We learn this morning that Lehman is filing for protection from creditors whilst it seeks to sell assets to sort out its financial problems. Markets are falling on the news ,as on this occasion the US authorities have not offered to rescue it directly.
I am not surprised they have declined to put up the money. There have to be limits on how much the US taxpayer can support. The massive rescues of Fannie and Freddie stretch even the long pockets of Uncle Sam.(See September 8th post).The decision on Lehmans in that sense is doubly good news. It will force the private sector to accept more of its own risks and not to expect a bail out in every case. It will also provide some much needed relief to the escalation of risk for taxpayers.
At the same time the US authorities are all too well aware of the possibility that the Lehman collapse could place strains on other financial institutions who have relied on doing business with Lehmans or have similar “assets” on their balance sheets that may need writing down as a result. So the US authorities are making yet more liquidity available to the system.
Maybe they have also encouraged the larger private banks to make available their own facility to help financial companies in trouble, which is being announced today. We are also likely to hear of the takeover of Merrill Lynch. It looks as if there is a massive amount going on behind the scenes in the USA to try to bottom this banking crisis and establish a new pattern of ownership, finance and values of financial instruments that might prove stable.
The US authorities remain alert and active, whilst the UK authorities remain sleepy and inactive. The CBI have revised their forecast for the UK economy to show a recession in the second half of this year, and practically no growth next. That must mean at least another £15 billion of government borrowing in each year, to add to the massive total the government has already committed. The UK financial positon is still deteriorating fast. The government refuses to produce its own new forecast, so it looks increasingly out of touch and behind the plot. Every knows its forecatss are wildly optimstic, so why not change them and try to look as if they want to manage events rather than be managed by them?