Ethicmentality - Ethics in Capitalist Economy, Business, and Society by Michela Betta

Author:Michela Betta
Language: eng
Format: epub
Publisher: Springer Netherlands, Dordrecht

Lehman Brothers: Easy Credit and Risky Debts

The collapse of Lehman Brothers is different from the collapses of HIH and Enron. Within the timespan of 7 years, the market underwent such dramatic changes that it was impossible to reach agreement about the causes that led to the global financial crisis (GFC) of 2006–2010.4 Economists and financial experts have named a number of causes for the GFC, which has been labeled the subprime mortgage crisis, a financial markets crisis, and a crisis of regulation. But consensus about the root causes remains unattainable, with experts pointing to several reasons such as lending, leverage, securitizations of debts, potentially insolvent borrowers, risk and mismanagement, deficient/excessive regulation, institutional failure, market failure, irresponsible rating agencies, behavioral issues, corporate governance, and monetary policies.5 These reasons are perceived by some observers as occurring concomitantly and by others as being separate. One worrying conclusion, however, is that academics in economics and finance did not see the crisis mount and take shape. In an article written by seven academics affiliated with American and European business and economic departments and schools (Colander et al. 2010, 427) the authors point out that “the economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold”. If the academic experts did not see it coming, how could others less expert in economic matters foresee it?

In the analysis of the global financial crisis, the 1929 crash and subsequent Great Depression casts a long shadow, either because some observers think that the Great Recession, the GFC, differs “greatly” from the Great Depression (Kolb 2010) or because it is assumed that it was the greatest financial crisis since the Great Depression (Friedman and Weiser Friedman 2010; Galbraith 2010; Wilmarth 2010). These links to the 1929 downturn are important. Back in 1949, Schumpeter identified the main causes for that crisis in what he called an army of ineffective and dysfunctional small banks (“Lilliput banks”), mismanagement of the big banks, a mortgage situation out of control, and “speculative mania” (Schumpeter [1949] 2004a, 323–324). There appear to be some recurring patterns between the two big crises. One question that keeps surfacing is whether some of the reasons for the GFC were in fact extraneous to the fields of economics and business and were more located within society (as was the case for the 1929 crisis). This idea was suggested after the 1929 economic crash by Robbins (1934) who pointed to how governmental intervention and mounting social expectations about owning properties increased pressures on the economy (see also Mitchell 1935). On 15 September 2008, after the Bush Administration refused to intervene and save it, Lehman Brothers filed insolvency and bankruptcy, paving the way to its own dissolution after 164 years of economic, financial, and political success. Peter Chapman (2010) has written a captivating story of Lehman Brothers, highlighting the involvement of the Lehman people and their bank in politics and government. Chapman reconstructs the

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