First we had the  firesale of Bear Stearns to JP Morgan. Then Indy Mac. Then the Fed’s rescue of Fannie Fannie Mae and Freddie Mac.  Now we hear about the collapse of Lehman Brothers and the firesale of Merrill Lynch to Bank of America. While not directly related, the UK’s Northern Rock near-collapse (only averted by nationalisation) and NZ’s widespread collapse of minor finance houses also share some common features - a reliance on debt to fuel property market speculation, over-lending to unsound borrowers, exposed by an increasing inability to raise new funds and repay old ones as they fell due.  Other major banks worldwide have had major writeoffs, and there may be more grief still to come (eg. AIG).

I’m no economist, nor am I a banker. I can’t say if or how these problems could have or should have been prevented.  The primary blame must lie with the leadership of the individual institutions. However, I  also believe markets generally work if you let them, and I suggest that, contrary to what some people might believe, some markets have not been allowed to operate.  By keeping interest rates artificially low whenever there was a blip in the markets, by avoiding hard decisions, by papering over the cracks, by refusing to take decisive action on issues, by avoiding some pain, all that seems to have been done is to make the collapse worse than the pain avoided in earlier years. So, I do wonder if a major factor in the scale of the US problems was the actions of its government and central bankers to avoid some market and voter pain over the years. There are a lot of retirees who probably now wish they’d suffered a little pain occasionally rather than lose their life savings all at once.

If you put off tough decisions, the problems don’t go away, the solutions only get tougher, and you risk losing everything. This is a lesson that national leaders, business leaders and the general public would do well to ponder in a broader context.