It’s been five years since Ben Bernanke turned Dick Fuld away from the discount window, sealing both their fates.
Lehman Bros. — love it or hate it — was a very necessary component of the Street.
The collapse of a risk-taking investment bank the size of Lehman left a gaping hole in the bond markets that only the Federal Reserve could fill.
Starting with a $700 billion balance sheet when the Fed stepped in to what was thought to be a temporary operation in 2008, today the Fed’s holdings stand at almost $3.7 trillion and growing.
At the same time, the balance sheets of the major investment banks have shrunk considerably since those pre-Lehman bankruptcy days.
The USS Titanic Lehman captained by Fuld has been replaced by the USS Super QE captained by Bernanke.
Last week the Fed, which had painfully pitched a sloppy multimonth explanation of “tapering” (reducing its monthly bond purchases), decided the economy is still just too weak five years after it began quantitative easing. It liked the permanence of its power, and fooled the markets by not acting.
If you add up all the reduced buying power of the major investment banks that remain today, which is greatly curtailed due to overly restrictive new regulations, you might find the financing of our economy has almost become a zero-sum game.
The Fed has stepped in and begun underwriting the economy as the investment banks have been structurally regulated out of financing America’s growth.
I wonder what the gross domestic product growth rate would be today if Lehman had been saved on that Sunday night five years ago. I believe it would be way higher than the anemic sub-2 percent we have now.
Or better yet, what if the Fed were to taper, forcing the administration and Congress to move quickly to loosen the overly restrictive anti-growth parts of their new regulations and get the economy humming again?
It’s one thing for the Fed to be accommodative. It’s something else completely for the Fed to permanently underwrite the US economy.