
The dangerous myth still believed about the Lehman Brothers bust - rfreytag
https://www.washingtonpost.com/opinions/the-dangerous-myth-we-still-believe-about-the-lehman-brothers-bust/2018/09/09/5a2f8a9c-b2bc-11e8-9a6a-565d92a3585d_story.html
======
lordnacho
This is basically right. It's a myth that anyone believed in any of the
stronger forms of efficient markets. The interaction of ineffective regulation
and political lobbying had a lot to do with the crisis.

Related myth is the idea that nobody saw it coming. I went to a luncheon at
Goldman's in 2006 where they announced things would start looking rocky in
2007 and the big whammy would be 2008.

~~~
hardlianotion
Yes - the Associate class training of Lehmans in 2005 had a few speakers that
were warning of an oncoming crisis. And the folk on the mortgage desks had
early view of the problems that were becoming unmanageable.

~~~
philipodonnell
Is there any sense of something like that happening today?

~~~
hardlianotion
I work far away from that sort of thing now.

------
TheOtherHobbes
This is counterfactual nonsense.

Greenspan supported the repeal of Glass-Steagall, and also supported the
Commodities Futures Modernization Act, which did a huge amount to legitimise
Credit Default Swaps.

He opposed HOEPA oversight by the Fed of fraudulent liar's loans by
unregulated lenders. He was on the wrong side of multiple conflicts of
interest, including some related to Enron's SPV frauds.

While Greenspan was giving PR-scented talks about the renewal of trust in the
markets after the regrettable failures of the Enron years, the FBI was warning
there was an epidemic of mortgage fraud.

So - no. Greenspan was not a misunderstood and essentially powerless economic
moralist. He was at ground zero of the crash, and deserves a significant share
of the blame for it.

~~~
gbacon
There’s the old saw about the “repeal” of good ol’ Glass-Steagall again. The
change in 1999 merely did away with restrictions on commercial banks and
investment banks being controlled by the same holding company. There were
enormous moral-hazard problems for _all_ banks, and that was induced by what
were then only widely assumed bailout guarantees.

I’m just a random guy on the Internet. Maybe you’ll believe WaPo[0].

 _But why let facts get in the way of a good screenplay?_

 _Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three
institutions at the heart of the crisis — were pure investment banks that had
never crossed the old line into commercial banking. The same goes for Goldman
Sachs …_

 _The infamous AIG? An insurance firm. New Century Financial? A real estate
investment trust. No Glass-Steagall there._

 _Two of the biggest banks that went under, Wachovia and Washington Mutual,
got into trouble the old-fashioned way – largely by making risky loans to
homeowners. Bank of America nearly met the same fate, not because it had
bought an investment bank but because it had bought Countrywide Financial, a
vanilla-variety mortgage lender._

[0]: [https://www.washingtonpost.com/lets-shatter-the-myth-on-
glas...](https://www.washingtonpost.com/lets-shatter-the-myth-on-glass-
steagall/2012/07/27/gJQASaOAGX_story.html)

~~~
snowwrestler
Yes. There's also the fact that institutions that would have violated Glass-
Steagall, like JP Morgan Chase and USAA, came through the financial crisis
better than pure investment banks.

And one of the tactics to help stop the crisis was to allow remaing investment
banks to convert to bank holding companies that accept deposits--which would
have also violated Glass-Steagall.

And that Europe didn't have a regulation like Glass-Steagall, yet the crisis
didn't start in Europe, it started in the U.S.

------
roenxi
(preface: I'm not an American, I'm just interested!)

The language used to talk about economics is so technical that any talk about
what is or isn't still believed is practically unknowable. I'd accept that
there is a consensus on "it is obvious what the problem was when Lehman went
bust", and simultaneously that there is no consensus on "what was the problem
was when Lehman went bust".

This article talks in general and specific terms about the regulatory
framework. Seems reasonable. But in this age of fractured politics (where no
blow is too low) an opinion piece is either preaching to the choir or being
completely ignored.

Macroeconomics has a major theme - how to divide the economic pie up in a
manner that encourages people to contribute to said pie. I'd rather know who
is still talking seriously about the growing and contributing part of that
theme and whether they are currently in charge or currently not in charge of
the financial system.

Modern economic management is really focused around debt (c.f. how the money
supply is enlarged and how quickly that happens in the US). After 2008, it
isn't obvious whether the debt-based approach is growing the pie as there seem
to be a real indicators that are not promising. I suspect that debt is simply
moving pieces of the pie around. But intead of establishing these broad and
general strokes of the picture people do love to dive into the detail of
regulation where they are going to make mistakes, be wrong and get defensive
about points that ultimately do not matter.

~~~
pas
Economies are debt based since the invention of debt basically. Debt-basedness
is not the problem.

Nor is the balance sheet of central banks. Inflation is low despite huge QE
programs.

