Martin Wolf: We still live in Lehman’s shadow:
fifth anniversary of Lehman’s failure is an opportunity to assess where we have come from and where we are going. How important, for example, was Lehman’s failure? It was less significant than many believe… a financial crisis was on its way, anyway… [and] the financial crisis was a manifestation of overstretched balance sheets…. This is not to argue that the decision to let Lehman fail in September 2008 was unimportant. The shock began a devastating run…. The idea that this was a private [banking] system was revealed to be an illusion. Taxpayers woke up to discover that bankers were exceptionally highly paid and out-of-control civil servants.
Governments and central banks dealt with the global financial panic relatively quickly and effectively, though a devastating aftershock emerged in the eurozone in 2010. Yet eliminating panic and even restoring the banks to health relatively quickly, as the US did, was not enough to generate a vigorous recovery….
Worse, the one way we seem to know to restore health to our economies is to restart the credit machine…. On the principle that a bad recovery is better than none, I accept over-reliance on monetary policy as the least bad available option. In countries suffering from foreigners’ mercantilism and domestic aversion to investment and fiscal deficits, little alternative seems to exist. But managing that policy is really tricky. For this reason, though not only for this reason, it is high time that the White House nominated the next chair of the Fed. It needs to be someone who understands and believes in the only policy available.
It should, of course, be Janet Yellen, the current vice-chair.