James Pethokoukis

Politics and policy from inside Washington

John Taylor on the Lehman anniversary

Oct 1, 2009 18:15 UTC

From his blog:

Two weekends ago the big news was the one-year anniversary of the Lehman Brothers bankruptcy and the ensuing panic. But when you look at the data, the real one-year anniversary of the panic is closer to now.

In the four weeks from Friday September 12, 2008, just before the Lehman bankruptcy, through Friday October 10, the S&P 500 fell by a huge 28 percent. But the decline was relatively modest (3 percent) in the first two weeks of that period, from September 12 to September 26, a year ago today. It is not unusual to see that size of change in a one or two week period. The real panic (the remaining 25 percent of that 28 percent decline in the S&P 500) occurred later, from September 26 to October 10. If you look at interest rate spreads or stock prices in other countries you see the same timing. Such facts have led me and others to be skeptical about the commonplace claim that it was simply the decision not to intervene and bail out Lehman’s creditors that triggered the panic. Rather I focus on the chaotic rollout of the TARP which began later and continued through October 13 when its ultimate use was finally defined.

More on Free Market Day

Sep 14, 2009 18:22 UTC

Barry Ritholtz responds to my previous post:

While I love the idea of Free Market Day, I have to disagree with the typical post-mortem assessment of Lehman. This was not a binary choice; The Lehman decision was not an either/or situation, limited to a gladiatorial thumbs up/thumbs down.

In the real world,  there are shades of grey.

I have said — and I am still saying — that the best option would have been a more Bear Stearns approach (w/o the Fed’s $29B) — essentially, a prepackaged, orderly bankruptcy sale/liquidation. The problem with Lehman wsn’t that it was allow to suffer for its own sins –t he problem was they were allowed to do a header onto the sidewalk and splatter everyone else around. They should have been gently euthanized, their body parts sold off.

The Rescue them” or “Let them die” choice is really a false dichotomy.  When reviewing how the Fed and Treasury behaved, discussing what was done, and analyzing the possible impact of the alternatives, we need not be limited to simple Yes or No choices.

Me:  Yeah, but that is the real-world dichotomy that Paulson and Bernanke created for themselves by wasting the five months or so between Bear and Lehman.

COMMENT

“Let`s be rich not poor”

Culture, religion are mean to practice “peace” in society rather than to provoke
“individual interest”. Need of respect of culture is prime concerns , that lacks in today’s`
context. Culture are always rich than the mean mentality that people exhibit , on
behalf of their benefits, ignoring prime objective. Making bargains or agreements on ground of people sentiments ,following certain ideology is a practice of lodaciens.

Nobody has rights to play on rich culture & try to sabotage each other, whether it is “Christian, Hindu, Islam, Buddism or Jain”. Let`s not play dirty game.

In context of India, Indian culture always enriched with “Tamil, Kannada, Malyalam & Telgu” are the property of nation & has to respected by all because they are rich & have evolved through generation & their growth is never involved.

Concern over the article published on “The Hindu” on September 14 2009 Title “Engaging Nepal:Soon difficult questions “elaborates different meaning & differences & has deviated from cultural richness of “Tharu,Madesis & Limububan & other ethnics group ” who represents small in number but are rich in culture in comparison to persisting one & always respectful to live in “HARMONY” with unity.

National interest, without hurting neighbor who exhibit their potential rather than effect of “Gravity Model” in globalized market will be followed .

Global environment, which is always guided by UNITY ,is what will be on next article ,based on population statics’, prime concern & it`s effects on development of individual nation.

Happy wishes for Ramadan & Deepawalai ,wishing everybody to enjoy festive mood & always be merry ,having gala time.

Ananta Paudel
Student-Madras University, Chennai.
India.

Permanent Dweller of Nepal.
15 September,2009

Posted by Ananta Paudel | Report as abusive

Get ready to celebrate Free Market Day

Sep 14, 2009 15:21 UTC

At a House Financial Services Committee hearing just after Lehman Brothers filed for bankruptcy protection a year ago, the committee chairman, Barney Frank, suggested that September 15, 2008 be commemorated as Free Market Day, since Lehman was allowed to fail and free markets allowed to work. Frank then added that because AIG was bailed out the next day, “the national commitment to the free market lasted one day.”

Funny guy, the chairman — but probably not to Ben Bernanke, Hank Paulson, or Timothy Geithner. They’re the folks, obviously, who get the blame for not ginning up some way — any way — to bail out the investment bank and avoid a dangerous escalation of the financial crisis.

At last check, both Bernanke and Paulson steadfastly maintain that legally their hands were tied, thus the need for expanded authority to take over and wind down failing financial firms. If such authority had existed, Bernanke said a month after Lehman’s implosion, “we could have saved it. We would have saved it.”

Of course, that explanation seems to have evolved a bit over time. There are plenty of hints that a way would have been found to save Lehman, had Bernanke and Paulson anticipated the breaking of the buck by the Reserve Primary Fund and the flabbergasted reaction by international investors who had expected a repeat of the Bear Stearns bailout.

Yet in the year since the Lehman collapse, the consensus that it was an unmitigated disaster may be starting to shift. Free Market Day may be worth celebrating after all.

There are a couple of main arguments here. Call one of them the No Real Harm Theory. This has two aspects. First, economist and former Treasury official John Taylor argues that credit spreads didn’t really blow out until the market got a look at the government’s reaction to Lehman’s demise — the hasty construction and apocalyptic selling of the TARP.

At the same time, others argue that given the fragile state of the market, saving Lehman would merely have shifted the spotlight to some other endangered firm.

Then there’s what we’ll call the Worse the Better Theory. It holds that the severe market reaction to Lehman is what persuaded Congress and the Fed that it was time to do whatever it took to stabilize the financial system through bailing out AIG and passing the TARP.

Without Lehman, a continuation of piecemeal fixes would have allowed the financial system to erode further, heightening the chance of depression. What’s more, Lehman exposed the dangerous fragility of our interconnected financial system, serving as a catalyst for reform.

So is the case for letting Lehman die a clear-cut one? No. But it is a reasonable one, and even more so if the government had spent the time between March’s Bear Stearn rescue and Lehman’s chaotic bankruptcy creating a predictable and transparent resolution protocol.

So celebrate Free Market Day? You bet, but make it a quiet dinner rather than a wild party.

COMMENT

Good point on celebrating with a quiet dinner. However, I feel that unfortunately the govt has done very little to try to change and improve the structural problems in the economy. The govt has tried to prevent the normal business cycle from running its course, in which the recession would clear out the excesses and clear the way for a more sustainable recovery.

They have instead tried to fix a debt problem with more debt, which I believe is very reckless. Unfortunately though, the ones in power are the same people who mismanaged things and helped create the financial crisis.

So in my opinion, one of the few ways for the average person to protect themselves is to invest in gold related assets, because gold should continue to benefit from the Fed’s Keynesian efforts to avoid deflation at all costs. I have been reading some interesting articles on these topics at http://www.goldalert.com that I think are useful for investors to check out. They discuss in depth the inflationary consequences of the money printing, in addition to the potential impact on the dollar, the gold price, and prospects for the international and global economy.

Posted by john turner | Report as abusive
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