Is Euroland really facing a Lehman moment?

Economist
October 6, 2011

The fear of contagion is widespread in panicky financial markets. As the latest impasse over the Greek bail-out’s latest instalment continues, an even bigger restructuring of its massive public debt is looming. And the worry remains that a swingeing write-down in Greece could precipitate a bigger crisis in the euro area as banks in other countries come under even greater pressure.

Such concerns are certainly bubbling at the Global Economic Symposium being held in the city of Kiel in northern Germany. They are not confined to Europeans. Plenty of American and Chinese are alarmed at the latest lurches in the euro area’s debt crisis. They, too, fear that a Greek default could be Europe’s Lehman moment, which would—as in autumn 2008—send financial shock waves around the world and trigger another global recession.

But speaking at the conference, Edward Lazear, who was President Bush’s chief economic adviser during the financial crisis, argued that the contagion effects of Lehman’s fall in September 2008 had been exaggerated. He likened the crisis to popcorn rather than dominoes. If the heat is on, removing one kernel from the pan will not stop others from popping. The problems affecting banks in 2008 were rooted in their bad lending rather than their exposure to other banks and the interconnectedness of the financial system. Hence the solution had to be to cool the pan down by stuffing banks with capital.

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