AlterNet plus comments at bottom

Another One Bites the Dust: What’s Behind the Crash of Lehman Bros

By Otto Spengler, Asia Times. Posted September 15, 2008.

The wake of the financial meltdown on Wall Street is going to badly damage confidence about retiring on an investment portfolio.

Lehman Brothers survived the American Civil War, two world wars and the Great Depression, but today, Monday, the firm that set the standard in fixed income markets will be liquidated. Potential losses are so toxic that none of the major financial institutions was willing to acquire it.

Lehman’s demise follows the failure last week of the two American mortgage guarantee agencies, Fannie Mae and Freddie Mac. It is remarkable that the US authorities, exhausted from their efforts to bail out the mortgage guarantors and other firms, have left Lehman to its fate.

An enormous hoax has been perpetrated on global financial markets during the past 10 years. An American economy based on opening containers from China and selling the contents at Wal-Mart, or trading houses back and forth, provides scant profitability. Where the underlying profitability of the American economy was poor, financial engineering managed to transform thin profits into apparently fat ones through the magic of leverage.

The income of American consumers might have stagnated, but the price of their houses doubled during 1998-2007 thanks to the application of leverage to mortgage finance. The profitability of American corporations might have slowed, but the application of leverage in the form of mergers and acquisitions financed with junk bonds multiplied the thin band of profitability.

Wall Street and the City of London rode an unprecedented wave of profitability by providing overpriced leverage to consumer and corporate markets. Led by the financial engineers at Lehman, the securities industry grew an enormous infrastructure of staff, systems, and financial exposure. They were so successful that when the music stopped, there was no way to liquidate this mechanism gracefully. It only could be allowed to collapse.

The Great Crash of 2008 has entered a new phase, judging from the market opening in Europe and US equity futures prices. Lehman’s failure and the sharp decline at other financial firms, notably American International Group (AIG), the world’s largest insurer, have pushed equity values down to their lowest levels of the year.

As I wrote on May 20, the proximate cause of the Great Crash is the enhancement of poor returns to capital through leverage. The decline of returns to capital, though, stemmed from a global imbalance of supply and demand for capital in response to the rapid aging of the world population. The aging pensioners of Europe and Asia must find young people to pay interest into their pensions, and they do not have enough young people at home. Germans aged 15 to 24, on the threshold of family formation, comprise only 12% of the country’s population today and will fall to only 8% by 2030. But one-fifth of Germans now are on the threshold of retirement and half will be there by mid-century.

In effect, Americans borrowed a trillion dollars a year against the expectation that the 10% annual rate of increase in home prices would continue, producing a bubble that now has collapsed. It is no different from the real estate bubble that contributed to the Thai baht’s devaluation in 1997, except in size and global impact.

It is easy to change the financial system, I argued in my May 20 essay. The central banks can assemble on any Tuesday morning and announce tougher lending standards. But it is impossible to fix the financial problems that arise from Europe’s senescence. Thanks to the one-child policy, moreover, China has a relatively young population that is aging faster than any other, and China’s appetite for savings vastly exceeds what its own financial market can offer.

There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear.

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Yes. Does this shine a light on the election?

Posted by: oregoncharles on Sep 15, 2008 10:02 AM

For an even blunter analysis, see Mike Whitney’s piece at counterpunch.org today.

Maybe, just maybe, nobody really wants to be President when it all comes down. How would YOU like to be Herbert Hoover?

This would explain a great puzzle: the sudden collapse of Obama’s heretofore superb campaigning skills, and his blatant efforts to alienate core Democratic voters (e.g., his vote for the FISA bill.)

Maybe he’s had a briefing from Robert Rubin, he now understands how bad it’s going to be, and he doesn’t WANT to be President next year. That would make McPalin sacrificial lambs in a whole new sense: not because they can’t be elected, but because no one in their right mind would want to be.

So if it seems like Obama is TRYING to lose, maybe you’re right!

» RE: Yes. Does this shine a light on the election? Posted by: nochicagoboys

» a note about market exuberance preceding 10/29/1929 Posted by: lexicon

» History repeats itself Posted by: Cathyc

» RE: Yes. Does this shine a light on the election? Posted by: VZEQICVA

» RE: Yes. Does this shine a light on the election? Posted by: oregoncharles

» RE: Yes. Does this shine a light on the election? Posted by: kelt65

If Only ...

Posted by: mmckinl on Sep 15, 2008 11:37 AM

"I see no solution except to allow American households to begin the painful process of rebuilding their balance sheets, which implies a slowing economy for the next two years."

This debacle will take more than two years to sort out. As far as household balance sheets, they have been shredded. For millions of households it is bankruptcy, for millions more, losing their grasp on the middle class and life as paupers.

We are nowhere near to being through this mess as trillions of $ in Alt-A, prime, car, student, commercial and credit card debts go bad.

We aren’t even half way through this.

WHat’s going on here...

Posted by: lexicon on Sep 15, 2008 12:50 PM

What’s going on here, is that the elite money has already cashed out, they’ve been doing it over the last couple months...and the whole monetary system is going to crash.

...but, it won’t matter, because the people who MATTER, are safely out in US CURRENCY-PROOF positions.

It’s the rest of us assholes, that have to buy milk, gas, butter, diapers and ground-up-cow-meat with US Dollars, that are going to suffer.

lexicon

Excellent piece

Posted by: jebpgh on Sep 15, 2008 1:25 PM

Well written, concise and under-stated. One of the best short commentaries I’ve read on the crisis.

