You are here: Home > Opinion > Columnists

Three years after the collapse of Lehman Brothers

By John Ross: 0 Comment(s)Print E-mail China.org.cn, September 15, 2011

Adjust font size:

The exterior of the world headquarters for Lehman Brothers can be seen in New York, May 19, 2008. [Xinhua/Reuters Photo]

This week marks three years since the collapse of Lehman Brothers. Although the U.S. was in recession for nine months, and Europe for six, before Lehman's bankruptcy nevertheless that event rightly symbolizes the beginning of the greatest economic crisis for more than sixty years. What have the intervening three years shown?

Don't miss:

Uncertainty over the American economy

Lehman's symbolized the origin of what is now known as the "Great Recession" because this was, above all, a crisis originally focused in the U.S. banking system. At the pinnacle of that system, before the crash, stood the U.S. investment banks – Merrill Lynch, Bear Stearns, Lehman Brothers, Goldman Sachs, and Morgan Stanley. These had the world's highest salaries, among the world's greatest profits, and were the aspirational career for tens of millions of Americans.

Three years later none survives in its original form. The first three were bankrupted or forcibly acquired, the last two turned themselves into U.S. Federal Reserve regulated bank holding companies. The top tier of the U.S. banking system was destroyed, as was private ownership of the world's largest insurance company, AIG, and the U.S. mortgage institutions Fannie Mae and Freddie Mac – the world's largest non-governmental financial organizations.

Alongside this the world's largest retail bank, Citigroup, saw its share price fell by 98 percent – it was saved only by the U.S. tax payers. The British banks Lloyd's and RBS, the latter with a balance sheet larger than UK GDP, were nationalized. The market judges there has been no effective recovery by these institutions – three years later all still have share prices which have fallen by more than 90 percent.

A second wave of the banking crisis is currently spreading – affecting Bank of America, Barclays and Société Générale all of which have suffered share prices falls of more than 85 percent. The financial system's crisis is unfinished.

Macroeconomically the GDPs of the U.S., Europe and Japan are all below their end of 2007 levels – i.e. over three and a half years they have experienced net negative growth.

China was the country which most successfully came through this financial crisis. Its economy has grown by well over 30 percent since 2007. Even if China's economy slows slightly in the second half of this year, as is likely with tightening measures to damp inflation, China's GDP will have risen by over 40 percent in a four year period.

The enormous economic events of the last three years, however, necessarily tested not only practical economic policy but also economic theory – normally it may take decades to test an economic analysis, but in the biggest economic events since the 1930s it sometimes only took days!

A graphic illustration is the way in which U.S. official economic ideology was shown to be false within a week, possibly even within a few hours, of Lehman's bankruptcy. Why, after all, was Lehman's allowed to go under? Because U.S. capitalism is supposed to be a risk rewarding/risk punishing system. Lehman's Brothers took risks, it failed, and therefore it should be allowed to go bankrupt was the theory's logical line of reasoning. But actually it became clear that this bankruptcy had brought the international financial system to its knees. Any repeat would be fatal. Since then the path followed by governments is that no equivalent scale of bankruptcy must be permitted.

1 2 Next