This one didn’t get bailed out

The nation’s fourth biggest investment firm, Lehman Brothers, has gone under. This time a major economic player faced bankruptcy, no one bailed it out, not other banks, not foreign investors, and not the government. That is to say, this time the market is going to be allowed to work, including its important work of destroying failed businesses. What, though, will be the consequences?

Do you think all of these failures due mainly to the mortgage house of cards tumbling down means that we need to give up on free market economics in favor of a neo-Keynesian government regulation of the economy? Isn’t that where we are headed?

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  • EconJeff

    Do you mean the “mortgage house of cards” that was built in a neo-Keynesian framework of regulating the economy? Consider Tyler Cowen’s take in the NYT (

    “In short, there was plenty of regulation — yet much of it made the problem worse. These laws and institutions should have reined in bank risk while encouraging financial transparency, but did not. This deficiency — not a conscientious laissez-faire policy — is where the Bush administration went wrong.”

    We’re more likely to go from one form of regulation to anther.

  • fw

    “neo-keynsian”. No.

    The regulations put in place after the great depression were PRECISELY to separate institutions doing “money market” (ie risky) accounts from those who were accepting regular deposits, CDs, etc. The unsophisticated public would know what they were buying.

    Banks over time managed to take over the regulatory bodies and effectively eliminate these regulations.

    This is about proper police action of the state. Government regulation CAN be about maintaining law and order. The are not all about socialism or being anti free market. Your post seems to suggest otherwise.

    You would do well to rethink this.

    Rules and regulations need to enforce..

    1) transparency in the marketplace
    2) Full assumption of risk by the transactional parties involved (ie mandatory audits by independent third parties and sufficient cash reserves to cover loses)
    3) clear accounting rules to ensure that apples are apples and oranges oranges and to again assure transparency. it is becoming clear that the AICPA and other voluntary organizations are not enough here.
    4) our money is mere paper. therefore , public trust in financial institutions is REALLY important to avoid bank runs and another great depression style melt down….

    This is NOT a choice between free market economics and socialism/government intervention.

    Laws against usary are not immoral Dr Vieth. The free-market can be only relatively free I would assert. It to must be bound and constrained by rule of law to be truly free.

    Free-market does not equal anarchy (no regulation or law).

    Your post suggest exactly that !

    I am surprised at you.

  • fw

    this is all pebble-thrown-into-pond.

    Note that the large insurer AIG is now seeking some federal assistence. and insurers WILL raise insurance rates now. Insurers make MOST of their money not from your premiums, but by reinvesting your premiums. Their investments are not decreasing rapidly in value.

    Be prepared to hear that your premiums are rising due to increased risk for insurers. True. But the risk will not be from those insured.

    The rule of Law is ESPECIALLY necessary in banking and finance. This is precisely because (as luther points out) the sin of covetousness (unlike sexual and other immoralities), can be masked as a virtue so very easily (“hard work” etc) in a way that no one can argue against…..

    Rules, transparency and a level playing field are urgent.

    The government in a quiet move, is now accepting assets rated as junk as collateral for bank and institutional guarantees and federal temporary loans!

    The consolidation of bank of america with merill lynch will only ensure further problems in that intitutions will be created that are SO large they cannot be allowed to fail. tail wags dog. and to allow b of a and merill to merge will mean the govt will have to now waive the reserve requirements for banks in this case….

    eg: all rules are being thrown out the window rather rapidly.

    the glass-stegall act, now being dismantled, was not keynsian socialism I would maintain….quite the opposite.

  • fw

    it seems that the current strategy is for the us government to guarantee the assets (many valued as “junk”) of alot of unregulated institutions rather than providing cash and bailouts for now.

    This MIGHT work , if we believe that what we have now is not just the tip of an iceberg.

    I personally believe that what we have seen so far IS just the tip of the iceberg. and the us governments assets and resources are NOT unlimited.

    Interesting that Palin/McCain seem to be more interested in pig makeup, and taking mock offense….(everyone who actually watched the utube clip with Sen Obama´s comments KNOWS that there was not even a REMOTE reference here to Gov Palin!) than in talking about the economic meltdown (can we call it anything else?? it is unprecidented, and far more massive and pervasive than the savings and loan scandal in which McCain was involved previously….) and our two wars…..

    what is it Obama is talking about?? Do a google.

    economy… healthcare…. war… veterans benefits….

