Column : Year after Lehman, recovery

Font Size

Print

Feedback

Email

Discuss

: The one thought I have on the first anniversary of the Lehman Brothers collapse is whether 9/15 was more harmful than 9/11. The latter episode has changed the way we travel, the way we view the world, especially the Muslim world, and it has heightened all sorts of authoritarian tendencies in the erstwhile liberal societies. In this sense, Osama bin Laden was a change maker. Yet there has been no repeat of 9/11 on American soil, though around the world, Bali, Bombay, Madrid, London we have had terrorist attacks. We do not need to dispute any longer whether the world is globalised.

When Lehman Brothers collapsed , we were not unprepared as we were before 9/11. After all the recession in output growth and employment had started in the second quarter of 2007 in the US. Commodity price inflation had led to a tightening of interest rates and the slowdown in house price inflation had begun. The UK had already faced the Northern Rock collapse in September 2007.

By March 2008 we had the Bear Stearns takeover and AIG followed soon. Famous names were being gobbled up by other famous names—Merrill Lynch, for example. There was fear in the air and to echo the words of Chuck Prince the embattled head of Citibank, the music had stopped.

Still the collapse of Lehman Brothers triggered a panic which was as unprecedented as it was unexpected. Here was a brokerage firm and as such it was like a signalling system at the centre of a vast and complicated set of transactions. When it went, the machine juddered to a standstill. Credit dried up. There was a meltdown. The banks could fail and other banks could buy them. But the failure of a middleman firm wreaked havoc.

It was at this point that the conflation of an output recession and a financial system failure led to great anxiety. Comparisons were made with the Great Depression. Economists were denounced (often by fellow economists) as myopic, overpaid arrogant peddlers of implausibly unrealistic theories. Mathematics, the assumption of rationality, the evil genius of Chicago economists and many other villains were cited. Some were even more hopeful that here was the collapse of Capitalism itself.

The sight of George W Bush’s Treasury Secretary asking for $800 billion to buyout banks raised the joyous spectre of bank nationalisation. Could socialism be far behind ?