Two top economists (one a Nobel prize winner) provide an excellent analysis of the current financial crisis. While they don’t say it, it also points to a counter-intuitive solution to the problem. Its all in the hands of the American consumer.
Their main hypothesis is that this current meltdown is very similar to the meltdown that led to the Great Depression. Both were caused by massive consumer debt.
“It appears that we’re witnessing the second great consumer debt crash, the end of a massive consumption binge.” Steven Gjerstad and Vernon L. Smith, in The Wall Street Journal.
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Every once in a while I feel compelled to put my economics degree to use. This is one of those times.
There’s a tremendous amount of pain around the collapse of Lehman Brothers. I don’t want to belittle or take attention away from that pain. I have been in two market collapses myself (Latin American stock markets in 1994 and the internet business in 2001) and it is not fun.
But there is a silver lining in the collapse of Lehman. Lehman’s bankruptcy, along with Bank of America’s purchase of Merrill Lynch and Bear Sterns disappearance are the end a particular type of business: the large scale broker-dealer investment bank. These banks made huge amounts of money in secondary markets for stocks, bonds and financial products derived from other underlying assets. The money in these markets is primarily traded among participants in those markets. It does not directly go to the companies, governments or people whose name might be on those assets.
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