Allowing Lehman Brother to fail was the right thing to do

Résumé du document

In order to fully understand how and why Lehman Brothers collapsed, the subprime crisis needs to be defined first.

Extraits

[...] Thus, the fall of Lehman Brothers, and its dramatic consequences, seemed however necessary to make the financial markets safer in the long term and to give the necessary impulse to launch a comprehensive wave of regulation to protect investors. Long-term stability as a target via a deeper regulation The immediate disasters during and following the fall of Lehman Brothers (financial crisis spreading and turning into a world-wide economic crisis) cleared the way for a comprehensive regulation of the financial markets, targeting long-term stability and protection of investors. [...]

[...] Keynes and Hayek applied to the recent history of Lehman Brothers It is certain that their diagnoses of the situation as the remedies proposed would diverge as much in 2008 as in 1929. For Keynes, the current crisis would confirm the statements made in The General Theory of Employment, Interest and Money [HYPERLINK: https://en.wikipedia.org/wiki/The_General_Theory_of_Employment,_Interest_and_Money]". It is another example of the necessity of having state interventions to regulated, control, verify the financial markets. The latter are not capable of self-regulation, it is the state's role to do so. [...]

[...] These two factors constituted major channels for the propagation of financial shocks. The development of complex securitisation, via CDOs notably, typical examples of financial innovations, has sustained the financing of real estate assets by spreading risks throughout the world via securitisation. In that sense it can be argued that the global financial system, primarily European, has financed the US housing bubble. Regarding systemic institutions, the Financial Stability Board (FSB) has adopted the concept of systemically important financial institutions (SIFI), defined by their ability to disrupt the overall financial system and cause economic shocks to a set of countries in the event of bankruptcy. [...]

[...] Lehman Brother's bankruptcy was therefore to serve as an example and show other banks that the Fed would not always be there to save them. Bankers therefore had to be responsible for their actions by assuming the consequences of their decisions. According to the economist Olivier Pastré, this bankruptcy had the effect of a bomb and "woke up" the states on the stakes of the banking system. This showed that the system was not as robust as thought and that important steps were needed, culminating in the first G20 summit in Washington in November 2008 and the Basel III proposals. [...]

[...] We can therefore say, in the light of the multiplicity of reforms carried out or in progress, that there is a real fundamental work being done, which is in line with the repeated statements of the G20 since November 2008 on the need to reform the financial system. Finally, so-called systemic institutions are now also identified and closely monitored. Systemic risk can be succinctly defined as the risk of a major disruption in the provision of financial services with serious consequences for the economy as a whole. [...]