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Lehman’s Long Shadow: Bloomberg Opinion Special Edition

Lehman’s Long Shadow: Bloomberg Opinion Special Edition

(Bloomberg Opinion) -- Ten years ago today, Lehman Brothers was in its death throes, on the way to a bankruptcy that would turn a slow-burning financial crisis into a five-alarm, systemic fire. Today and tomorrow, Bloomberg Opinion writers are looking back at the crisis and assessing what we’ve learned and where we’re still vulnerable.

Ten years ago, amid a worsening subprime mortgage crisis, the U.S. government did what few have dared: It allowed a major global investment bank, Lehman Brothers Holdings Inc., to file for bankruptcy. Within days, the shock waves crippled the nation’s largest insurer, triggered a run on money-market funds, and accelerated a cash crunch that would ultimately destroy millions of jobs. Only by pledging trillions of dollars to prop up the financial system, and spending hundreds of billions more on fiscal stimulus, did the government manage to prevent the worst economic disaster since the Great Depression from becoming the worst ever.

The repercussions of that debacle endure today. In the U.S. alone, an estimated $1.4 trillion in annual economic output will never be recovered — a loss that has weighed most heavily on the poor. The cost of shoring up economies has left advanced-nation governments deeper in debt than at any point since the Second World War, and depleted the financial resources central banks will need to fight the next recession. The populism that has gripped the developed world, and that brought Donald Trump to power, can be traced to the way the crisis — and the spectacle of governments left with no choice but to bail out those responsible — undermined confidence in the establishment.

Given the scale of the damage, the experience should be seared into the memories of politicians everywhere. It’s shocking to see how quickly they’ve forgotten, and how fragile the financial system remains.

A lesson learned should lead to meaningful changes by individuals and institutions. That has largely been the case in the decade since the financial crisis almost tipped the global economy into a prolonged depression that would have devastated livelihoods for at least a generation. But there are also consequential lessons that haven’t been sufficiently internalized; and some that were not foreseen at the time of the crisis but are now urgent and important.

Anyone attempting to understand the legacy of Lehman Brothers could start with two phrases that bookend the biggest bankruptcy in American history. The most famous is “too big to fail.” The most important is “quantitative easing.”

Ten years after the collapse of Lehman, what is clear is that a lot of money left the pockets of ordinary Americans. While there’s no telling where the next crisis will come from, the lesson from the last one is that retail investors need to be better prepared to keep their pockets from being picked by more sophisticated players.

To see how Europe’s banking system has failed to bounce back from the collapse of Lehman Brothers Holdings Inc., one metric will suffice. The market value of a single U.S. company — Apple Inc. — is getting close to that of Europe’s 48 biggest banks combined.

In many ways, all the talk about global central banks beginning a “great unwind” of their extraordinary monetary stimulus is positively quaint.

After all, how can officials from the Federal Reserve to the Bank of Japan even pretend to know how to reverse what they’ve done over the past decade? I’m speaking specifically about propping up financial markets with easy money and allowing the world’s debt burden to balloon to almost $250 trillion.

It was supposed to be a play in three acts. Wall Street banks and the U.S. economy took the first blow from the Lehman crisis. Next, the epicenter of trouble moved to Europe, causing a run on sovereign debt. The overhang of global borrowing was then going to culminate in a big emerging-market fiasco, caused perhaps by a disorderly unwinding of China’s post-Lehman credit bubble.

That denouement never materialized for an underappreciated reason: The forces that hastened Lehman’s demise have steadied emerging markets ever since.

Note: We’ll have our regular newsletter this afternoon, and another special newsletter tomorrow morning with the rest of our Lehman coverage.

To contact the editor responsible for this story: Timothy L. O'Brien at tobrien46@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mark Gongloff is an editor with Bloomberg Opinion. He previously was a managing editor of Fortune.com, ran the Huffington Post's business and technology coverage, and was a columnist, reporter and editor for the Wall Street Journal.

©2018 Bloomberg L.P.