Niall Ferguson: Astute and Absurd

This Tuesday, the Financial Times ran a fascinating opinion piece by one of its opinion editors, Niall Ferguson.

The headline was, "Why a rescue of Lehman would not have saved us." Pause on that headline for a bit. Who is "us"? I believe that Ferguson's answer (or the headline writer's answer) would be that the whole western industrialized world was affected to various degrees by the credit crunch epitomized by Lehman's bankruptcy filing a year ago, so that everybody living in that world is to some degree part of the "us" that needed saving.

Anyway, a Lehman bail-out would not have done it.

Ferguson's treatment of the theme does what his work often does -- maddeningly mixing up the astute with the absurd. But, quickly, here are two quotations that reflect the strength of the piece. Ferguson writes that in some "possible worlds" Lehman might have sold itself to a buyer in the months before it had to declare bankruptcy. But in this world, "[There] was a reason why no buyer could be found [over the preceding six months]. Lehman was a firm in its death throes....Even when a deal with Barclays seemed within reach, the British Financial Services Authority vetoed it. Alistair Darling, the chancellor of the exchequer, made it clear, 'we are not going to import your cancer.'"

That is how governments and central banks often go about "bailouts," by the way. Shotgun marriages. That's what happened with Bear Stearns and with WaMu. Should the respective governments have worked harder to secure such a marriage of Lehman with the most plausible suitor, Barclay's?

No. Ferguson quite rightly raises the possibility that the drowning man would have taken the lifeguard down with him. "Bob Diamond must thank his maker every day that the FSA did not approve a deal that might have destroyed Barclays; instead, he got what he wanted -- Lehman's core investment banking business -- dirt cheap from the bankruptcy court."

Having made those good points, Ferguson goes on seamlessly to make what seems to me a very bad one.

"Like the executed British admiral in Voltaire's famous phrase, Lehman had to die pour encourager les autres -- to convince the other banks that they needed injections of public capital, and to convince the legislature to approve them."

Lehman dies for TARP? It was good that Lehman not be bailed out because this made politically possible the bailing out of "the others"? That's just bizaare.

Let's think about this fearlessly. What would have been the result had neither Lehman nor anybody else been bailed out? "OOOH, the humanity!"

IMHO, we would have seen a very sharp descent of all economic indexes, then the economy, including but not centrally its financial portion, would have found its bottom and the way for a genuine non-inflationary recovery would have paved itself. Instead, we rescue ourselves from the very bottom by inviting stagnation, (afraid of the letter "V" we came up with the letter "L") and we hide this choice from ourselves while inducing a new round of 1970s-style inflation.

That's what Ferguson should have written. Not "Why a rescue of Lehman would not have saved us," but "why the kind of salvation implied in big bank rescues is not worth having." Capitalism is about risk, and to work toward a genuine capitalism we needed the "V." All of it, including that nasty point at the bottom.