The first-year anniversary of the fall of Lehman Brothers has passed with
journalists, politicians and market analysts seizing on the occasion to offer
seemingly sober assessments of what went wrong and what went right in the
leadup and aftermath of the biggest financial event since Black Tuesday.
The most popular storyline offered by these Monday-morning quarterbacks is that
the mistaken decision to allow Lehman to fail resulted from the George W Bush
administration's misplaced faith in the free markets. In this telling, the real
crises began in the days following the Lehman bankruptcy, which unleashed a
financial panic that would have caused complete economic
collapse - if not for the subsequent federal intervention.
In reality, Lehman's demise was simply the result of an unfolding crisis that
began years before. Popular belief aside, allowing the institution to succumb
to the overwhelming debts on its balance sheet was perhaps the only correct
decision made by government since this crisis began. The propagandists'
complete reversal of cause and effect now threatens to spur the government to
compound prior mistakes and bring on the next phase of the financial crisis.
Unfortunately, this chapter will likely be much more dangerous than what we saw
last autumn.
In March 2008, in the aftermath of the Bear Sterns "bailout" (which itself was
a major mistake), equity shareholders walked away with a generous US$10 per
share, all creditors were made whole, and most employees got jobs and bonuses
from JP Morgan. As a result of this largesse, the Fed created a very serious
problem for itself. After Bear, the perception took hold that investment banks
were too "interconnected" to fail. The resulting moral hazard decreased the
financial stability of the banking system and exposed taxpayers to open-ended
risks.
The George W Bush administration rightly determined that a message needed to be
sent that Bear was an isolated case, and that capitalism still held sway on
Wall Street. The fall of Lehman, which was helped along by the unrealistic
recalcitrance of its chairman Richard Fuld, would be that clear signal.
However, politics quickly trumped economics, and the Lehman trial balloon soon
turned into the Hindenburg. Washington had no stomach for the ensuing financial
carnage, and when other institutions began to topple, Bush, the then-Treasury
secretary Henry Paulson and Federal Reserve chairman Ben Bernanke, abandoned
their prior convictions and threw all they had into the ensuing bailout
bonanza.
As a result, the moral hazard that they had sought to avoid now exists on a
scale unprecedented in our history. Capitalism has been extinguished on Wall
Street, and our financial institutions now exist as public utilities. The
presidents of our biggest banks are now the highest paid civil servants in the
world.
Since market forces are no longer allowed to allocate capital and control risk,
these decisions are now made by government regulators and are then passed
through to their subordinates on Wall Street. This perverse organizational
structure constitutes a new form of American fascism.
The pain of allowing Lehman to fail will be dwarfed by the agony of bailing out
the rest of Wall Street, which is now a foregone conclusion. Just because the
Lehman bankruptcy created unpleasant consequences does not mean it was a
mistake. On the contrary, sometimes doing the right thing hurts - especially if
it is done to avoid even greater pain down the road.
It just seems that our representatives are incapable of asking for short-term
sacrifice. There is no price they are not willing to force the rest of us to
pay to assure their own re-election.
In reward for its gross culpability in creating the financial crisis, the
Federal Reserve has been rewarded with extensive new powers. Given the damage
it was able to inflict in the past, I can only imagine the havoc that will be
wrought by the new "Super Fed".
If the current policies continue, the United States that we know - for which
our forebears risked so much - will cease to exist. The constitution originally
established by our Founding Fathers has been under attack almost since
inception. Up until now, the greatest damage occurred during Franklin
Roosevelt's New Deal. However, the current assault on our birthright could be a
knockout blow. The last vestige of republican government now hangs in the
balance.
Peter Schiff is president of Euro Pacific Capital and author of The
Little Book of Bull Moves in Bear Markets. Euro Pacific Capital commentary and
market news is available at http://www.europac.net
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