FacebookTwitterRedditEmail

The Collapse of Lehman Bros.: a Reassessment

Robert Samuelson takes on the collapse of Lehman a decade ago and assesses the argument of Larry Ball that the Fed could have bailed out Lehman. He ends up siding with Bernanke–Paulson and says the Fed would have taken big losses if it bailed out Lehman. He also says we would have seen the financial crisis anyhow.

There are three points worth making here. First, the claim that the Fed lacked the legal authority to bail out Lehman is absurd on its face. The Fed was doing lots of things at that point on questionable legal authority. It was operating in uncharted grounds.

But, whether or not a bailout out of Lehman would have been fully lawful, the more practical question is: Who would have stopped them? Who would have filed a suit to prevent the Fed from bailing out Lehman? Is it plausible that a court would grant standing and then tell the Fed that it had to let Lehman go bankrupt? That one is absurd on its face. Letting Lehman go bankrupt was a choice.

The second point is that the Fed need not have taken losses on a bailout. Regardless of the value of Lehman’s assets at the time, there is a simple logic that the bailouts should have taught everyone. If you make massive loans to banks at below-market rates for a long enough period of time, and also give them a Timothy Geithner “no more Lehmans” guarantee, so that others will also make loans, any bank will eventually return to solvency.

This was the story of Citigroup, AIG, and Bank of America, all of whom were effectively bankrupt in the fall of 2008. In each case, the Fed set up special lending facilities to bring them back to life. Do the arithmetic. If banks get $500 billion in loans at 4–5 percentage points below the market rate (that’s being generous, since the market rate for an effectively bankrupt bank in the middle of a financial crisis is going to be very high), then they can make $20 to $25 billion a year in profit lending at the market rate. Given two or three years, you can patch up a pretty big hole.

Certainly, the Fed could have done this with Lehman, say a Maiden Lane 4. Then Lehman would repay the loan, including the below market rate interest, and Timothy Geithner would have another success story where he could boast about how we actually made money on the bailout. And, the vast majority of the media would agree with him.

The third point is that we would have had the economic crisis anyhow, even if Lehman had been bailed out. Nationwide house prices were falling at a rate of close to 2.0 percent a month, even before Lehman. The bubble was deflating and there was nothing to stop it. This meant that the bubble-driven construction boom was going to end, costing more than 2.0 percentage points ($400 billion a year in today’s economy) in lost demand.

We also were losing the consumption boom driven by the housing wealth effect. This would cost us another 2 percentage points of GDP or so in lost demand. A loss of 4 percentage points of GDP in annual demand ($800 billion) is going to lead to a bad recession even if the financial system is operating perfectly.

This column originally appeared on Dean Baker’s Beat the Press blog.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

August 05, 2020
Roy Eidelson
Black Lives Matter: Resisting the Propaganda of Status Quo Defenders
Melvin Goodman
The Department of Homeland Security: the Ideal Authoritarian Tool
Paul Street
Misleaders at a Funeral: Bill Clinton and Barack Obama Eulogizing Racial Justice in the Name of John Lewis
Seiji Yamada
Hiroshima, Technique, and Bioweapons
Vijay Prashad
How Trump Managed to Lead the World with the Worst Response to the COVID Pandemic
Richard C. Gross
Trump’s Alternative
Jonas Ecke
The Worst Hunger Season Yet to Come: Global Moral Failure in the Time of Covid-19
Rafiq Kathwari
The Battle for Kashmir
Kenneth Surin
Malaysia’s Arch-Kleptocrat is Found Guilty
Medea Benjamin - Nicolas J. S. Davies
U.S. Cold War China Policy Will Isolate the U.S, Not China
Lee Camp
Why Housing Is a Human Right
Sam Pizzigati
For Egalitarians, a Sudden Sense of Possibility
Jonathan Cook
Can Israelis Broaden Their Protests Beyond Netanyahu?
Thomas Knapp
Ten Years After Lieberman’s “Internet Kill Switch,” the War on Freedom Rages On
Binoy Kampmark
Staying on Message: Australia, the US and the AUSMIN Talks
Elliot Sperber
The View From Saturn 
August 04, 2020
John Pilger
Another Hiroshima is Coming…Unless We Stop It Now
Dave Lindorff
Unsung Heroes of Los Alamos: Rethinking Manhattan Project Spies and the Cold War
Kenneth Good
Escalating State Repression and Covid-19: Their Impact on the Poor in Kenya
Dean Baker
We Need an Economic Survival Package Not Another Stimulus
David Rosen
Globalization and the End of the American Dream
John Feffer
The Pandemic Reveals a Europe More United Than the United States
Patrick Cockburn
The Government’s Failed Track-and-Trace System is a Disaster for England
Ramzy Baroud
‘Optimism of the Will’: Palestinian Freedom is Possible Now
CounterPunch News Service
Statement From Yale Faculty on Hydroxychloroquine and Its Use in COVID-19
Manuel García, Jr.
Ocean Heat: From the Tropics to the Poles
Sonali Kolhatkar
Why the Idea of Jobless Benefits Scares the Conservative Mind
Greta Anderson
Framing Wolves in New Mexico?
Binoy Kampmark
Pulling Out of Germany: Trump Adjusts the Military Furniture
Shawn Fremstad – Nicole Rodgers
COVID Stimulus Checks Shouldn’t Penalize One-Parent Households
Adam Shah
The 1 Percent’s Attack on Unemployment Benefits is a Sign of Our Broken Democracy
Evaggelos Vallianatos
On the Beauty of Life
B. R. Gowani
Mohammed Rafi: Singer and Human Par Excellence
David Krieger
Eight A-Bomb Haiku
August 03, 2020
Linda Pentz Gunter
The Resistible Rise of Nuclear Gangsters…and Their Downfall
John G. Russell
The Sleep of Reason Produces Monsters
Cal Winslow
Their Heroes and Ours: California’s Health Care Crisis
David Barber
Renouncing White Privilege: A Left Critique of Robin DiAngelo’s “White Fragility”
Linda G. Ford
Free Joy Powell! America’s Political Prisoner for Fighting Police Brutality
Prabir Purkayastha
Trump’s Withdrawal From WHO: a Cover-Up for His Abject Failure on COVID-19
Dean Baker
The Plunge in Consumption of Services Leads to a Record 32.9 Percent Drop in GDP
Ramzy Baroud
Human Rights Defenders: Palestinian Eyewitness Testimony of the Execution of Abdul Fattah al-Sharif by Israeli Soldier, Elor Azaria
Karen J. Greenberg
Accountability is Gone in America
Cesar Chelala
A Wrong Message for the Pandemic
Jonah Raskin
Chesa Boudin: Reformer in the San Francisco DA’s Office
FacebookTwitterRedditEmail