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By Hayek’s Standards, Is the Type of Financial Economy Portrayed in Lehman’s Article Still “capitalism”?

Updated on July 6, 2020
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Analyst of financial articles based on the contemporary financial economy

By Hayek’s standards, is the type of financial economy portrayed in Lehman’s article still “capitalism”?

Introduction

Lehman's trillion-dollar insolvency typically shook the underlying foundations of the international economy. It resulted in systemic risk and virtually led to the collapse of the financial system within the US via counterparty risk and subsequent firesales (de la Iglesia Viguiristi, 2019). The impact of Lehman's collapse was not restricted to the US economy but instantaneously triggered sudden and massive disruptions within the financial markets of the foreign economies, encompassing both progressive and emerging economies. When Lehman Brothers declared their first quarterly loss, the stocks of depository institutions as well as primary dealers reduced. Moreover, at the period of filing for insolvency, the stocks of banks coupled with the primary dealers reduced by −2.90% and −6.00%, correspondingly, making them the largest losers in a single day. The bankruptcy of the Lehman Brothers was never the result of the Great Recession as well as the subprime mortgage crisis, but its collapse prompted a huge selloff within the international markets.

By Hayek's standards, the kind of the financial economy that was depicted within the Lehman's article is financial capitalism. Capitalism has numerous flaws that were seen in the case of Lehman Brothers. The firm ought to have rejected the austerity as a sole route to economic recovery at the expense of embracing genuinely transparent as well as the effective regulation of the banking system in a bid to tackle structural problems in the market. At the period of fining insolvency, the institution had held $600 billion in terms of the assets that were diversified internationally. Moreover, it had ventured massively in mortgage origination within the U.S. form 1996-2006 using leverage making the firm become a de-facto real estate hedge fund (Grinder & Cooper, 2018). Thus, when real estate values peaked and reduced between Lehman became susceptible. As it can be the firm had adequate factors of production to sustain its operation but much of its assets were unstable. Lehman Brothers operated believed in the conservative monetary theory, and thus could not effectively deal with the undesirable externalities via influencing incentives as well as regulating individuals' behavior within the market.

In 2008, the firm struggle with loses through issuing stock, disposing of assets as well as decreasing cost. The firm also had its books enormous tranches subprime coupled with low-rated mortgage loans it could not sell, which made it unable to paybacks its underlying creditors when the loans became illiquid. Moreover, this consequently made the firm to encounter a credit crunch. It could not cheaply attain cash through debt issuance, and stock under leading to the dilution of both shares and negative sentiment, which consequently made its share price to drop. Thus, the closedown of the firm as well as the near-meltdown was not a failure of the capitalism but was due to the failure of the contemporary economic models in comprehending the responsibility as well as operation of the financial markets, and more widely volatility within the capitalist economies. This makes the watchdogs, bankers as well as assessment agencies to be massively blamed.

The models offered apparently for the scientific sustaining regarding the policy decisions and financial innovations that led to the worst crisis such as the Great Depression were not predictable. Thus, the major cause of the Lehman's collapse was the underlying flaw within the ideology about the self-interest of safeguarding the society from the corresponding financial system's extremes just in the case of the Lehman Brothers (Sassower, 2017).

The belief can typically be traced to the prevailing economic theory about the causes of the asset-price instability. The theory typically controls for the underlying risk as well as asset-price variations. The contemporary economists' of the mechanical models assert that self-interested market participants would not tender on the housing as well as supplementary asset prices to excessive levels immediately after the crisis( Nishibe, 2016). Consequently, such excessive fluctuations have been perceived to be the major indicator of the market participants' illogicality. Moreover, the flawed assumption that self-interested decisions can be sufficiently depicted utilizing mechanical rules massively strengthened the development of the artificial financial instruments and consequently legitimized the purportedly scientific grounds in making their respective marketing to the pension funds coupled with supplementary financial institutions globally. Remarkably, emerging economies possessing relatively less developed monetary markets escaped numerous extra egregious consequences of similar innovations.

Contemporary economists' dependence on the mechanical regulations to comprehend as well as sway economic results extend to the macroeconomic policy and frequently draws on the authority of Keynes, who overruled their respective approach. Regarding interest as well as money, Keynes offered a missing foundation depending on the expansionary fiscal policy in a bid to navigate advanced capitalist markets regarding the Great Depression.

Conclusion

In summation, the by Hayek's standards, the kind of the financial economy that was depicted within the Lehman's article is financial capitalism, which has numerous flaws. The flaw within the ideology about the self-interest of safeguarding society from the corresponding financial system's extremes is one of the major causes of the insolvency of many firms.

Bibliography

de la Iglesia Viguiristi, Fernando. "A Decade after the Collapse of Lehman Brothers." La Civiltà Cattolica, English Edition 3, no. 2 (2019): 18-32.

Grinder, Brian, and Dan Cooper. "In Defense of Capitalism Part IV: The Promise and the Peril." Financial History 127 (2018): 11-13.

Nishibe, Makoto. "The Crisis of Capitalism and the “Quality” of Money." In The Enigma of Money, pp. 87-92. Springer, Singapore, 2016.

Sassower, Raphael. "Capitalism at a Crossroad." In Encouraging Openness, pp. 439-453. Springer, Cham, 2017.


This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2020 Michael Omolo

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