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If the Fed Had Bailed out Lehman Brothers, Would We Have Avoided the Great Recession? Essay


There is no doubt that the crisis of 2008 has shaped the existing economical landscape a lot. Leading to the bankruptcy of a number of companies, it made the U. S. entrepreneurships reconsider their policies and established only-the-strong-survive principle as the key strategy for the America companies in 2008.

Although the U. S. Fed could have given a second chance to the famous Lehman Brothers Company by bailing the firm out, the chances were never taken. Hence, the Lehman Brothers have gone completely bankrupt.

In a retrospective, however, the Lehman Brothers could have hardly been able to fight the financial crisis in 2008 efficiently even with the help of Federal Reserve, which means that in the case the company would have stayed afloat, they would have not been able to offer people sufficient help anyway, being almost broke themselves.

Taking a closer look at the financial situation in which the Lehman Brothers was in 2007, one must admit that the company was not doing well, according to what MacEwan and Miller say. Therefore, it is rather questionable that a loan from a bank could save the day; rather, it would serve as the means to keep the company afloat for a while, yet it would not make Lehman Brothers prosperous again. As MacEwan and Miller explain,

Lehman Brothers, Bear Stearns, Citibank, and others all held large amounts of these assets on their books. So, as the housing bubble burst, as many homeowners failed to meet their mortgage payments, and as the value of CDOs and credit default swaps fell, many banks (including some of the largest banks) saw a sharp decline in the overall value of their assets. (MacEwan and Miller, 107)

Hence, it can be considered that there was hardly any chance for the company to survive the crisis. The main problem of the Lehman Brothers was that the bank depended on the Fed much more than it was required. In its turn, the Federal Reserve followed the policy of the housing bubble (Fox), which can be defined as a run-up in the prices for housing enhanced by the certainty in future stability.

Resulting in the rapid decline of the Federal Reserve’s progress, the given policy must have been considered the only legitimate course of actions in the situation when the economics was gripped by crisis. On the one hand, the given approach seems rather reasonable, given the fact that creating the housing bubble helps spread the belief in strong economic system among the population.

On the other hand, the downside of the give strategy is that, while people believe that the crisis will not last long, the poor state of economics and the rapid increase in price for housing will finally lead to a financial collapse. According to what Friedman, Moseley and Sturr claim,

The housing bubble was in part generated by the Federal Reserve maintaining low interest rates. Easy money meant readily obtainable loans and, at least in the short run, low monthly payments. Also, Fed Chairman Alan Greenspan denied the housing bubble’s existence — not fraud exactly, but deception that kept the bubble going. (Friedman, Moseley and Sturr 133-134)

Taking into account the given information, one must admit that the Lehman Brothers’ impact on the financial situation within the state was rather small. Because of the scale of the crisis, it was quite doubtful that the bank would handle the complexities within its own structure and policies, not to mention having a tangible effect on the state economy.

Hence, it can be concluded that even if the Fed bailed the Lehman Brothers out, the housing bubble would have ultimately led to the financial instability. The Great Recession seems to have been spawned not by the inability for entrepreneurships to get investments, but from the existing housing policy.

In addition, the critical state of affairs in the sphere of finance and economics in the USA should be mentioned: “It has become commonplace to describe the current financial crisis as the most serious since the Great Depression” (Friedman, Moseley and Sturr 135). It can be alleged that the economical situation in which the USA was trapped in 2008 was quite close to the one of the 1929, known as the Great depression: “So we reap the whirlwind with a market collapse building to Great Depression levels.

Once again, we learn history’s lesson from direct experience: capitalist financial markets cannot be trusted. It is time to either reregulate or move beyond” (Fridman, Moseley and Sturr 132). Naturally, the fact that the U. S. economics was collapsing did not improve the Lehman Brothers situation. Judging by the above-mentioned, one must admit that the USA economics was way too unstable for the Federal Reserve to take risks by giving the loan to the company which could have been broken by the end of the crisis (Palley).

When considering the reasons behind the decision of the Federal Reserve to refuse to give the Lehman Brothers the loan which the company needed, one must admit that the Fed was impacted by the problems within. The fact that the Fed was suffering from the crisis was the main reason, while the fact that the Lehman Brothers lacked trustworthiness happened to be the pivoting point in Federal Reserve strategy.

To Lehman Brothers’ credit, one must mention that the company did have certain opportunities to improve their financial situation with the help of the Federal Reserve’s investments.

According to the existing evidence, there have been several attempts to bring the company back to life, along with the endeavors of Bear Sterns: “The precedent for preventing the failure of a large financial institution, initiated with Bear Stearns, now appeared to be reinforced by the Fannie Mae and Freddie Macactions” (MacEwan and Miller 110).

