Liveblogging: The Anglo-Saxon Chronicle: Cynegils

Reflections 11 Years After the Crash

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1) If there hadn't been any of the kind of panic we got post-Lehman, how severe you think the U.S. recession would have been? Would it have been like a slightly worse S&L crisis, or is that underselling it?

I think the smart money in June 2008 was that the recession was or was about to be over. Housing investment had already rebalanced: the construction sector was back to a sustainable share of GDP. There were only about 500 billion of mortgage losses to be distributed around the world or to be bailed out by governments—really, trivial amounts in a world economy with 80 trillion of traded financial assets. And with Bear-Stearns the U.S. government had guaranteed the debt but not the equty of too big to fail institutions. Banks were still having trouble raising equity. But as long as people were confident that the 500 billion of bad mortgage debt would ultimately land on somebody who could absorb it, the only thing that would make a bad recession was if people anticipated a bad recession. And with no Lehman panic—if Bernanke, Paulson, and Geithner had not caused everybody to say quote what the fuck is going on" by allowing Lehman's bankruptcy uncontrolled and then justifying their actions by claiming that they were forbidden by law to support a too-big-to-fail institution that was insolvent and not just illiquid... Without that, no reason to fear even as bad as the S&L crisis.

2) Do you think there would have been a euro crisis without the Lehman panic?

Sooner or later there would have been a sudden stop in lending to the Southern European periphery. Sudden stops in international lending with hard currency pegs are nasty things. Without Lehman, however, Southern European governments might well have gone with Iceland: saying that it was the responsibility of Northern European governments to bail out their banks and their depositors, rather than the responsibility of southern European governments to bail out the banks' debtors. Then all that would have been left would've been a Greek debt problem, and that was very small potatoes in the context of the eurozone economy in the whole.

3) How do you think China's economy might have evolved in the absence of a Lehman-type event? They said that they wanted to rebalance towards consumption in the early 2000s, but they doubled down on investment in a big way—Adam Tooze has their total stimulus a 19% of GDP in 2009—to keep growth up:

More exports, less investment. I do not think it would have made it easier for them to rebalance towards consumption: they tried, it just turned out to be hard do.

And if there hadn't been any bailouts, What do you think the Fed & Obama admin would have had to do then?

1) If there had not been any bailouts, we would have been in for a serious rerun of the Great Depression. Certainly the 2009-2010 trough would have been deeper. We can hope that massive failure of every New York too-big-to-fail bank save JMPC, GS, and maybe BoA in February 2009 would have created sufficient clarity for conservatorship of all of high finance and for a fiscal stimulus program on a proper scale to bring about a morning in America by late 2010. But given the attitude of the Republican Party the Kenyan Muslim Socialist and all his works, and given that both Bernanke and Geithner fundamentally believe the bankers are good but emotionally fragile people hey need to be coddled by having their profits and options boosted, I do not think the chances of a good outcome would have been very high. Of course, perhaps Obama bonded with Bernanke and Geithner because they looked good in suits and seemed to know what they were doing. And they would not have looked so with New York banks failing en masse...


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