Why the ghost of Lehman still haunts us

livemint.com:

Mumbai: On 15 September, it will be 15 years since Lehman Brothers—the fourth largest investment bank in the world—declared bankruptcy. To control the economic aftermath of the bankruptcy and stop many other financial institutions from getting into trouble, the US Federal Reserve, along with other central banks of the rich world, decided to print money and flood their financial systems with it. This was originally supposed to be a temporary measure to rescue the financial institutions.

But over a period of time, it became a permanent measure and much of the money printed since 2008 is still around. Further, the behaviour of the rich-world’s central banks during an economic crisis—from the dotcom bubble burst of 2000 to the Lehman crisis to the covid pandemic—has pretty much been in line with the learnings they have drawn from the Great Depression of the 1930s. It also explains why we live in a world where financial and asset bubbles keep reappearing every few years.

In this piece, we will look at this dynamic and try to understand why we’re never far from the next big bubble. After running up for many years, the Dow Jones Industrial Average, America’s premier stock market index, reached its then all-time high of 381.17 on 3 September 1929. Post the high, stocks ran out of steam.

By 13 November, the Dow was down 48% to 198.69. By 8 July 1932, the Dow was down 90% from its September 1929 peak and hit a low 41.22. Soon, the troubles of the stock market spilled over to the commodity markets as well, gradually impacting the whole economy.

Between 1929 and 1933, the US economy contracted by over 25%. This was the economic depression. The wholesale prices of non-farm products fell nearly 25%.