One year since the collapse of Lehman Brothers

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One year since the collapse of Lehman Brothers
15 September 2009

The collapse one year ago today of the 158-year-old Lehman Brothers,
the fourth largest US investment bank, set in motion an avalanche that
threatened to engulf the entire global financial system.

It was followed two days later by an $85 billion US government bailout
of the insurance giant American International Group (AIG) and in the
ensuing weeks by a run on the $3.6 trillion international money
market. The commercial paper market, which provides the financial
lubricant for the global capitalist economy, seized up. Financial
transactions virtually came to a halt in every market as banks and
finance houses held on to their cash, fearing they might need it
themselves or that those to whom they lent money might collapse.

The immediate origins of the crisis lay in the downturn in the US
mortgage finance market at the beginning of 2007 following the housing
bubble, fueled by cheap credit, of the earlier years of the decade.
The buying and selling of mortgage-backed securities had assumed ever
greater importance for the Wall Street banks and investment houses,
leading to a vast expansion of the so-called “sub-prime” market based
on increasingly risky investments.

The end of the housing bubble impacted Wall Street in the form of a
steep decline in the stock market in August of 2007—at one point there
were predictions of a 1,000-point fall in a single day—as the crisis
began to spread internationally, with the bailing out of two German
banks that had been heavily exposed to the US mortgage market.

The US Federal Reserve intervened as it had in previous financial
storms—the Wall Street collapse of October 1987, the Asian economic
crisis of 1997, the failure of Long Term Capital Management in 1998,
and the bursting of the dot.com bubble in 2001—by cutting interest
rates and easing credit conditions. But this time, these measures
failed to alleviate the crisis.

Over the ensuing months, the problems in financial markets grew
steadily worse until they erupted in March 2008, when the US
government mounted a $30 billion operation to secure the takeover of
the investment bank Bear Stearns by JPMorgan Chase. Bear Stearns, the
second largest US underwriter of mortgage bonds, had been hit by the
failure of two of its hedge funds the previous July and there were
growing fears that it did not have the cash to meet creditors’ claims.

A World Socialist Web Site editorial board statement of March 18 drew
out the implications of the Bear Stearns collapse: “However the events
on Wall Street play out during the next few weeks, there is no
question but that a crisis of historic magnitude is now unfolding.
After a generation of relentless media propaganda, which touted the
infallibility of the capitalist market and the genius of Wall Street’s
financial wizards, the United States economy now stands on the very
brink of an economic crisis on a scale not seen since the Great
Depression.”

Just six months later, this warning was confirmed.

The crisis of September and October 2008 was to trigger a bailout
operation by the US administration and governments around the world on
an unprecedented scale. While the massive injection of funds to prop
up the financial system—in the US alone total commitments, if fully
met, would amount to $23.7 trillion—has been touted as a means to
prevent economic catastrophe, the way in which this operation was
organized from the beginning revealed its essential purpose—to protect
at all costs the most powerful financial interests.

The initial plans were drawn up by a small group, headed by the
then-US treasury secretary and former Goldman Sachs chief executive,
Henry Paulson, meeting in the offices of the New York Federal Reserve.
Among those present was Timothy Geithner, the current US treasury
secretary, who was at the time the president of the New York Federal
Reserve, and the chief executive of Goldman Sachs, Lloyd Blankfein.

In subsequent weeks the question was often asked: Why was not Lehman
Brothers bailed out when just two days later AIG was given a lifeline
of $85 billion? Although it was not widely known at the time, Goldman
Sachs was AIG’s largest trading partner and stood to lose at least $20
billion if the insurance giant went down.

The initial emergency meetings established the pattern to be followed
thereafter: the bailouts were to be organized by and for the banks,
with government officials charged with the task of organizing the
necessary finance and legislation.

Since the beginning of the global financial crisis and the onset of
the deepest recession since the 1930s—the fall in global industrial
production, world trade and global equity prices to June of this year
was greater than in the corresponding period in 1929-30—major
governments have spent trillions of dollars in bank bailouts and
stimulus packages, estimated to be equivalent to at least 18 percent
of global gross domestic product.

This has produced signs of “recovery” in the form of a rise in equity
markets, a certain stabilization of the financial system and, above
all, increased profits for the banks. But the conditions confronting
the working class have steadily worsened, with unemployment now on the
verge of 10 percent in both the US and Europe.

While trillions of dollars have been spent, not one of the underlying
problems that led to the crisis has been resolved, none of those
responsible has been held to account and all the same financial
methods that led to the crash continue to be employed.

The crisis has not been resolved. All that has happened is that the
massive debts and “toxic assets” of the banks and finance companies
have been taken onto the books of the capitalist state, acting as the
executive committee of the financial aristocracy. Now this debt is to
be paid for through sweeping attacks on the social conditions of the
working class.

In a recent speech on the need to prepare an “exit strategy,” the
managing director of the International Monetary Fund, Dominique
Strauss-Kahn, set out the agenda that must now be adopted: “The most
important step is to contain pension and health care costs. … While
cost-cutting reforms in this area may be politically difficult, they
are essential to secure fiscal sustainability.”

This program is already being implemented. In the US, after
“restructuring” the auto industry, the Obama administration is moving
to slash health care. In Britain, whatever party comes to power after
the forthcoming elections will cut spending on a massive scale. A
recent article in the London-based Financial Times insisted that
consumption in Britain would have to be reduced by 20 percent from the
levels of 2006-2007. In Australia, which has not officially entered a
recession, the Rudd Labor government has warned of the “pain of
recovery” as it commits itself to cut the budget deficit.

While the official “newspeak” is of “recovery” and “turning the
corner,” more perceptive commentators have noted that nothing has been
resolved and the dangers of a further collapse are increasing.

According to the former International Monetary Fund chief economist,
Simon Johnson, there is very little “reform” of the financial system
either under way or on the table. The “facts on the ground,” he notes,
are simple: “Our banks and their ‘financial innovation’ have not been
defanged. In fact, they are becoming more dangerous. … We have lived
through a tremendous crisis—and learned how close we came to a second
Great Depression—yet nothing is now happening to prevent a repeat of
something similar in the future.”

One year on, the working class must draw the necessary lessons from
this crisis. Whatever the immediate course of economic events, it must
take matters into its own hands and strive to remove the threat of
catastrophe hanging over its head.

There is no rational solution to this historic crisis within the
framework of capitalism. Only by ending the profit system and
overthrowing the financial oligarchy, which has concentrated effective
political power in its hands, can the future be secured through the
establishment of a planned world socialist economy. This is the
perspective of the International Committee of the Fourth International
and the World Socialist Web Site.

Nick Beams

http://www.wsws.org/articles/2009/sep2009/pers-s15.shtml

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