The Lehman Disaster and Why It Matters Today
Channel: New Economic Thinking
Date: 2023-09-13

On September 15, 2008, Lehman Brothers, a giant investment bank with a storied history, filed for bankruptcy. The shock was profound; world markets melted down. 

Over the next few days, one financial behemoth after another, including American International Group (AIG), Washington Mutual, and Wachovia collapsed. The crown jewels of Wall Street – Morgan Stanley and Goldman Sachs – slid toward the abyss. The Federal Reserve, the Treasury, and other regulators were forced to step in, sometimes in conjunction with famous private investors, to rescue the system. The government in effect nationalized AIG and, after two cliffhanging votes in Congress, it directly injected capital into leading private banks.

Ever since then, debates have raged about why the authorities – the Fed and the Treasury -- allowed Lehman to go broke, after earlier helping to salvage a series of other institutions.

In this interview, INET President Robert Johnson and INET Research Director Thomas Ferguson review those dramatic events. They also draw disquieting parallels between the Lehman debacle and more recent episodes of financial deregulation, including controversies over crypto and private equity.

Papers and articles referenced in the discussion:

Laurence Ball, The Fed and Lehman Brothers (Cambridge University Press, 2018). 
https://www.cambridge.org/gb/universitypress/subjects/economics/macroeconomics-and-monetary-economics/fed-and-lehman-brothers-setting-record-straight-financial-disaster?format=HB

Thomas Ferguson and Robert Johnson, “Too Big to Bail: The ‘Paulson Put,’ Presidential Politics, and the Global Financial Meltdown: Part I: From Shadow Financial System to Shadow Bailout,” Intl. J. of Pol Economy, Vol. 38, No. 1 (Spring, 2009), pp. 3-34;
https://www.tandfonline.com/doi/abs/10.2753/IJP0891-1916380101

Ferguson and Johnson, “Too Big to Bail: The ‘Paulson Put,’ Presidential Politics, and the Global Financial Meltdown – Part II: Fatal Reversal—Single Payer and Back,” Intl. J. of Pol Econ, Volume 38, No. 2 (2009), pp. 5-45. 
https://www.tandfonline.com/doi/abs/10.2753/IJP0891-1916380201


Thomas Ferguson, Paul Jorgensen, and Jie Chen, “How Much Can the U.S. Congress Resist Political Money? A Quantitative Assessment,” Institute for New Economic Thinking Working Paper No. 109. 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3593916

Ed Kane's relentless work
https://www.ineteconomics.org/research/experts/ejkane
  
Michael Greenberger, “Too Big to Fail U.S. Banks’ Regulatory Alchemy: Converting an Obscure Agency Footnote into an ‘At Will’ Nullification of Dodd-Frank’s Regulation of the Multi-Trillion Dollar Financial Swaps Market,” Institute for New Economic Thinking Working Paper No. 74. https://www.ineteconomics.org/uploads/papers/Wp-74.pdf

William White, "Why The Monetary Policy Framework in
Advanced Countries Needs Fundamental Reform," Institute for New Economic Thinking Working Paper No. 210.
https://www.ineteconomics.org/uploads/papers/WP_210-White-Monetary-Policy.pdf

Thomas Ferguson, “Central Banks, Green Finance, and the Climate Crisis.” 
https://www.ineteconomics.org/perspectives/blog/central-banks-green-finance-and-the-climate-crisis