The problem is that there is no countercyclical program to save for the
eventual downturn. (Important note, there never really was. Centuries ago
villages disappeared, cities emptied out, thousands died from starvation,
crime was worse, and armed conflict coming to town was very much always a
possibility). Sure there are social support systems in many countires. The US
has a very inefficient one, it doesn't really help getting out of the gutter.

~~~
roenxi
> Economies are debt based since the invention of debt basically. Debt-
> basedness is not the problem.

It may not be the problem but it is a good stating point. The degree of
indebtedness is important.

> Inflation is low despite huge QE programs.

My understanding is that inflation is measured as a consumer-goods-only effect
and that the QE programs gave vast sums of money to people who used it to buy
assets (kind of a tautology that, because obviously it didn't end up flowing
into consumer goods).

The fact that it didn't show up in the inflation statistics is a good start,
but why is that the only way it can cause problems? It looks like the
government picking winners and losers, and governments have a terrible track
record of making those decisions.

~~~
cinquemb
> The degree of indebtedness is important.

I think what you mean is the ability to service the debt under a variety of
non "act of god" scenarios.

There are a lot of companies around the world defaulting on USD denominated
debt now because of rising interest rates, that at ZLB, would have been able
to keep racking up the debt because it would have still been serviceable.

Same is true for a lot of governments with a decent amount of USD denominated
debt that are finding it hard to service because of currency outflows from
domestic financial (debt/stock) markets in response to rising interest rates
(combined with a lack of sufficiently acceptable local options).

>It looks like the government picking winners and losers, and governments have
a terrible track record of making those decisions.

It definitely seems like this to me, and is more pronounced/easier to see in
places where the state has a heavier influence on the markets. But even this
will only last so long before it doesn't.

------
sgift
[https://outline.com/MxvDb6](https://outline.com/MxvDb6)

------
sgt101
In the end the only strong indicator of economic success in the long term
seems to be the quality of the rule of law in a jurisdiction. It's not that
the rule of law in the USA is poor compared to everywhere else, but that it
could be made better still and this would be a way for the USA to both
continue its global leadership and to better deserve its global leadership.

------
d--b
> The answer is that the capture of Congress by financial lobbies ensured the
> balkanization of regulation into an alphabet soup of agencies, many of them
> underfunded and ineffective.

I thought at this stage everybody knew that already.

------
DubiousPusher
This is bananas. This is like piling explosives around the base of every
skyscraper in Manhattan, connecting it all up with fuses and then blaming the
ignition of that fuse for the ensuing disaster.

Yes, we get it. Mortgage credit was too easy to come by in the 2000s. That
availability was driven by government subsidized lending. But that bubble
should've burst and triggered a recession that was perhaps a bit worse than
ordinary. It left a crater in the global economy because the financial
products it tourched off happened to connect every major financial institution
in a way I don't think anyone understood until the autopsies of the Great
Recession started to come in.

~~~
InclinedPlane
The government was not responsible for the sub-prime mortgage crisis, only a
tiny fraction of sub-prime loans were due to legal mandates (6%).

[https://www.cbsnews.com/news/loans-to-low-income-
households-...](https://www.cbsnews.com/news/loans-to-low-income-households-
did-not-cause-the-financial-crisis/)

~~~
DubiousPusher
I'm saying it doesn't matter either way.

To me it doesn't matter who built or lit the fuse. The piles of
interconnecting ordinance were the derivatives. Any asset in a bubble that had
decent exposure in a derivatives market could've triggered the disaster. The
layers of deals too complex for anyone to understand that entwined many major
financial firms are what made the Great Recession "Great".

------
ohiovr
Seems to be trendy these days to say that there is going to be another
downturn or collapse whereas in 2007 saying such things you might be branded
as a heretic. Ever since 2009 some people made careers out of saying there is
going to be a collapse, indeed Zero Hedge has predicted 11 of the last 7
doomsday collapses in the USA since then. I've come to see people like Zero
Hedge, Jim Rogers, Peter Schiff, as permabears and as such not too interesting
to hear about their particular predictions. The massive inflation never
happened, and there was no collapse. But what is interesting is that there is
a chorus from the opposite end now, that is saying it is inevitable. That
seems unusual. Seems that the concensus among these sorts say that things will
probably be fine till about 2020 then it blows up. It being about everything
that is overvalued, which is also nearly everything. I actually lost the
entire bull run because of fear.

I figure this stuff is being dredged up because of the 10 year anniversary of
2008. The whole world is going to change by April next year, I think the US
economy might be chugging along even in spite of the hell everyone else is
about to endure in their markets because Trumps tax cut is basically a multi-
trillion dollar cash stimulus in the economy that goes broadly to nearly
everyone.

