Thursday, September 17, 2009

Lehman's Purpose in Dying

I have been saying for quite awhile that if it wasn't Lehman it would have been someone else. Lehman was not the cause of the financial meltdown, rather it was a symptom of the cause. The New York Times has an article on this very topic and takes it even a bit further.

Ever since that weekend, Mr. Nocera writes, most people, including the columnist himself, have viewed the decision by Henry Paulson Jr., the Treasury secretary at the time, and Ben Bernanke, the Federal Reserve chairman, to allow Lehman to go bust as the single biggest mistake of the crisis. Never mind that the two men have insisted ever since that they had no other option; surely, they could have created some options if they’d wanted to. Or so goes the conventional wisdom.


As we approach this anniversary, though, Mr. Nocera says he has begun to question that conventional wisdom. Yes, the fall of Lehman Brothers set off a contagion of panic. And he’s still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But he’s become convinced that, if Lehman had been saved, the collapse would have occurred anyway.

John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.

I love that line because there is so much truth embedded in it. It follows nature and the rules that govern our universe. Forest fires are good, death is good for what is left behind. Americans used to believe in this concept. Capitalism was allowed. It stopped a decade or so ago. If Chrysler would have been allowed to fail under Jimmy Carter, think about how that would have strengthened the U.S. car industry. You could even say if Chrysler would have died it would have saved Detroit. Death in capitalism is a good thing long term. Unfortunately, in my eyes there has been far to little death in the last 12 months in the U.S. even if more death would have meant alot more pain in the U.S. over the last twelve months.


Mr. Nocera says that almost everyone he’s ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman.

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