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Home Publications Blogs Beat the Press Is There Anyone Other than the NYT Who Wants to See a Lehman-Type Collapse In Europe?

Is There Anyone Other than the NYT Who Wants to See a Lehman-Type Collapse In Europe?

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Thursday, 06 October 2011 04:39

In a front page news analysis the NYT told readers that:

"but these days the problem for Europe may be that it has not had — and may not have — its own Lehman Brothers, at least in the sense that Lehman shocked Americans to take divisive and expensive steps to repair the damage."

There is no one cited in the article who says anything like this. In the wake of the Lehman collapse, the economy lost more than 700,000 jobs a month over the next nine months. While much of this job loss was probably an inevitably result of the bursting of the housing bubble, the financial freeze up associated with Lehman's collapse almost certainly worsened the situation. It is difficult to see how Europe or the world economy as a whole would benefit from the same sort of financial freeze-up.

It is also worth noting that, contrary to assertions in the article, the Fed began its special lending facilities long before the Lehman collapse. It expanded these facilities in response to the collapse and Congress did authorize the TARP, but it difficult to see how the economy on net ended up better off as a result of the crisis that followed the Lehman collapse.

Of course there are scenarios that could be positive in Europe or could have been positive in the U.S. For example, if the government had used the bankruptcies that would have resulted from letting the market run its course to restructure the financial system, then the country might have a much more efficient industry. Goldman Sachs, Morgan Stanley, Citigroup and Bank of America all would have been bankrupt, giving the government an opportunity to reestablish these banks as a set of smaller financial institutions that were more focused on serving the productive economy.

This is a possible, but not likely outcome from a collapse in Europe. Just as is the case here, the financial industry holds enormous power. It is likely that they would be able to garner the government assistance to keep their current structures largely intact.

Comments (3)Add Comment
Winner-Take-All Changes Winners Over Time with Creative Destruction
written by izzatzo, October 06, 2011 7:34
Goldman Sachs, Morgan Stanley, Citigroup and Bank of America all would have been bankrupt, giving the government an opportunity to reestablish these banks as a set of smaller financial institutions that were more focused on serving the productive economy.


Any economist knows for the creative destruction of market power to work it must emerge from the bottom up, not top down as micro managed socialism.

Let the banks grow as large as they like for they will eventually self destruct under their own weight of unmanageable rigidity trapped in yesterday's technology, toppling like so many outdated dinosaur computers as new faster and nimble ones crowd them out.

Stupid liberals.
...
written by kharris, October 06, 2011 1:01
Uh oh. Stupid has written one of those "everyone knows" thingies. Back in my teaching days, I'd tell my students to assume, when confronted with an argument based on an "everyone knows" statement, that the conclusion reached was untrue. "Everyone knows" is a way of making a claim without being able to back it up. We don't really "know" what Stupid claims we know. What he has offered is a belief, not a fact. In Stupid's assertion here, it is associated with the "government can't (fill in the blank)" bit of received wisdom.

Now, back to the article under consideration. The author seems to have decided that some broad conclusion is needed to make the article worth doing. Now, I like Joe Nocera's work well enough, but I once heard him explain that his job is to reach conclusions for his readers, even if he doesn't know enough about his subject to feel confident in that conclusion. That reduced my confidence in Nocera's work, pronto. Anyhow, there are plenty of explanations for Europe's slow, grinding response to their troubles (like Germany history and the structure of governance in the EU and EMU). If the author is aware of any of these explanations, it doesn't show. A "compelling narrative" tends to be high on the list of things that editors demand from newspaper writers, often with bad results.
Regarding "Stupid Liberals" (Above)
written by Will, October 06, 2011 3:01
"Any economist knows for the creative destruction of market power to work it must emerge from the bottom up, not top down as micro managed socialism."

The thing is - the big banks and investment firms have such clout that the normal forces of the market do not apply to them. If they did at least some of them would be out of business. Lehman and Bear were unlucky, but plenty of others succeeded in getting bail-outs, thus avoiding the reckoning which the market and shareholders could have (or might have) dished out.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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