Sunday was the 5-year anniversary of the failure of Lehman Brothers – there was a live-streaming Twitter account, an good article by Liam Dann reminiscing, and a pointer to what he wrote about the crisis at the time.
Given how well his article held up, I was tempted to see what embarrassing things I said at the time – given that the magnitude of the deterioration was definitely worse than I could tell in real time. Luckily, my posts are simply descriptive things pointing out some of the factors we need to keep an eye on (here on the day, here a few days later) – my view of the situation had shifted significantly since the failure of Bear Sterns in March (where I comment about moral hazard in comments).
When I think back to those times my way of compartmentalizing the issues was the same, but my assumption about a central banks reaction function was very different – I had thought that central banks would be “conservative” in terms of bailing out financial institutions more readily than they would optimally need to, as a result moral hazard appeared to be a more timely issue than the actual collapse of a financial institution which they would ‘never allow’. My expectations, and the expectations of many people in financial markets, took a bit of a shock when Barclay’s dropped out of the purchase and the Fed allowed Lehman’s to simply declare bankruptcy.
The OBR, macroprudential policy, comments about asset bubbles – these are all central banks feeling out ways they can improve policy in the financial stability space. Prior to the crisis, there for analysts there was an assumption that either there were policies in place to avoid a crisis (a minority) or that central banks could quickly and sufficiently respond to a crisis (a majority, eg here although I am thinking also in terms of consistent expectations in financial markets) – and it is arguments about “why this failed” that is driving a lot of discussion forward. And this is good.