Insights on the ‘players’ in Ms. Tett’s latest economic melodrama, and some commentary.
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Some insights on Lehman Bros.:
Headline: Ten years on, the Fed’s failings on Lehman Brothers are all too clear
Sub-headline: The key policymakers have always maintained they had no choice but to let Lehman collapse. That’s simply not true
In 2007 Fortune magazine ranked Lehman Brothers investment bank number 1 on its list of “most admired securities firms”. Just a year later, on 15 September 2008, the financial world was shocked when Lehman, with $600bn (£463bn) of assets, filed for bankruptcy, causing chaos in financial markets: stock prices plummeted, credit flows froze, and markets feared that even larger financial institutions – from Morgan Stanley to Goldman Sachs and Citigroup – might fail.
The Lehman bankruptcy was shocking, in part, because it was unique. Other financial institutions, such as Bear Stearns and AIG, also experienced crises in 2008 and surely would have failed if not for emergency loans from the US Federal Reserve. On the eve of its bankruptcy, Lehman urgently sought similar aid from the Fed, but the policymakers at the time – Fed chair Ben Bernanke, Treasury secretary Henry Paulson, and Timothy Geithner, president of the Federal Reserve Bank of New York – said no.
Some insight on Carmen Reinhart:
Headline: The Reinhart-Rogoff error – or how not to Excel at economics
Or at least, they were. On April 16, doctoral student Thomas Herndon and professors Michael Ash and Robert Pollin, at the Political Economy Research Institute at the University of Massachusetts Amherst, released the results of their analysis of two 2010 papers by Reinhard and Rogoff, papers that also provided much of the grist for the 2011 bestseller Next Time Is Different.
Reinhart and Rogoff’s work showed average real economic growth slows (a 0.1% decline) when a country’s debt rises to more than 90% of gross domestic product (GDP) – and this 90% figure was employed repeatedly in political arguments over high-profile austerity measures.
During their analysis, Herndon, Ash and Pollin obtained the actual spreadsheet that Reinhart and Rogoff used for their calculations; and after analysing this data, they identified three errors.
The most serious was that, in their Excel spreadsheet, Reinhart and Rogoff had not selected the entire row when averaging growth figures: they omitted data from Australia, Austria, Belgium, Canada and Denmark.
In other words, they had accidentally only included 15 of the 20 countries under analysis in their key calculation.
When that error was corrected, the “0.1% decline” data became a 2.2% average increase in economic growth.
Ms. Tett provides more of Reinhart’s insights.
Big US banks have increased their reserves to cope with this. But Ms Reinhart fears that those in countries such as India and Italy are less prepared. Furthermore, ultra-low interest rates erode bank profitability.
Another issue is that it is hard to model future risks due to the lack of historical precedent. “Crises usually happen because of a boom-to-bust cycle and investors know what that looks like. This is different,” Ms Reinhart adds. As far more financial activity flows through the non-bank sector, via capital markets, nasty surprises can easily erupt.
And a concluding paragraph featuring Reinhart:
“Surveys [already] show a significant tightening of lending standards,” observed Mr Shin. Or as Ms Reinhart notes: “A credit crunch seems really very likely.” No wonder Oxford found that fears about finance were poisoning confidence; or that the chance of a V-shaped economic recovery seems increasingly low.
This reader is given to a kind of nostalgia for another Tett:
January 16, 2015:
Headline: A debt to history?
Sub-headline: To some, Germany faces a moral duty to help Greece, given the aid that it has previously enjoyed
Last summer I found myself in that spot for a conference, having dinner with a collection of central bank governors. It was a gracious, majestic affair, peppered with high-minded conversation. And as coffee was served, in bone-china crockery (of course), Benjamin Friedman, the esteemed economic historian, stood up to give an after-dinner address.
The mandarins settled comfortably into their chairs, expecting a soothing intellectual discourse on esoteric monetary policy. But Friedman lobbed a grenade.
“We meet at an unsettled time in the economic and political trajectory of many parts of the world, Europe certainly included,” he began in a strikingly flat monotone (I quote from the version of his speech that is now posted online, since I wasn’t allowed to take notes then.) Carefully, he explained that he intended to read his speech from a script, verbatim, to ensure that he got every single word correct. Uneasily, the audience sat up.