One year after the collapse of Lehman Brothers, the causes of the financial crisis have come into focus, and the impact of government policies can be assessed. There's plenty of blame to go around—but we should also note the actions that saved the world's economies from a far greater calamity.
The roots of the crisis, of course, lay in the real-estate frenzy of the early 2000s. At the peak of the housing boom, major financial institutions were seriously overleveraged in real estate and real-estate related assets. These firms, as well as the major rating agencies, ignored the substantial evidence that the real estate market was in a bubble and therefore substantially underestimated the risk in subprime and other mortgage instruments.Ultimately, responsibility for the fate of many failed financial firms must fall on the CEOs who were blinded by the seemingly high profitability of financing the housing market and failed to control risk and leverage of their institutions.
The Federal Reserve was also seriously at fault for not anticipating the crisis. Alan Greenspan, along with his successor, Ben Bernanke, failed to grasp the danger posed by the excessive build-up of leveraged subprime securities by the major financial institutions. Furthermore, the Fed failed to issue any warnings—or, for that matter, take any actions—to prevent this overleveraging from occurring.
The collapse of Lehman sent the financial markets into a tailspin. A year ago investors asked, "If Lehman's paper isn't any good, whose is?" As a result there was a massive exodus from private capital to safe Treasury securities, paralyzing capital markets, freezing lending, and sending risk premiums on corporate and personal debt to record highs. These convulsions in the credit markets caused the recession from which we are just now emerging.
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