The war is much of the crash

Posted by: PaulK on Sep 15, 2008 1:29 PM

This war since 2001 has set the U.S. back about 4 trillion so far, if you count all of the hollowing out of people and infrastructure that we’ve done. We can no longer afford the interest on 6 trillion euros, payable in euros. Worse, our creditors want to see some cash or else they’re not kiting any new loans to us.

We’ve approached a point where the current regime has a problem keeping up appearances because they have no cash. You’ve seen this in political campaigns, in megachurches going under, in corporations kicking off. Always they scream a lot, they blame somebody else, they ask for concessions from the workers... and then one day the phone is shut off. In this case the regime can’t bail out their buddies. Sorry!

So what does a cash-and-carry government do? Print more money!

First, the dollar isn’t worth a tenth of a euro. That’s your life savings in your bank, or whatever your bank is called tomorrow.

Next, every corporation in the US is for sale cheap to foreigners.

We get stagflation. Big stagflation.

We cut back on luxuries like public libraries and doctors and jobs for everyone and food. Scarce money is reserved for foreign mortgage payments and soldiers that keep the regime in power. I wish I could call it a democratic government but they’re stealing millions of votes one more time, so until we see an unrigged vote they’re an un-American regime.

» RE: The war is much of the crash Posted by: VZEQICVA

» But don’t worry because McCain and Obama will make sure there’s lots of war to finance. Posted by: edgar1

» The Pentagon:Beacon of Prosperity in a Dark Night Posted by: edgar1

Forced Thriftiness

Posted by: dayahka on Sep 15, 2008 2:28 PM

We all know that no one is going to "conserve" voluntarily, and very few are going to "simplify" their lives and turn to thrift. But a way had to be found to lower the standard of living for everyone in this country (well, most everyone, the rich excepted) while the standard of living increases elsewhere in the world. So, how do you get people to be thrifty and to save rather than consume? Easy, you take away their money and you make everything more expensive. But you make it seem as if this is happening due to forces beyond your control (the act of god clause in government) and you mumble and grumble about the need for reforms and regulations.

» What does your average American know about thrift? Posted by: Cathyc

Wow&rsquo:

Posted by: kelt65 on Sep 15, 2008 3:07 PM

A post by Spengler on alternet?

I think my head will explode

Normally this guy is some kind of raving lunatic cross between a monarchist and a neocon, but he makes sense here.

» RE: Wow&rsquo: Posted by: nochicagoboys

Utterly unashamed of schadenfreude, I love what happened today.

Posted by: andabottleof_rum on Sep 15, 2008 3:09 PM

There was even a news story about Lehman executives leaving their offices in tears, angry at reporters capturing their grief and shock. It’s beautiful to imagine.

When Wall St. workers, whether executives, traders, secretaries, or what have you, start leaping from windowsills and splattering on the pavement, then we can see real change.

» Jumping from skycrapers Posted by: Cathyc

» RE: Utterly unashamed of schadenfreude, I love what happened today. Posted by: JSquercia

» Ah Yes, I remember it well. Posted by: edgar1

» RE: Utterly unashamed of schadenfreude, I love what happened today. Posted by: nochicagoboys

CRASH @ the KOOL-AID STATE

Posted by: Mister_PsyOps on Sep 15, 2008 4:50 PM

This column is a complete whitewash that doesn’t bother to mention that the vaunted "Federal Reserve" Corp (not federal, zero reserves) is an unconstitutional protected monopoly flimflam. A private Fascist bank that prints money out of thin air by and for parasite freeloaders.

What is going down is garden-variety FASCISM at an entire economy based on organized corporate crime for what late and great George Carlin called the "Owners" that pull most all the strings and all the bunko stings.

No crooked ponzi scheme lasts forever and this one will sputter out till it dies. Then the criminal parasites that run the "Federal Reserve" Corp will pick up the pieces and re-label their next Orwellian sham something new. It will no doubt be presented by a corporate stooge like Obama or McCain and called something like "The MOM & APPLE PIE ACT". (Mom will be the usual Fascist and the Pie will be chock full of more police state lies).

The MSM brainwashed public will no doubt buy it - as they continue to buy the genocide of bogus "war on terror".

Nader Forever!

Posted by: Gaubladt on Sep 15, 2008 5:08 PM

If Al Gore hadn’t taken all those votes away from Nader in 2000, we wouldn’t be in this ghastly situation now.

» Jesus Christ and McDonalds Forever! Posted by: Cathyc

» Sheep Forever! (Gore’s entire family was bankrolled by Armand Hammer & Big Oil) Posted by: PointMan

Wall $treet needs to be shut down sooner if this country is going to recover ! Posted by: maxpayne on Sep 15, 2008 6:23 PM

Main Street is on life support at best. Once China FLIPS the FORECLOSURE SWITCH, the Lehman Brothers fiasco will only look like a warm-up in pale comparison.

The Great $770 Trillion Nominal Derivative Meltdown...

Posted by: gazooks on Sep 15, 2008 7:59 PM

... is just kicking in. Where she stops, nobody knows.

The rage of delirious, totally unregulated leveraging of risk emanating from Wall Street is a global phenomenon. Trouble is, there’s no facility enabling an orderly unwinding of such profligate obligations.

Strange that no one thought of that.

Sing it agin’ Alan G.

Posted by: Sojourner on Sep 15, 2008 9:29 PM

I’m forever blowing bubbles

Pretty bubbles in the air

They fly so high, nearly reach the sky

Then like my dreams they fade and die.

Fortune’s always hiding

I’ve looked everywhere

So, I’m forever blowing bubbles

Pretty bubbles in the air.