  • TK

    Re: “Their investments are not decreasing rapidly in value.

    I work for a VERY large worldwide insurance presence. We have an internal joke that one day reps will get a memo that corporate lawyers will determine that reps are too much of a liability for the company and they’ve decided to pull out of the insurance market all-together. (The funny-but-sad part of the joke is the implication that insurance company assets are simply so large that they no longer need to take in new premium dollars.) This will never happen, of course, but it is financially feasible.

  • fw

    after alot of reading about current financial and economic events one overarching theme strikes me.

    This is all about risk (interest, the rent of money, is strictly a function of risk and time, ie the more risk and time, the higher the interest earned).

    since earning money the old fashioned way, the passage of time, is becoming sorta passé, that leaves risk as a way to get high returns.

    the real question is who will bear the burden of that risk?

    In a pure free market, it would not be the government. and in that case maybe credit card companies should be out of luck if they extend credit to the uncreditworthy. after all, credit-worth folk simply will NOT pay 30% interest.

    ultimately , credit will need to tighten severely, IF that is even possible, and the economy will need to revert to a higher percentage of cash-and-carry.

    It would be interesting for some economist to attempt a study as to what portion of financial activity is credit/interest bearing.

    I get a sneaking suspicion that all is conspiring to eliminate all financial transactions that do not involve a fee or interest or credit…. the end of cash…. i wonder how this progression looks over history.

    our economy is becoming “creditized”. I remember back when (I am 52 years old) , you could go into a car dealership and offer cash and they would be ALL over you. NOW dealerships would shun you because they make more money off of the financing than they do off the actual car….. how many folks own their homes outright now… used to be.. ALOT of folks did. How many people own NOTHING now. even the shirts on their backs are borrowed, they are paying down their credit cards with interest for those shirts.

    Ownership seems to be fast becoming illusion.

    any of our readers have anything on this?

    increasingly it will be all of us who bear the burden of failed risk. in the form of government guarantees, higher insurance rates, which in turn are supposed to be a PRIVATE market way to cover risk, higher credit card interest, which in turn will result in more risk of personal defaults which will, in turn result in still higher credit card rates and higher taxes in bailing out the banks….

    so what is all happening is WAYYYYY beyond a few banks failing…. it is systemic….. the government will HAVE to intervene with the Rule of Law in some fashion.

    This will not necessarily be a Keynesian exercise, but it WILL be absolutely necessary. and it WILL be very painful.

  • There is a “culprit rich environment” here, ranging from federal mis-regulation (Community Reinvestment Act of 1977) and Federal Reserve policy (“let’s see-saw the interest rates some more and snag us some ARM holders) down to people close to me who claim to be unaware that it’s prudent to save for a rainy day, and the bankers who would make big loans to people with such attitudes.

    Bring back Keynes? No way. Let the bankers feel the pain of their stupid decisions, and maybe this time they’ll catch on to basic, Biblical principles of financial stewardship. They’ve been bailed out time and again, and that’s one big reason they’re continuing to make dumb decisions.

  • fw

    #8 bubba

    my understanding was that glass segall was actually a fairly good set of laws, and that the idea behind the depression era reserves was to prevent bank panics and ensure confidence in the little depositors in banks and so prevent an evaporation of bank liquidity. I understand that the depression was that there was a sort of massive negative inflation. lots to sell with no buyers. and that this was in large part brought on my a large wave of protectionism globally. how accurate is my understanding here?

    what is missing in my understanding.

  • Manxman

    Our financial system is sick at its very core because our money supply is dependent on nothing but debt and ever-increasing levels of spending & consumption. It’s all smoke & mirrors, and when something happens like this mortgage crisis, the real nature of our financial system is revealed – it’s all built on IOU’s. Our currency has no real value – it’s all promises to pay.

    The Federal Reserve system is an abomination, and until we understand the implications of what it does and how it does it, we will not have economic security. We will be slaves of the Fed and those who control it, and slaves of the debt that’s used to fuel our money supply.

  • Anon

    What about a Constitutional economics with real money? Or even a Biblical economics where no one can sell their home or tools, or buy those of another, so that everyone has the means to earn a living and a place to have shelter that doesn’t belong to someone else. Certainly this was in the mind of Jefferson when he mentioned the yeoman farmer as the backbone of the Republic, and those who framed the Homestead Act.

  • Anon

    Oh, and of course the forgiveness of debts at the end of six years.