be the split or even a complete break-up of the European Union and NATO. After that, “the king of the north” (Russia) will come somewhere into the south. Many indicate that this might be Georgia. When this happens, the West will come against Russia. At that time, peace will be taken from the earth and the “great sword” – nuclear sword – will be used. (Revelation 6:4) However, it will be neither the great tribulation nor “the end of the world” (Armageddon). As Jesus foretold, that will be “the beginning of birth pains”. (Mathew 24:7,8)

  • Michael said:

    Oh shut up with the stupid Bible. Most outdated piece of shit every.
    And btw, Russia is a mess, you should get some basic economic education before posting bullshit all over the Internet.

  • Senan said:

    Well said Michael. I must admit I’ve never seen the bible quoted in connection with serious financial matters before! One thing though, Russia might be a mess at the moment, particularly considering now bust oil barons etc. but I do think it’s an oft forgotten powerhouse. Sure there’s corruption, harsh environment, and inward thinking, but it shouldn’t be underestimate as a player for the next 20 years.

  • Tranen Capital said:

    It seems however with 20/20 vision of the past, that many banks would not have responded as quickly as they did, if the government did bail them out. We are here now and the only way is foward, the financial landscape has changed, tranen capital is ready for those changes because real value will have to come back to the mean.

  • lrodcrutch said:

    You mention that if Lehman had been bailed out, other companies would have had to be bailed out as well. Of course, that happened anyway, so are you saying that the bailout would have been even greater? Of course, I realize it would have had to increase by the $40 billion to Lehman, but I’m talking about greater figures.

  • Senan said:

    Although not hugely significant yet monetarily, the current Dubai debt situation has the potential to run some more financial organisations into trouble. The reported debt level is manageable as it currently stands, I just wonder is it the tip of the iceberg.

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