by Michael Tory
Financial Times
June 4, 2012
What if the European elites have got it entirely wrong and, rather than fearing and avoiding a “Lehman moment”, Europe in fact needs one in order to move beyond this interminable state of crisis? Could Greece play the part of Lehman Brothers? There is a strong argument that it should.
By the time of the Lehman bankruptcy the American political system was suffering from acute bailout fatigue: by 15 September 2008, the US had already bailed out Bear Stearns (indirectly), Fannie Mae and Freddie Mac. While the steps taken were sufficient to “save” each individual institution, they were obviously insufficient to stop broader contagion or restore confidence. It was clear that policy makers’ faith in further bailouts was at an end.
This was because the problem clearly lay not with individual banks but with the system. The banking sector was woefully undercapitalised and the usual remedy of new private capital was simply unavailable given the uncertainty about the size of the losses on their real estate and structured credit portfolios.
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