Wednesday, September 15, 2010

Yeah, it was Lehman all along!

One of the prevailing myths that seems to keep going like the Energizer Bunny is that the financial meltdown occurred because the Bush administration let Lehman Brothers fail. Yes, this was a major event, the biggest bankruptcy in U.S. History, yet the economy did not go down because Lehman failed, no matter what Paul Krugman might say. And he says:
I’m puzzled: shouldn’t the papers this morning be full of retrospectives about The Event That Ended The Economy As We Knew It? (Not to mention the event that guaranteed an Obama election win.)

Or have the financial media decided to go along with the prevailing public view that none of this happened until after Obama was inaugurated?
While this is a short post on Krugman's part, nonetheless it is full of the usual fallacies he likes to promote. First, and most important, the economy did not go down because Lehman failed; Lehman failed because it had been a major player in promoting an unsustainable boom, and during the boom, it profited well, and when that toga party came to an end, so did Lehman's profitability.

Second, a rescue of Lehman by stuffing its assets full of funny money from the Federal Reserve System would not have changed the fundamental picture a whit. Wall Street was in trouble because its balance sheets were unbalanced, not because the Fed had failed to create enough new dollars. Lehman had bet the house on the housing market and lost.

Furthermore, had the Fed and the Bush administration let the banks and financial houses that were unsound go under, yes, the original economic downturn would have been steeper than it was. However, there were healthy financial houses and there were a lot of healthy assets in the economy, and they would be leading us in a recovery right now.

Instead, the government, first under Bush and then under Obama, decided to paper over the holes in the asset framework with Monopoly Money as though there had not been a massive amount of malinvestment occurring. As we have seen, we now have no recovery and the future is grim.

So, Happy Lehman Day to all of us. It would have been happy had Henry Paulson not demanded that taxpayers and the Fed bail out his good friends.


Jeff Harding said...

Keep doing this stuff! Great comment. Eventually this fraud will be recognized as the political hack that he is.

wes said...

Could not agree more, particularly with the last sentence.

mike m said...

Save Lehman? Dick Fuld and all the upper management along with Paulson should be in jail. What does Obama do? He makes one of the major players, Timmaaaaaay, Sec of the Treasury. Talk about rewarding bad behavior. Maybe I need to take up a life of crime. Maybe if I rob enough little old ladies on the street, someone will make me Chief of Police.

I don't know if you've seen this video, but here it is. Bill Black starting at 1:31:00 1:56:00 he explains that it was not liquidity that was Lehman's problem, rather insolvency. Insolvency that was being hidden by, at best case faulty accounting standards, at worst case, fraudulent accounting standards.

Of course all of the banks that were insolvent should have been allowed to fail, and their assets, good and bad, sold at fire sale prices. There are 8100 banks in this country, many of whom did not make bad decisions, and I'm sure, more than a few, would have been interested in those assets at 20 cents on the dollar.

That would have also given the banks opportunity pass along those sale prices, and write down part of the principle on the individual mortgages. (not that would have been fair, but it would be better than what we have now).

So, many of the assets are still hidden on and off balance sheet, and marked-to-myth, until, of course, they mature, or are sold. This is, by no means, over. Can the Fed buy them up? Can they FHA rewrite the individual loans with Treasury backing? Can banks like JPM borrow enough from the Fed at ZIRP and buy long term Treasuries at 3-4% to cover all of the losses? Can they do it all without hyperinflation? What odds are they giving in Vegas? That's your best bet. At least you know the odds up front. They may be stacked against you, but at least you know what they are, and the House will pay if you win.