My girlfriend and I were spending Monday in New York City after attending a wedding, and the only art museum open was the Modern, so that's where we went. I had heard the news about Lehman Brothers in the morning and was following the latest carnage on Wall Street, but I was mainly trying to enjoy a vacation day. After our art-touring, and looking for the mid-town subway stop we pause to gape at the most garishly lit building I've seen yet in Manhattan. It was a massive block of video display. This thing was zipping and flashing. Then I noticed that there were media crews up and down the block, with all cameras pointing to the flashing video building. I realized I was looking at Lehman Brothers!
I was of course thrilled to be looking at the eye of the financial storm. It turns out that Lehman had been in the World Trade Center, but had moved to mid-town after nine-eleven.
News reports were rather odd. NPR interviewed Gordon Steele, author of Empire Of Wealth, an very good economic history of America. Steele compared the Fed allowing Lehman to fail to the the New York banks letting Bank of the United States fail in the 1929. I don't get it. Bank of the United States was the immigrants bank. Lehman is an investment bank that caters to the ultra-rich. The failure of Bank of the United States did set off a chain reaction; a wave of bank failures across America that launched the real Great Depression, because it had far more impact of peoples lives than the more famous stock market crash. Steele wondered is Lehman's failure would set off a similar chain of events.
Other reports described how upset Lehman's employees were at being made into such a spectacle. Most of those interviewed were angry that the Fed had not bailed out Lehman. Wow. They think we should be sympathetic?
I think what is going on today is that the Fed, and the press, and the public, are realizing that bailing out this bank (i.e. Bear Stearns) or that bank is not going to solve anything. We are facing a systemic crisis. The Fed is dealing with this by exchanging credit for just about anything at its many discount windows and TAF facilities. That sure sounds like monetization to me. But it is doing this for the few bank it chooses to save. Bank of America and J.P. Morgan seem to be on the A list. Merrill Lynch and WaMu are on the shit list.
So, what next for the financial crisis? The failure of Washington Mutual is only a few days away, if things keep going at this pace. And, after the elections, we'll have accelerating inflation, probably hyper inflation.
By the way, this financial crisis affects our ability to innovate our way out of the energy crisis. We no longer have an investment banking industry to supply capital to American industry on favorable terms. There is going to be a wave of innovation for alternative energy? Which of the almost-dead banks will finance this project? European banks will prefer to finance Euro companies like Airbus and Siemens over General Electric.
Those bonds we just guaranteed, issued by Fannie and Freddy? We will have to keep making those coupon payments even when the homes they represent are no longer generating income, because the occupants have left. More monetization. Our hapless government will monetize everything they can until our dollars are well and truly worthless.