It is time for Lehman to Die

It has almost become the catch phrase for so many business headlines lately, "Too Big to Fail". By the Fed intervening like it did with Bear Sterns and now the Treasury more recently with Fannie and Freddie (although here congress messed up way back when it gave the implicit guarantee not actually when Paulson made it real) the threat of moral hazard has become something we have all become weary of.

Is it right for the good people, i.e. those that save and or run profitable companies to have to come in and subsidize the risk takers who have been rewarded way in excess of the norm. I suspected that because of the earlier intervention there was no way government or its agencies could be seen to help Lehman in its current crisis.

As a libertarian I feel strongly that Lehman and the financial markets need to sort out their own mess, even if it has devastating consequences. This business of borrowing from tomorrow in order to smooth things for today is not right, it is in fact theft. The bible does say however, that we pay for the sins of our fathers so I suppose the behaviour that takes us to this point is not unnatural, but it doesn't mean it is right.

What will it mean if Lehman and others are left to falter. Before I answer that question I think the fact that nobody has bought Lehman in any shape or form and whoever sits at the table has walked away without a bid tells me that something is seriously wrong. Now back to the worst case scenario.

Should Lehman go bankrupt, it will send the entire financial market into chaos, as all the derivative players try and establish what in fact is owed by who and to whom. There will of course be further tightening in credit standards and the cost of borrowing will sky-rocket, irrespective of where the Fed drops rates to, they only have 200bps to play with any way. All this uncertainty will have a major impact on confidence and many more companies and individuals will follow the bankruptcy route thus placing further downward pressure on asset prices. The deflationary spiral will take hold. Already because of the Fannie and Freddie commitment by congress the tax payer will be burdened for decades to come with spiralling government expenditure financed in part directly by the tax payer but indirectly through major credit creation from the Fed and Treasury printing press, where the US Dollar will bear the ultimate pain with this inflationary bailout. So from a massive unemployment and decade long depression will come dollar wealth destruction causing massive inflation and then a further economic depression.

Ultimately from all this pain will emerge a stronger more robust financial system, whereby its participants will no longer trust the promises of government to perpetuate the fiat fraud and fraction reserve banking.