They Got Away with It

The SEC has decided to scold Lehman Brothers executives instead of bringing fraud or even civil charges.

U.S. Securities and Exchange Commission investigators may issue a public rebuke of Lehman Brothers Holdings Inc. and its former executives instead of suing them for actions that led to the firm’s 2008 failure

It's even more ridiculous. The SEC may, implying may not issue a report on the Lehman Brothers investigation:

The commission would have to vote on whether to issue a report and it’s still possible that the SEC may decide to bring legal claims in court, the people said. The 21(a) reports, which lay out allegations of misconduct without imposing penalties, have only been issued six times in the past decade.

To date no criminal charges have been brought against the the large financial institutions or their executives who are responsible for the financial crisis. Only New York City has issued a subpoena on Goldman Sachs and started a criminal investigation. In the video segment below, Elliot Spitzer and Matt Taibbi below spell out the lack of justice.



Earlier, Bloomberg pointed out the Federal Reserve gave loans as low as 0.01% to foreign banks. This was basically a subsidy to foreign banks.

Credit Suisse Group AG (CS), Goldman Sachs Group Inc. (GS) and Royal Bank of Scotland Group Plc (RBS) each borrowed at least $30 billion in 2008 from a Federal Reserve emergency lending program whose details weren’t revealed to shareholders, members of Congress or the public.

The $80 billion initiative, called single-tranche open- market operations, or ST OMO, made 28-day loans from March through December 2008, a period in which confidence in global credit markets collapsed after the Sept. 15 bankruptcy of Lehman Brothers Holdings Inc.

Units of 20 banks were required to bid at auctions for the cash. They paid interest rates as low as 0.01 percent that December, when the Fed’s main lending facility charged 0.5 percent.

Finally, we have a ahem, lame hard hitting segment on high frequency flash trading. We have super computers, probability, routing algorithms and co-location services being the money makers on Wall Street instead of strong companies that are making great products and profits. 70% of trades are high frequency trades.



With such an ongoing disaster and nothing happened to change things, it's no surprise we would see this, a segment warning we are the verge of a Great, Great Depression. Minimum we will muddle.





Robert Lucas on Lehman Brothers

Even Nobelist Robert Lucas, an apologist for Fed actions in 2008, (and blaming the larger problems on policies of the Obama administration), points to centrality of Lehman Brothers collapse.

From Lucas' PPT, widely available as PDF from

Economically, the routine use of short term borrowing is identical to the issue of demand deposits: “you give me cash today, take it back (withdraw it, decline to roll it over) whenever you like”

People extending short term credit to Lehmann and other investment banks to get a slightly higher return than the T-bill rate did not think (or did not admit) that they were taking on risk, and neither did those who extended credit to them, accepting their Lehmann paper as collateral

In effect, “shadow banking system” was created, uninsured and unregulated

The economics of the 2008 “credit freeze” following the Lehman Brothers failure were identical to the economics of the 1930s bank runs

The effects of the credit freeze were also similar to the effects of the bank runs of the 1930s

A part of the effective supply of liquidity supply had vanished, other money-substitutes now became suspect, everyone wanted to get into government-issued or government-insured assets: reserves, currency, and insured deposits

Could see this in the widening spreads between treasury bills and commercial paper, between government and corporate bonds, etc.

A flight to currency? Not exactly. But a flight to government promises of currency, current or future

All of this similar to earliest stages of the Great Depression

Lucas opines, by way of a his questionable interpretation of some cherry-picked evidence, that the great culprit in the lasting phenomena of a Great Depression or Great Recession was (is) anti-business sentiment of the American people. (???) Based on 1930s popular magazine coverage that I have seen (old, fading and yellowed), what Lucas claims now is exactly what was claimed by many economic popularizers (NOT populists) in the 1930s.


