Five years on: The lessons of Lehman

Commentary: The enduring lesson of Lehman Brothers is to abandon lust for credit-driven economic growth.

Two employees of Christie's auction house maneuver the Lehman Brothers corporate logo, which is estimated to sell for 3000 GBP and is featured in the sale of art owned by the collapsed investment bank Lehman Brothers on September 24, 2010 in London, England.
Oli Scarff/Getty Images

On Sept. 15, 2008, Lehman Brothers -- the fourth-largest investment bank in the U.S. at the time -- filed for bankruptcy, accelerating the worst financial crisis since the Great Depression.

Five years later, has the American economy recovered? Not unless you consider the Dow Jones Industrial Average to be the one true marker of health. Unemployment remains high, construction moribund, growth sluggish, foreclosures rife. Meanwhile the wider so-called “advanced” (the better word would be “decaying”) world divides between large countries that have at best stabilized, and the other ones -- Cyprus, Greece, Portugal, Ireland, and perhaps Spain -- that verge on collapse.

Why has the economy failed to recover? As usual, economists are divided. Keynesians argue that governments have not pumped enough “stimulus” into the economy through public spending and tax relief.  Their opponents, the “austerians,” blame weak fiscal discipline, which supposedly depresses confidence and credit markets. But what passes these days for a Keynesian case takes no account of the special character of the financial crisis that Lehman's failure kicked off. And the austerians have dishonest sponsors, who really seek a new assault on social insurance programs, on public services, and on safety, health and environmental protections.

Both sides miss the crucial lessons of the crisis, which go beyond the fact that it exposed the instability and corruption of the megabanks. The meltdown also showed that the economic growth enjoyed by the prior generation, which was driven by waves of speculation, was unsustainable and cannot now be repeated. It revealed that the conditions for steady, high growth -- which we enjoyed in the postwar era and have come to expect by force of habit -- no longer exist.

What happened? History and a global view can help us understand. Let us divide the postwar years into three phases. The first is 1945–1969, when the entire world economy, including the Soviet bloc but not China, grew and developed more-or-less steadily. The second is 1970-2000, when after the oil shocks growth resumed in the rich countries, and then in China and India, but not in Latin America, Africa, the then-Soviet empire, much of Southeast Asia or the Middle East. The third phase is 2000 to the present, the years of instability, crisis and now stagnation for the entire finance-driven economic world.

What demarcates these phases? The first was a time of cheap and easy resources, and of balanced public-private backing for the growth of demand. In these years demand and supply grew together, worldwide, and poor countries grew along with the rich. The second phase began with oil shocks, but then the rich countries used their financial power, through high interest rates and debt crises, to deflate world resource demand and energy prices. Thus the rich grew and the poor did not, and rising inequality illustrated the fact that growth was no longer shared. In the third phase, credit-fueled growth faltered with the NASDAQ Stock Market bust of 2000–2002 and the corporate accounting scandals (Enron, Tyco, WorldCom) that followed. Then came the boom in corrupt mortgage lending, which concluded with the Lehman crisis. Liars' loans, in which mortgages were packaged with no documentation of credit worthiness, were a Lehman specialty. 

A return to rapid growth is unrealistic.

Now five years after Lehman the U.S. faces four barriers to renewed growth:

First, a choke-chain effect of high and volatile energy prices has transformed and will continue to transform growth of total spending by energy consumers into royalties for the producers and into inflated profits generated from inventories. This is good for the Saudis and for speculators, but for the U.S. and Europe it stifles business investments and drains the purchasing power that government stimulus injects.

Second, U.S. military might, which has in the past been used to ensure a low cost of oil, minerals and food, has lost its power. Force can no longer effectively to keep resources cheap for the world's rich. Everyone who saw what happened in Iraq and Afghanistan knows this -- including the U.S. military, whose leaders saw the reality of modern war first-hand.

Third, the digital revolution has made much human labor redundant. Electronics are doing to the office worker what long ago the internal combustion engine did to the horse. But downsized office workers, unlike horses, still need useful jobs and they need to be fed, housed and cared-for in illness and old age.

Fourth, the big bankers are entrenched and operate with impunity. They cannot be induced by favor or fear or fine words from President Obama to revive the economy. Yet their political influence blocks the government from doing directly what the financial industry refuses to do, namely lend to productive projects. Franklin Deleano Roosevelt in 1933 had a great advantage over Obama: he owed nothing to bankers, and they did not own the Congress.

Under such conditions, a return to rapid growth is unrealistic. In fact, an obsession with unachievable goals may lead us to policies that are increasingly desperate and destructive. By reaching for too rapid growth, we court the risk of snake-oil remedies, both dangerous and ineffective. To maintain slow growth will be hard enough. And let us hope we can do that much, because slow is better than zero, and markets can translate stagnation into collapse.

Granted, some of the barriers to growth could be lowered. Even now, shale gas is giving North America some respite on resources -- for how long, no one knows. The banks, now serving no useful function, could be downsized, though given their power it would take a political upheaval. Large parts of the military will never be used again and might be abolished.  Well, best not to plan on much of that.

Realistically, we need to think how to live decently on what we have. For this we need more, not fewer, shared public goods and social protections. Public insurance programs -- for retirement, health, housing and bank deposits -- are not a burden; they are a necessity. Public education, infrastructure and the effective regulation of health and product safety and of the environment are not liabilities, but precious assets. If kept, they will remain to protect basic living standards, long after all the growth-dependent chimeras of self-financed schooling, privately funded health care, privatized retirement savings and race-to-the-bottom “competitiveness policy” have flitted away.

Meanwhile livable cities, care for the aged, energy conservation and climate change are among the most pressing issues. There is work to do, and underemployed people to do it, as Keynes said many years ago. Bringing them together is possible, necessary and urgent.

Five years after Lehman, we should give our obsession with credit-driven economic growth -- with faster growth for its own sake -- a rest.  As Roosevelt abandoned the gold standard, so we must abandon the growth standard. Let us instead protect what we have, improve what we can and try to solve the concrete problems of our age.


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