Home > Uncategorized > The anniversary of Lehman and men who don’t work

The anniversary of Lehman and men who don’t work

from Dean Baker

Last week marked the eighth anniversary of the collapse of Lehman Brothers, the huge Wall Street investment bank. This bankruptcy sent financial markets into a panic with the remaining investment banks, like Goldman Sachs and Morgan Stanley, set to soon topple. The largest commercial banks, like Citigroup and Bank of America, were not far behind on the death watch.

The cascade of collapses was halted when the Fed and Treasury went into full-scale bailout mode. They lent trillions of dollars to failing banks at below market interest rates. They also promised the markets that there would be “no more Lehmans” to use former Treasury Secretary Timothy Geithner’s term.

This promise was incredibly valuable in a time of crisis. It meant that investors could lend freely to Goldman and Citigroup without fear that their loans would not be repaid — they had the Treasury and the Fed standing behind them.

The public has every right to be furious about this set of events eight years ago, as well what has happened subsequently. First, everything about the crisis caught the country’s leading economists by surprise. Somehow, the country’s leading economists both could not see an $8 trillion housing bubble, nor could they understand how its collapse would seriously damage the economy. This bubble was clearly driving the economy prior to the crash, it is difficult to envision what these economists thought would replace the demand lost when the bubble burst. 

The immediate fallout from the collapse of Lehman also caught the Fed and Treasury by surprise. Having made the decision to allow the market to work its magic on a major bank, they apparently did not anticipate the consequences. The Fed and the Treasury later cooked up the excuse that they lacked the legal authority to save Lehman, as though someone would have brought a lawsuit to stop them if they had tried.

Having failed to recognize both the risks of the bubble and the consequences of the Lehman collapse, the Fed and Treasury then pulled out all the stops to keep the big Wall Street banks in business. They said this was necessary to prevent another Great Depression.

It is difficult to see how letting the market work on Wall Street would have condemned us to a decade of double digit unemployment. Would fiscal and monetary stimulus no longer work?

To support the second Great Depression myth, a paper from Alan Blinder and Mark Zandi, two of the country’s most prominent economists, tried to show how we would have had a decade of double-digit unemployment without the Wall Street bailout.

In fact, the paper shows nothing of the sort. It shows that if we never took any steps to boost the economy we would have faced a decade of double-digit unemployment. That distinction may be too subtle for people who write on economics for a living, but most of the public understands the difference.

The record of failure continued into the recovery. Most economists believed that we would see a quick bounce back from the crash, even without any exceptional amounts of government stimulus. This was the excuse for the austerity that was imposed across the world in 2011. As a result, we have seen an incredibly slow recovery in the United States, and an even slower one in Europe.

Workers in the United States are just now getting back to their pre-recession levels of income. According to the Congressional Budget Office, potential GDP is now 10 percent less ($1.9 trillion) than the amount projected for 2016 before the downturn. This is a recurring loss of GDP that amounts to almost $6,000 a year for every person in the country. This is an incredible burden that the austerity crew has imposed on our children and grandchildren.

This brings us to the story of men who don’t work. There are many economists who argue that the economy is now fully employed and it is time for Federal Reserve Board to raise interest rates to slow the economy and the rate of job growth.

While the unemployment rate is relatively low, those of us who are opposed to Fed rate hikes point out that millions of prime-age workers (ages 25-54) have dropped out of the labor force and are not counted as unemployed. These people likely would be working if the economy created the jobs.

But the rate hike crew decided the problem is that millions of men are no longer suited for the labor market. One economist even argued that these men have opted for internet porn and video games over work.

It’s touching to see economists talking about the problems of men without jobs. However economists who pay attention to economic data know that there has been a sharp drop in employment rates among prime-age women also. In fact, the drop in employment among less-educated prime-age women has actually been larger than the drop among less-educated prime-age men.

In other words, our leading economists had no clue about what was going on in the economy at the time of the crash, they got the recovery completely wrong, and they still don’t seem to have a clue today. But they are good at making up stories about the lack of marketable skills of less-educated workers.

See article on original site

  1. charlie
    September 21, 2016 at 2:34 am

    and the failure of economists to predict anything seems to have no consequences for the eminance

  2. jlegge
    September 21, 2016 at 4:00 am

    Thanks for this. More examples of economists for whom reality is a fantasy: http://www.transactionpub.com/title/Economics-versus-Reality-978-1-4128-6251-6.html

  3. September 21, 2016 at 8:41 am

    Reminds me of the economists who said that the problem of 30% unemployment in Germany in 1932 was that 30% of Germans simultaneously had decided to go on vacation. I.e., the problem was lazy Germans.

    Which, if you know Germans at all, doesn’t even begin to pass the laugh and giggle test.

    Same with Americans today.

    • David Chester
      September 21, 2016 at 9:44 am

      If so many do work as claimed here, how come that in the States there are those whose speculation in land values provides them with an income without their doing a stroke of work?

  4. September 21, 2016 at 10:12 am

    Still no mention of the elephant in the room: the men who don’t work but play games in Wall Street.

  5. September 21, 2016 at 10:27 am

    I am not an academic. I’ve worked in policy development and implementation for 40 years. Now I do it on a contractual basis and only part time. The notion in this and most of the other discussions here that bothers me is “real” or “reality.” There’s a truism in the policy business. Real depends on the policies that are put in place. And policies can be either pulled into being or pushed into being. Pulled policies are created by getting out front of your constituency and convincing them they need some policy (some reality) you want them to accept from you as essential. Pushed policies are those that are put out for people to accept based on the simple principle that it’s always been so and it’s only recently that somebody(ies) made the error of ending these right realities. You see reality in my line of work is flexible, buildable, refineable, and always (it is assumed) reversible. Once this is lost or forgotten the risk increases of becoming trapped in a fixed reality trying to deal with actions and actors that not only can and do change (in character, wishes, achievements, and morality) but can reject today what they accepted yesterday. Reality is one of those things that not only can slip away from you when you turn your head but can wreck the best plans of we planning “professionals.” Calling actions and events real does not make them so. It only makes them something the speaker wants to be real.

  6. lesprit351
    September 21, 2016 at 11:41 am

    Worse yet. The Lehman economist is now the senior economic adviser to Trump.

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