Still, no matter how sad this can seem, the given approach has had little effect: “Yet, while the precedent seemed very clear on September 7, the federal authorities failed to follow it a few days later when Lehman Brothers, the nation’s fourth largest investment bank, moved toward collapse” (MacEwan and Miller 110).

Fighting against the odds, Lehman Brothers tried its best to stay afloat. It must be admitted, however, that at that point, the company could hardly have any impact on the economical state of affairs within the country. Judging by the fact that the Lehman Brothers could not handle its own financial issues, it is hardly believable that the company could have had any effect on the financial processes. Hence, even if the Federal Reserve offered the bank the required loan, the collapsing Lehman Brothers would not have been able to save the day.

Therefore, it is clear that even with Lehman Brothers receiving the help of the Fed the outcomes of the crisis would have still been deplorable. Although it is quite questionable whether the company would have had the power to adjust to the situation which the U.S. market faced in 2009, it would still have taken too much time to adjust to the changes in the economics.

Hence, Lehman Brothers would not have been able to offer people a full range of their services. Even though Lehman Brothers had already lent a considerable amount of money from the Federal Reserve Bank, the former would have been able to pay the bank back with the revenues which they would have obtained from the future financial operations.

However, the Fed did not trust with the company that had already been in debt by the point at which the crisis peaked. Therefore, it seems that there is no one to blame in the given situation; it was Federal Reserve to decide whether to trust Lehman Brothers, and the bank’s decision is not to be judged by anyone except its members.

In addition, the fact that the company was facing its own crisis is worth bringing up as an argument that the Federal Reserve would have only postponed the process of the company’s regress. Even if Fed had provided the required amount of loan money, Lehman Brothers would have already been dead and gone by now, which means that the recession would have been in progress even if the Lehman Brothers still provided their services.

Works Cited

Fox, Justin. “A Random Walk from Paul Samuelson to Paul Samuelson.” The myth of the Rational Market: A History of Risk, Reward and Delusion of Wall Street. Ed. Justin Fox. New York, NY: Harper Collins Publishers, 2009. 60-74. Print.

Friedman, Gerald, Fred Moseley and Chris Sturr. The Economic Crisis Reader: Dollars and Sense. Armonk, NY: M. E. Sharpe, 2011. Print.

MacEwan, Arthur, and John A. Miller. “The Emergence of Crisis in the United States.”Economic Collapse, Economic Change: Getting to the Roots of the Crisis. Ed. Arthur MacEwan and John A. Miller. Armonk, NY: M. E. Sharpe. 65-117. Print.

MacEwan, Arthur, and John A. Miller. “Globalization and Instability.” Economic Collapse, Economic Change: Getting to the Roots of the Crisis. Ed. Arthur MacEwan and John A. Miller. Armonk, NY: M. E. Sharpe. 119-159. Print.

Palley, Thomas I. From the Financial Crisis to Stagnation: The Destruction of Shared Prosperity and the Role of Economics. Cambridge, UK: Cambridge University Press, 2012.

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IvyPanda. (2019, April 16). If the Fed Had Bailed out Lehman Brothers, Would We Have Avoided the Great Recession? Retrieved from https://ivypanda.com/essays/if-the-fed-had-bailed-out-lehman-brothers-would-we-have-avoided-the-great-recession/

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"If the Fed Had Bailed out Lehman Brothers, Would We Have Avoided the Great Recession?" IvyPanda, 16 Apr. 2019, ivypanda.com/essays/if-the-fed-had-bailed-out-lehman-brothers-would-we-have-avoided-the-great-recession/.

1. IvyPanda. "If the Fed Had Bailed out Lehman Brothers, Would We Have Avoided the Great Recession?" April 16, 2019. https://ivypanda.com/essays/if-the-fed-had-bailed-out-lehman-brothers-would-we-have-avoided-the-great-recession/.


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IvyPanda. "If the Fed Had Bailed out Lehman Brothers, Would We Have Avoided the Great Recession?" April 16, 2019. https://ivypanda.com/essays/if-the-fed-had-bailed-out-lehman-brothers-would-we-have-avoided-the-great-recession/.

References

IvyPanda. 2019. "If the Fed Had Bailed out Lehman Brothers, Would We Have Avoided the Great Recession?" April 16, 2019. https://ivypanda.com/essays/if-the-fed-had-bailed-out-lehman-brothers-would-we-have-avoided-the-great-recession/.

References

IvyPanda. (2019) 'If the Fed Had Bailed out Lehman Brothers, Would We Have Avoided the Great Recession'. 16 April.

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