A Lonely Success
Zakaria, Fareed, Newsweek
Byline: Fareed Zakaria
Don't forget: the bailouts worked.
September is the month for anniversaries from hell. Last week we remembered 9/11, and this week it's time to recall the collapse of Lehman Brothers. Most of the discussion about the financial crisis has focused on a question that won't go away: could the fall of Lehman have been prevented? For many this was the cardinal error that sparked the crisis. Others believe that Lehman was the precipitating factor, but that the financial system was so highly leveraged that something or other would eventually have broken its back.
We will never know what would have happened if Lehman had not failed. But we can be fairly sure that without its collapse, it would have been impossible to shock the political system into action. In the month after the fall, the U.S. government made a series of massive moves to restore stability to the financial system. And it's clear that those actions saved the American--and thus the global--economy from total collapse.
Consider the facts. After the fall of Lehman, credit froze in the U.S. economy. Banks stopped lending to anyone, even Fortune 500 companies with gold-plated credit. People couldn't get consumer and car loans at any price, businesses couldn't get short-term loans to meet payroll. Private-sector borrowing--the lifeblood of modern economies--fell from 15 percent of GDP in late 2007 to minus 1 percent of GDP in late 2008.
The effects on the broader economy were immediate. GDP shrank by 6 percent in one quarter. Some 1.7 million people lost their jobs, the biggest drop in employment in 65 years, which was then exceeded in the next quarter when 2.1 million jobs evaporated. The net worth of American households decreased by $5 trillion, falling at the unprecedented rate of 30 percent a year. The worldwide numbers did not look much better. The contraction in global trade in late 2008 and early 2009 was worse than in 1929 and 1930. In other words, we were surely headed for something that looked like a Great Depression.
The U.S. government's actions stopped the fall. Between the passage of the Troubled Asset Relief Program (TARP) and the massive quantitative easing of the Federal Reserve, markets realized that the government was backstopping the financial system, that credit was beginning to flow again, and that if no one else was going to inject capital into the system, the U. …