Lehman Brothers and the Great Financial Crisis: Ten Years Later

I still don't understand fully "high finance," and so I am not sure about "credit swaps," interest rate swaps, etc., and how they influenced the Real Estate and Finance driven "recession" in the US and Europe.

The New York Times has a very detailed special section, "Crisis and Consequences," and after reading it which I haven't done yet, maybe I'll understand high finance a bit better.

Back in 2008, not unlike John Gapper of the Financial Times ("My naive part in Lehman's downfall"), I too thought it was the right response for the US Government to not bail out Lehman Brothers as it went into bankruptcy. Government officials were hesitant because of all the criticism of their bailout of Bear Stearns a few months before. From the article:

A few hours before Mr Paulson spoke, the Financial Times published a rather jaunty column by me, advising the Treasury secretary to take the weekend off to pursue his hobby of birdwatching. The government should resist the pressure to save Lehman Brothers, as it had Bear Stearns and Fannie Mae and Freddie Mac, the mortgage institutions, I wrote. It had “talked tough about moral hazard . . . but been a soft touch.”

Within days, Mr Paulson took my advice (and that of others) and allowed Lehman to collapse, triggering the worst postwar financial crisis and unleashing economic and social damage that still endures. It is rarely that an article backfires so rapidly and spectacularly, and I have had a decade to reflect on my part in Lehman’s downfall.

Yes, it sucks that excepting a few companies, leaders, and stockholders there wasn't much consequence for the "moral hazards" that financialization of so much of the economy got us into.

A protester in Chicago.  Photo: Keystone.

But I failed to consider  the ramifications of letting such a big actor fail and the mulit-year e negative impact this would have on real estate development -- both office and multifamily residential -- in urban cores.

The market was devastated and took years to recover, although some cities like Washington, Seattle, San Francisco, and "West Los Angeles" managed to recover sooner, although certain types of construction like condominiums, took much longer to recover.

But as we all know, the consequences of the GFC are far greater than the construction meltdown in US cities.

The government response, focused on maintaining financial institutions but not in helping the people, mortgages, and businesses that were "collateral damage," led in the US the rise of the "Tea Party" and rightward "populism" in Europe, including the Brexit vote in the UK.

In the US, the Tea Party furthered the anti-government strains within the Republican Party.  Whereas the Occupy Wall Street movement likely has had some impact on the current move for a more progressive Democratic Party.

I say I am not that good at economics (I do understand microeconomics pretty well in practice), in particular macroeconomics, but I definitely understand the concept of Keynesian economics, and why governments are supposed to be "countercyclical" in fiscal responses to crisis.

To stoke demand in times of recession, they should spend.

Note that what happened in 2008 is also a classic example of what Marxists call a "capitalist crisis," and it was a joke that Tea Partiers complained that the government was taking over the economy, that President Obama was a socialist, etc., as this was a classic example of the government stepping in to bail out capitalism."

-- "The Global Crises of Capitalism: Whose Crises, Who Profits?," Global Research

Also a good example of "neoliberal overreach."

-- "Neoliberalism: The Idea that Changed the World," Guardian

Unfortunately, in Europe definitely and in the US somewhat -- although there was a fiscal response in terms of the ARRA, the American Recovery and Reconstruction Act -- it wasn't enough because of Republican opposition, the response was government fiscal austerity, which New York Times columnist economist Paul Krugman has written about ad nauseam ("A General Theory Of Austerity?"), which extended the recession by many years.

Sadly, that was the time to build big infrastructure projects, when money was cheap and demand was low keeping prices down, but as the Republican response against "high speed rail" showed, the bias against government involvement and investment of almost any kind meant we failed to do any of that.

That's another economic lesson I learned, because I was aware, growing up in Michigan, how much of the state's infrastructure, be it dormitories at colleges or sidewalks, was constructed as part of New Deal projects, and this investment had great impact in later years and continues to do so.

Of course, in the US we've learned that Republican opposition to fiscal spending because of a concern about debt is total b.s. given what's happened to the US government budget after a massive tax cut for corporations and the wealthy ("Republican tax cuts to fuel historic U.S. deficits: CBO," Reuters).

Republicans are fine with debt if it funds tax cuts but otherwise they don't want to support government spending for much other than the military. And even though they produced the "debt crisis" by cutting taxes, they become a-historical and use the debt as the reason for further cuts to social spending.

In the UK, austerity led to the Brexit vote. The Conservative Party shifted "responsibility" for their recession from their choices on austerity, blaming the EU.

In Europe, austerity drives much of the hard right response in many countries, although this is abetted by immigration from Africa, which has been abetted both by the consequences since the US-initiated war in Iraq which destabilized the Mideast as well as drought further south.

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While yes, it's true that for the most part, no one went to jail and that's probably not good there are a bunch of lessons.

The big problem is that the government response was focused on institutions, not people ruined by the failure of institutions.

The second was the failure to apply Keynesian approaches for substantive fiscal stimulus.

The third is the failure in the adoption of neoliberal approaches to government -- government always bad, market always good, globalization of the economy -- was the failure to build a substantive safety net for people buffeted by the changes, from robust health care access to housing assistance. 

Although this problem has existed since the time of the Reagan Administration.  But as economic shocks become more severe, the need for and the consequences of not having such a safety net become more pronounced.