It is a year since Lehman Brothers—one of the venerable investment banks from America's Wall Street—collapsed, setting the global
financial infrastructure aflame. Since then, it has destroyed trillions of
dollars in public monies across the globe. Now, some are wondering, of course
on hindsight, that if only the government had bailed out Lehman,
markets would not have plunged into such a mess. A few are even questioning the wisdom
of letting a bank of Lehman size fail, that too, in a globalized economy. Some,
of course, comment that the US is right in letting Lehman Brothers fail, for
capitalism squarely rests on the principle of "the lure of wealth and the fear
of bankruptcy." Even otherwise, the global imbalances in debt and
asset prices have reached such a point from which there is no scope for soft
landing, argue others. There are a few others who argue that the collapse of
Bear Stearns should have alerted the Fed and treasury to take urgent steps
to backstop such a collapse. But the political system being what it is, it
may not always be easy to convince the Congress for deployment of public funds
to guarantee private debts against `vulnerabilities'. However, for a better
understanding of it, a relook at the origins of the crisis is in order here.
A true analysis of the origin of the crisis should trace a bundle of reasons for
the global financial meltdown rather than one that culminated in the fall
of Lehman: one, low interest rates maintained by the Fed under the
leadership of Alan Greenspan for too long; two, repelling of Glass-Steagall Act of
1933 that prevented the deposit-taking commercial banks from tying up their
capital in risky bets on securities; three, relaxation in limits on leverage,
granted by the Securities Exchange Commission during 2004, that
investment banks can undertake; and, four, unbridled expansion of trading in
complex, opaque derivative transactions to even systemically important financial
institutions. Finally, it is, of course, the bonus-driven compensation
structure that made them exploit the opportunities thrown open by the free markets
to the hilt. |
