It is about a month since the 1st anniversary of Lehman Bros' collapse. I wanted to see what everyone else has to say before I put in my 2-cents worth.
"Well, I think the heroes are-- are—(Federal Reserve Chairman) Bernanke. I think (former Treasury Secretary) Paulson's a hero. I think (current Treasury Secretary) Geithner’s a hero ..."
- Warren Buffett, 16 Sep 2009, CNBC Interview [Link]
"Not so fast Mr. Buffett...." - Lucky Tan
I remember how Greenspan was hailed a hero when he made 3 consecutive rate cuts that took the world out of recession after the Asian Crisis. 3 years later we had the dot.com bubble and later the US housing bubble. Is Greenspan still seen as a hero today? The consensus view today is allowing Lehman to collapse was a big mistake and the subsequent rescue effort i.e. banking system bailout has been a great success. Although it cost US tax payers about a trillion, it halted the freefall in the economy and saved the financial system.
"Letting Lehman fail was perhaps the only thing the govts have done right during this whole drama" - Jim Rogers, Financial Times
Jim Rogers has been badly criticised [Jim Rogers Is Wrong: The Feds Should Have Bailed Out Lehman] for his views. Jim Rogers' view is that there should be no bailouts and all the big but overleveraged banks should be allowed to collapse. It is easy to criticise Jim Rogers because allowing the banks to collapse would have definitely brought about more economic pain than what we are seeing today. If govts had listened to Jim Rogers, the economy today will be in far worse shape and unemployment would definitely be higher. It was also politically 'un-doable' to ask Americans to accept more pain. Jim Rogers cannot be so unintelligent to fail to understand the simplistic arguments against him. He is often misunderstood and there is validity in his ideas and he may be proven right in the long run. What good can be accomplished by allowing banks to collapse and making millions of Americans worse off? During the great depression, the US govt was able to carry out an extensive reform of the financial system - the FDIC, SEC, Glass-Steagall Act. There were also sweeping changes to the brought about by the NRA (National Recovery Administration) such as setting of minimum wages and encouraging the formation of unions. All these reforms led to a narrowing of income gap which was at a record high in 1929 and laid the foundation for the prosperity and large middle class in the 50s and 60s.
Before the current crisis, the income gap was at level not seen since the 1920s. There was plenty of excesses all over the place - the ridiculously high pay of executives ( and ministers in a small Asian island), the lack of regulation of the banking system and the household debt is at its highest level ever with the average American family owes U$120K (mortgage + credit cards). By rescuing the system from collapse, Bernanke is helping to preserve a system with numerous problems - chief of which is low wages which has resulted in high household debts all over the world. Wages are the main source of demand for goods and wages have been lagging productivity growth for the past 2-3 decades. What is preserved may be a system that is unsustainable in the long run anyway. By printing so much money, Bernanke preserved the debt of the working class and the wealth of the richest Americans and kept an unsustainable system going for just a bit long at a great cost to the taxpayer. In this 2006 (pre-crisis) prophetic video by Peter Schiff explains what is wrong and you can see that none of the problems he brought up in 2006 has been fixed.
Today I opened up the Straits Times and realised many things leading to this crisis are recurring:Like many I was optimistic that following the moves to rescue the system, there will be a determined effort to fundamentally reform it so that the mistakes of the past 2 decades will not be repeated. Unfortunately, one the system is rescued, all the momentum for change disappeared. Once the pain is gone all the lessons are forgotten. This is like a man having a heart attack, his surgeons rescued him from the brink of death and when he out of the ICU all he thinks about is going back to eating the unhealthy foods that put him in hospital. The 2 measures to look at are the income inequality and household debt - these are the bloodpressure and cholesterol levels for the economy. Once they start building up again, the next heart attack is just around the corner. What the politicians and central bankers have accomplished might be to postpone the real crisis and if they don't use the extra time well, the past 9 months of so-called recovery is just an illusion driven by brute force massive govt stimulus. Jim Rogers might be proven right in the longer run - allowing more pain and letting the banks collapse so that the financial system can be rebuilt may lead to a more equitable and sustainable system for the coming decades.