I made a couple observations: The fed is now afraid to show its cards. No
longer will it give forward guidance because they are not actually sure what
they need to do. If they raise rates they risk collapsing prices on debt
instruments, if they lower rates they fear inflation. As for protecting the
currency, they don't need to do that. The dollar is already a policy nightmare
for most of the world as to its current value. Inflation isn't bad at all
either. Employment is as good as it gets I think. So why raise rates? But this
is their plan. They plan to raise rates all the way to 2020 (familiar year
reported) and then... what? Also, I've been seeing ads for adjustable rate
mortgages at very low rates. Are they going to reset everyone's mortgage in
2019 causing a huge downwind pressure on home prices? That seems to be the
2006 2007 2008 pattern all over again.

~~~
todorstoyanov
Why April next year? Do you got some event in mind?

~~~
ohiovr
Month after brexit of course

------
fnrslvr
If key figures at the federal reserve didn't (don't?) believe in the self-
regulating power of a free market, that's nice, but this article still seems
to suggest that said belief is still alive and well among highly influential
figures in the economy, i.e. those financial lobbyists or their interest
groups must either

a) Believe that a free market can police itself; or

b) Be so myopically hell-bent on the bottom lines of their interest groups
that they're willing to recklessly sabotage important regulatory impediments
to meet their ends.

Either way, a lot of powerful people could still probably stand to be
admonished on the importance of well-enforced regulations, even if those
admonitions are embarrassingly basic. Am I missing something here?

~~~
cinquemb
The thing is, both of those are irrelevant in the long term, because there
will be a time under either scenario where a) or b) will not protect their six
or their balance sheets.

------
curiousgal
So it boils down to the U.S.' broken political system? If the effects of a
financial crisis are felt across the globe, why not have an international
comitee that regulates the markets? One that is not prone to lobbyists and
campaign contribution mania?

~~~
namdnay
Because then populists could score cheap points by railing against “unelected
bureaucrats”... e.g Brexit

~~~
jstanley
So the problem with having unelected bureaucrats is that it is too easy to
come up with arguments against having them?

------
woodandsteel
If, as the author claims, the economists all knew the efficient market
hypothesis is mistaken, then why didn't they inform the public during the
bubble, and get it to pressure the politicans to regulate the financial
markets?

Also, whether or not the economists believed in the efficient market
hypothesis at the time, the conservatives and libertarians sure did, and they
continue to do so.

------
tonetheman
Man that was hard to read...

------
arminiusreturns
Let me know when people are ready to get down to brass tacks about the Fed;
that it is an unconstitutional abrogation of the congress's powers, that it
was created and passed under the most dubious of circumstances and by the most
duplicitous group of people, and that the very banks that cause it's various
crashes are the ones who own it and run it and bail themselves out. The FOMC
is corrupt. The POTUS can do nothing other than appoint the board and hope
they do what is needed.

People let the economists use word-salad to confuse and obfuscate matters, and
this article is just naive whitewashing that does no root cause analysis and
ignores the rca that has already been done.

when speaking about the financial system, I am often reminded of Ralph Waldo
Emerson, "For a thousand hacking at the branches of evil, only one is striking
at the root."

------
cdoxsey
Also Bahnsen's book, Crisis of Responsibility, which makes the point that
everyone blames wall street or the government, but no one talks about main
street's culpability.

At one time it was considered an iron clad rule that Americans would always
pay their mortgage. But something changed in the American character and
suddenly millions of Americans were fine with defaulting on their debts.

There's plenty of blame to go around, but this recent turn to populism in the
wake of the financial crisis is particularly ugly for its rank hypocrisy.

~~~
michaelmrose
This is an embarrassing untruth told by one who has no idea how most of the US
lives. A huge portion of the US lives a few paychecks away from default
because so much of most families incomes is needed just to keep your head
above water. Rising home prices made homes look like an excellent investment
that Americans could no longer afford to pay for when the bankers tanked the
economy in the process of milking as much as they could from it.

Losing a home thrusts one either out into the street or onto the mercy of
families because the financial ruination may make it somewhere between
difficult to impossible to rent even if one has the money. It ruins your
credit, breaks up families, ruins relationships, hurts ones job prospects
even.

The idea that people faced ruin because they didn't have the character to live
up to their obligations is more than offensive.

When I lost mine after weathering a number of crisis the bank wasn't
interested in anything less than all back money due immediately or nothing so
catching up was impossible. Hell there was even a government program to help
people stay in their homes that would have lent every bit of the money
required to catch up and the bank wasn't interested.

In brief shove your crisis of responsibility because you have no earthly idea
what peoples lives are like or the shit they have had to slog through.

~~~
cdoxsey
You know nothing about me. I'm sorry that you had a difficult personal
experience.

This is a gross sociological question involving millions of people. Nothing
anyone can say about a question like this can possibly cover every case.

Maybe Bahnsen is wrong, but he's not uninformed. He works in the financial
industry and makes an interesting argument.

~~~
michaelmrose
He works in the financial sector and his argument after his sociopath
colleagues tank the economy is that its someone else's fault. That's
fantastic.

Banks are supposed to be experts in assessing risk and financial products. If
an expert sells a bunch of bad loans knowing he is going to fraudulently sell
them on to others anyway its the experts fault for tanking the economy.

At worst the buyers are stupid. There certainly was no crisis of faith and
values.