Critque of Lucas analysis

Really, Nobelist Lucas is just re-hashing the samo Milton Friedman analysis of the Great Depression -- apparently attempting to provide cover for the bankrupt Republican critique of the bankrupt Democratic attempt to revitalize a zombie-like Keynesian policy in a corporate globalized world system. (As elsewhere here in EP, "creating jobs WHERE?")

This is all available through Matthew Yglesias at ThinkProgress --

Yglesias at ThinkProgress

or at --

University of Washington

I cannot see how Lucas can say that the U.S. is "imitating European policies on labor markets, welfare, and taxes." Nor can Yglesias, who effectively ridicules Lucas' recent 'work' as "an essay about Barack Obama and how, contrary to conventional wisdom, he’s far and away the most significant policymaker in the history of the republic."

(I reference here page numbers of Lucas PDF, appears to be something like a PPT file that he used for his lecture.)

Can we meaningfully talk about "European policies" unless we are talking about the Euro? Labor union membership in France, for example, is a much smaller percentage than in Germany, where unions for about a century have been strong and elaborately structured -- like industry itself. In Germany, even the enlisted members of the armed forces are unionized!

Similarly, the medical systems and related payment (or insurance) systems are hardly uniform across Europe. This also applies to other institutions of the 'welfare state', or, in European terms, to 'social democracy'. Moreover, it is impossible to compare those institutions in a small nation like Estonia with a nation like Germany or Italy. And, IMO, comparisons of larger nations like Germany and Italy are also meaningless. Germany is like the apple while Italy is like the orange.

I think the only meaningful comparison between U.S. and Europe is between the Fed and the relatively new European Central Bank.

So, my 2¢ is this: the causes of the Great Recession are systemic. I refer to the necessary reforms put forward by the American Monetary Institute.

I note that the People's Bank of China has been pursuing a comparatively strict monetarist policy, even as China appears to be moving toward "European" ways such as minimum wage legislation.

I think that Lucas' analysis of Fed policy in early years of the Great Depression and in first decade of 21st Century is okay, although not contributing anything new. Also, his understanding about the importance of government providing a stable background ("centrally important") is sound, along with free-market competition (p. 5). Likewise, Lucas' understanding of the positive contribution of "a common [national] civilization" (social cohesion) in countries like Japan and and in continental Europe (p. 8).

However, Lucas' opinion that there is a substantial persistent gap, dating specifically to the 1970s, between per capita income in the U.S. compared with many other countries (p. 7) is a specious example of the problematic and challenging science of econometrics (pseudo-science when used with bias). I believe that the numbers used in the graph are dependent on "purchasing power parity" (PPP) calculations that are estimates at best and subject to bias.

My suspicion is that Lucas is cherry-picking his data. Would a Nobelist do such a thing?

Could a Nobelist be guilty of cherry-picking?

My suspicion is that Lucas is cherry-picking his data. Would a Nobelist do such a thing?

Where are Australia and New Zealand? Where are Russia and Yugoslavia? Where are Kuwait and Saudi Arabia? (Of course, government stats are notoriously hard to find for Saudi Arabia.) Where are Tunisia and Brazil, Mexico, India, South Korea, Sweden, Finland and Norway? But, of course, the data have been cherry-picked to make a point.

Even granting that Lucas' graph is based on reliable and valid measures of real income per capita (comparable across cultures and nations), the graph actually shows that the gap arose in the 1940s, moderating by about 1950 and continuing on from that time, with perhaps a stabilizing trend for the last three decades of the 20th Century.

The chart stops at the year 2000, long before the Great Recession! Apparently, Lucas thinks that the 'natural' course of things, projecting from the year 2000, would be that the gap would disappear ... and perhaps it soon will, or already has, by way of a decline in U.S. productivity. The comparison that should have been pursued in detail (dropping the others) would be U.S. compared with Canada, but that would be embarrassing to Lucas' thesis -- because Canada hasn't and isn't really experiencing the Great Recession as we are --

Reuters report on Canada's recession

But let's say, okay, there was such a gap stabilizing in the 1970s and continuing for three decades. Lucas' opinion that this gap has been caused by "European" tax and regulatory structures and represents a "larger welfare state" (p. 10, and, "policies do matter", p. 11), is still nothing but (as Lucas acknowledges) just his opinion, pure and unsupported by impartially presented evidence. Lucas hardly represents any kind of consensus even among his elite peer-group of Nobelists in economics!

