Super Lehman Bros. — Lessons Lost From Wall Street’s Flattening

Time magazine’s Justin Fox left out an important lesson not learned from last year’s bankrupcy of Lehman Bros.

In his analysis “Three Lessons of the Lehman Brothers Collapse,” Fox managed to conclude that 1) the financial system is fragile, 2) government action is helpful, and 3) crisis limits democracy.

NEW YORK CITY, N.Y. — Time magazine’s Justin Fox left out an important lesson not learned from last year’s bankrupcy of Lehman Bros.

In his analysis “Three Lessons of the Lehman Brothers Collapse,” Fox managed to conclude that 1) the financial system is fragile, 2) government action is helpful, and 3) crisis limits democracy.

However sexy Fox’s “lessons” may appear, they really hide an ugly reality: powerful forces manage the financial system, the federal government, and the limits of democracy.

And it’s all managed by stupid people. Really stupid people. The difference between these stupid managers and stupid criminals “as seen on teevee” is purely artificial.

Truth be told, the real lesson lost in the Wall Street meltdown of 2007 is that having money does not equal having brains; it equals sustaining stupid, ancient systems.

Had America learned this lesson, for example, with the sports card and comic book busts of the 1980s and 1990s, never would have happened the Asian financial crisis in 1997, the dot.com bubble in 2000, or the implosion of the Enron Corporation in 2001.

Reporters Bethany McLean and Peter Elkind can attest to the Texas energy giant’s demise; they wrote the best-selling book on it that became the 2005 documentary film, Enron: The Smartest Guys in the Room.
McLean and Elkind’s title is, of course, tongue-in-cheek; the company’s top executives were anything but rocket scientists.

To be fair, Douglas Rushkoff, the author of Life, Inc.: How the World Became A Corporation and How To Take It Back, would rather paint Enron and Lehman’s handlers less the court jesters and more the video game players.

“The marketplace in which most commerce takes place today is not a pre-existing condition of the universe. It’s not nature. It’s a game, with very particular rules, set in motion by real people with real purposes,” Rushkoff wrote in his “Economics is Not a Science” essay on Edge.org.

But, who are these stupid people that invented the operating system on which our high-tech global economic platform runs?

“13th-century monarchs,” Rushkoff explained.

And these guys knew nothing of natural science when they lived; they just assumed power for themselves, and how could they not when the religious institutions of their day just so happened to brand scientists as blaspemers and heretics?

Right, Galileo?

By Rushkoff’s logic, Wall Street’s trillion-dollar bailout following Lehman’s collapse last September played out just like another play in the monarchist’s old playbook.

In fact, the man who allowed Lehman to fall — President George W. Bush — even admitted the play’s existance last December: “I’ve abandoned free-market principles to save the free-market system.”

Remember: Bush isn’t the sharpest knife in the drawer either. But neither is his Democratic opponent, Sen. John Kerry. Both were C students at Yale. Bush, however, had a higher four-year average (one-point) than the loser in the 2004 presidential election.

Interestingly enough, with $167 million under his belt, Sen. Kerry is still the wealthiest member of Congress, though his wealth is down 28 percent since Roll Call’s last annual examination. Also, if you take into account his wife’s $1 billion net worth from her ketchup fortune, Kerry’s wealth is probably greater.
In other words, don’t cry for the Kerry household.

Actually, if you read Time’s Fox right, there’s no need to cry over any spilled wealth now.

“But while there are surely lots of potholes and wrong turns ahead, there’s ample evidence that the economy — both in the U.S. and worldwide — is in the early stages of a rebound,” he wrote. “And we have decisions made by government officials to thank for that.”

What evidence? What officials?

Since Fox failed to mention one of either, take the word of Joseph Stiglitz, the former chief economist at the World Bank, University Professor at Columbia University, and 2001 Nobel Laureate in Economics.
Bear in mind that Stiglitz destroyed Fox’s hollow claims.

“We’re going into an extended period of weak economy, of economic malaise. The U.S. will grow but not enough to offset the increase in the population,” Stiglitz told The Telegraph/UK last week. “If workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

Fox oddly agreed with Stiglitz on the point that is also the title of Stiglitz’s op-ed piece reflecting on the lessons of Lehman’s fall, “For All Obama’s Talk of Overhaul, the U.S. Has Failed to Wind in Wall Street.”
Fox said that President Barack Obama’s proposed financial reforms are “not so much” in the vein of President Franklin D. Roosevelt’s “New Deal” during the Great Depression.

Stiglitz went deeper, noting that “gambling, trading, and speculation” will continue in the market without justification, check, or balance as American taxpayers underwrite the whims of these financial institutions.
Stiglitz also called Lehman’s demise a demonstration in “incompetence” and suggested that the powers-that-be at the Federal Reserve (Ben Bernanke) and the Treasury Department (Henry Paulson) should have been better prepared in handling the situation, considering the rising signs of the “financial bubble.”

“Lehman Brothers was a symptom of a dysfunctional financial system and regulatory failure. It should have taught us that preventing problems is easier, and certainly less costly, than dealing with them when they become virtually intractable,” he wrote.

However, after reading Rushkoff’s essay, one might call Stiglitz naive for thinking that the whiz-kids on Wall Street ever really thought they had taken any risks with other people’s money at all and therefore needed protection from themselves.

“If science can take on God, it should not fear the market. Both are, after all, creations of man,” noted Rushkoff.

In response to Rushkoff’s analysis of the economics trade, scientific historian George Dyson, replied:
“How to best transcend the current economic mess? Put Jeff Bezos, Pierre Omidyar, Elon Musk, Tim O’Reilly, Larry Page, Sergey Brin, Nathan Myhrvold, and Danny Hillis in a room somewhere and don’t let them out until they have framed a new, massively-distributed financial system, founded on sound, open, peer-to-peer principles, from the start. And don’t call it a bank. Launch a new financial medium that is as open, scale-free, universally accessible, self-improving, and non-proprietary as the Internet, and leave the 13th century behind.”