Lehman Brothers and the Government

September 18, 2008 at 8:50 pm 1 comment

How is the collapse of Lehman Brothers going to affect the rest of us?

That was the Question of the Week posted on Sunday. But so much has happened in the stock market in four short days that the question is already old. Now, it’s not just about the brokerage firm Lehman Brothers. It’s about another such firm, Merrill Lynch; about the insurance giant AIG. And the frantic business on Wall Street doesn’t seem to be stopping. So what does this have to do with us?

Since all these things have to do with the stock market, there is obviously going to be huge economic repercussions from the dealings this past week. When heads of the government, the Federal Reserve Bank, and the VIPs of Wall Street all meet together for a weekend – as they did this past weekend to discuss the 160-year-old giant Lehman Brothers – you know something big is happening. And with only a small amount of economic knowledge under my belt, I’m not going to pretend to have any answers to what this means for the economy or the stock market. What I do want to focus on the repercussions alluded to in this quote from the Wall Street Journal:

“This latest bailout [AIG], however, has sparked an unusually loud backlash from Capitol Hill from lawmakers worried that the crisis is spinning out of control, raising questions about the scope of future federal action.”

Six words: the scope of future federal action. What is going on with the government and the governmental interference? Earlier this year, they offered to absorb $29 billion dollars’ worth of risk for J.P. Morgan if they bought Bear Sterns. Then, they just bailed out mortgage titans Fannie Mae and Freddie Mac, companies that had been partly government-sponsored to begin with. Over the weekend, the gov finally refused to aid Lehman Brothers, saying that it was a private business and it’s not the government’s role to intercede in private business affairs. Bravo. Now they’ve promptly reversed that view and offered up $85 billion dollars to rescue the private insurance conglomeration known as AIG, claiming its destruction would be disastrous for the fragile economy. But they haven’t just loaned money – they’ve also taken over the company and fired AIG’s new CEO, Mr. Willumstad. According to the Wall Street Journal, AIG director and former economic advisor to President Reagan Martin Feldstein said that “it’s not the government’s role to buy private companies.”

So what is the government’s role? Has it been overstepping its bounds lately in an effort to save the market? What are its bounds, anyway?

James Madison, who provided the framework for our Constitution, did not want to sign the Bill of Rights. Why? It seems like a good idea; a good document to have, protecting those “certain inalienable rights”. His response was simple. The point of the Constitution was to enumerate all the rights and roles of the government. Anything not included was not a governmental right, and therefore was a right of the people. Should they include a document with the people’s rights listed on it, future generations might reverse the purposes of the documents and claim that anything that wasn’t a specific right of the people was a right of the government.

More to come tomorrow…

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Entry filed under: Economics.

Lehman Brothers and the Government, pt 2

1 Comment Add your own

  • 1. freedom1  |  September 18, 2008 at 11:03 pm

    You’ve nailed it. This is analysis I’m not seeing anywhere else. Seems to me that the real question in all of this is the one you are asking: what in the world is the government doing intervening in the private markets? What has the government ever done to demonstrate an ability to run AIG? Or to demonstrate that it has the ability to manage the capital markets? Are we capitalists or socialists? I’m looking forward to your thoughts on Madison. Something tells me he would not have created Fannie and Freddie or bailed out AIG.

    Reply

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