So, here's a proposal: the gap was due to U.S. domestic crude oil production, which has now mostly played out.

Alternative to Lucas' unsupported premise

Here's my proposal offered as an alternative to the Lucas analysis: differences between U.S. and comparison group per capita real income were due to U.S. domestic crude oil production, now mostly played out. (Exhaustion of a non-renewable resource.) My thesis is much more subject to verification than Lucas', and references more objective measures -- although I have not investigated and presented them in charts and all.

NOTE: Norway is like Number Two in per capita real income globally and Number One in the EU, but since when is that? Since, specifically, about 1990 when price of crude oil went up! It is generally acknowledged that most of Norway's high per capita income rating is the direct result of oil production. AND, oil income goes into (oh, oh, Nobelist Lucas!) ... you guessed it ... WELFARE!

Lucas emphasizes that "policies do matter," but that hardly makes them comparable! IMO, all governmental social policies are well-intended in any democracy, but it may be that the efficiency of implementation of policies matters more than the nature of the policies themselves. For example, it is one thing to legislate full employment, but something else again to effectuate it. (Perhaps there is an exception to the rule: democratic nations that are disintegrating or have become dominated by foreign powers may enact social policies that are definitely NOT well-intended!)

Anyway, what I say to Lucas is this: NATURAL RESOURCES MATTER! (And Lucas fails to consider that!)

I think we should follow trends in Canada, if we want to continue the comparison-analysis on which Lucas relies so heavily. That's where we may be able to discover or rationally formulate a meaningful macro-economic generalization about the relations among social (welfare) policy, natural resource exploitation and exhaustion, and, per capita real income. Of course, we also would need to consider all this in the context not only of econometrics but also of demographics (population growth or stability).

these should be reformed into a blog post

you're all over the map, but generally these people who want to tear apart socialism, social safety net can't read charts or look at the statistics. Germany also has a strong export driven economy.

A slippery slope - Lehman Bros. to Smoot-Hawley

I started out to say, "Yes, and the importance of the Lehman Bros. collapse cannot be overstated."

But then I cited Lucas and added something about how disappointed I was with the biased conjectures in his 2011 Milliman lecture (just the PDF), which had been recommended to me by a friend. I felt that I had to justify and explain my criticism of a Nobelist.

Exports - I like that approach because exports are measurable and measured. Lucas says nothing about trade except that he states as though gospel the old thing that Smoot-Hawley was a substantial cause of the Depression.

I can let Lucas have his Smoot-Hawley argument, and I still say that he is silly with his premise that some kind of hypothetical quantitative measure of the extent of social democracy in one nation compared to others can be presumed to be the only significant causative correlation with a differential in per capita real income.

Even sillier is Lucas' premise about the failure of what he considers to be correct Fed action to put a neat end to recession. He makes a conclusion out of his premise that the cause of that failure is anti-business sentiment held by the American public. His premise mistakes public disgust with business criminality/political corruption for anti-business sentiment. He ignores the prominent evidence of the Republican victory in 2010.


You cannot let these people have a Smooth-Hawley argument that this caused the Great Depression because it is simply not true. Trade back in 1929 was just a small fraction of GDP, the U.S. was primarily a domestic economy. Also, while the tariffs were too high, they were not that much higher than before.

This argument has been disproved many a time. Philosophical arguments are not economics. Or Political arguments are not economics either.

Apology for bad link

Ooops, sorry, bad link for "University of Washington" ...

but the link is given correctly at the top of my first or original reply (reply titled "Robert Lucas on Lehman Brothers").

Link there is the URL.