Sept 12 (Reuters) – Of the many regrettable aspects of the
failure of Lehman Brothers, perhaps the worst is that it led to
policies which expanded and reinforced economic inequality in
the U.S., often through unfair means.
When Lehman went down five years ago it set in train forces
which could easily have led to the failure of many financial
institutions. Faced with the possibility of taking large swaths
of the banking system into effective government control, first
the Bush and later the Obama administrations chose instead to
shelter institutions and executives from the consequences of
That involved creating a variety of policies which
subsidized large banks and helped to dig a moat around their
businesses. This went hand in hand with monetary policy which
both supported banks and kept artificially high the value of
financial assets and real estate.
The reasoning behind the bailouts ran that, though it was
patently unfair to shield banks from market discipline, to
continue on despite being not simply illiquid but bankrupt was
better than the damage which would be caused by the alternative.
As for extraordinary and easy monetary policy, central
bankers maintained that keeping banks afloat and ramping up the
value of assets were simply side effects of policies the main
intent of which was to rescue the economy and create jobs.