Does Our Economy Really Have to Run on Fraud?

[glitch]

http://www.counterpunch.org/hudson09032010.html

The Angelides Commission Squints Back at the Bank Bailout and the Fall of Lehman

By MICHAEL HUDSON

What is the difference between today’s economy and Lehman Brothers just before it collapsed in September 2008? Should Lehman, the economy, Wall Street – or none of the above – be bailed out of bad mortgage debt? How did the Fed and Treasury decide which Wall Street firms to save – and how do they decide whether or not to save U.S. companies, personal mortgage debtors, states and cities from bankruptcy and insolvency today? Why did it start by saving the richest financial institutions, leaving the “real” economy locked in debt deflation?

Stated another way, why was Lehman the only Wall Street firm permitted to go under? How does the logic that Washington used in its case compare to how it is treating the economy at large? Why bail out Wall Street – whose managers are rich enough not to need to spend their gains – and not the quarter of U.S. homeowners unfortunate enough also to suffer “negative equity” but not qualify for the help that the officials they elect gave to Wall Street’s winners by enabling Bear Stearns, A.I.G., Countrywide Financial and other gamblers to pay their bad debts?

There was disagreement last Wednesday at the Financial Crisis Inquiry Commission now plodding along through its post mortem hearings on the causes of Wall Street’s autumn 2008 collapse and ensuing bailout. Federal Reserve economists argue that the economy – and Wall Street firms apart from Lehman – merely had a liquidity problem, a temporary failure to find buyers for its junk mortgages. By contrast, Lehman had a more deep-seated “balance sheet” problem: negative equity. A taxpayer bailout would have been an utter waste, not recoverable.

Lehman CEO Dick Fuld is bitter. He claims that Lehman was unfairly singled out. After all, the Fed lent $29 billion to help JPMorgan Chase buy out Bear Stearns the preceding spring. In the wake of Lehman’s failure it seemed to gain the courage to say, “Never again,” and avoided new collapses by bailing out A.I.G. – saving all its counterparties from having to take a loss.

[OllieLotte]

1. I'm not going to argue if they should have been baled out or not.

I will say is that the government sent mixed signals. If Bear Stearns had been allowed to fail, the market would have reacted and worked toward finding more capital. However, everyone felt "covered" by the government safety net and were caught totally off guard and panicked when Lehman went under. Consistency counts and mixed messages don't help. Picking winners and losers should be the government's job.

[ixion]

2. Of course not. The problem is that we have allowed fraudsters to take the helm

the top 1% are steering this ride, and we're in the back seat holding on.

[Crazy Dave]

3. All the banks that were "Too big to fail" are now even bigger n/t