One Year After Lehman
By: Dr. Charles Lieberman
Date: 9/14/2009
One year after Lehman was allowed to default, everyone is reviewing the financial landscape to determine whether improving conditions will be sustained. There is clear evidence that credit market conditions are vastly better, even if some aspects of the market have not fully reverted to normal. Regulatory reform appears to be going nowhere right now, reflecting the Administration's greater focus on health care reform and Congres's limited ability to do two things at once. But there is ever mounting evidence that the economy has bottomed and a recovery of undetermined speed is now underway.
Only a few month's hindsight was sufficient to enable most observers to conclude that the decision to allow Lehman to fail was a monumental blunder and will ensure Paulson an ignominious place in our history books. That conclusion remains intact after one full year. The Lehman bankruptcy triggered a dramatic breakdown in the credit markets that quickly curtailed spending in the broader economy and a precipitous decline in employment and growth. Extraordinary policy action was necessary to avoid an even more damaging outcome. After a year, credit market conditions have largely normalized. Cheap credit is allowing firms to deleverage, build cash and refinance debt, sometimes well before it actually matures. The return to normal is not complete. Commercial real estate has not yet adjusted to current market values and recapitalized accordingly. But, progress is being made almost daily and the worst seems over.
Washington is engaged in raging battles over health care reform to the point that other urgent issues have been put on hold. Everyone seems to acknowledge that regulatory reform of the financial system is needed, but it seems utterly impossible for Washington to overcome bureaucratic and lobbying efforts opposing financial reform at the same time a huge battle over health care is still underway. And the sense of urgency has been lost as the financial systems mends.
Most importantly, the economy is on the mend. Estimates of growth are being revised upwards and the Chicken Littles of the world now forecast that the recovery won't last. That's a welcome change after they forecast no recovery was in sight. With cheap credit and Fed policy unlikely to change until officials are convinced that a solid expansion is locked into place, betting on a solid recovery seems appropriate. So, the market rally seems well founded and should continue over the coming months and quarters. Download this article in PDF Format
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