THE BIGGEST STIMULUS GREED’S BACK LEHMAN BOTHERS NO MORE

ONE year after Lehman Brothers and the world financial system crumbled, the global economy has turned around so quickly and unexpectedly that banks are once again making huge profits and handing out obscenely large bonuses. What was called a world-changing crisis is looking like capitalism as usual.      The G-20 is meeting soon to discuss a new financial architecture, but a remarkably modest change seems likely. No doubt, banks in future will be asked to hold more capital: maybe, capital requirements will be higher for the biggest banks, and in boom times, the shadow banking system will be regulated. Most derivatives will be regulated and traded on exchanges, eliminating the counterparty risk that froze markets after Lehman Brothers collapsed. There is some talk of curbing financial pay, but nothing specific. The G-20 meeting will talk nobly, but vaguely of great things to be done, and will in practice be a photo-op for politicians.      The unspoken new consensus is that, in a future crisis, no really big company (like Lehman) will be allowed to go bust. That can only encourage risktaking by managements. So, expect more bubbles and boom-and-bust cycles.      Stock markets everywhere are rising, valuations are getting stretched, and everything points to a return of asset bubbles. Will central banks be quick to squash these bubbles? Not likely. They are worried sick that a premature tightening of money might cause a double-dip recession. They would much rather keep money easy and risk inflation and asset bubbles.      September 2008 was truly a Black September. The continuing fall in US home prices had relentlessly eroded the price of mortgage-backed securities (MBSs). It had also hit those who insured MBSs against default, through credit-default swaps (CDSs). Efforts by the Bush administration to revive the economy and housing market did not succeed.      On September 7, the two biggest mortgage companies in the world, Fannie Mae and Freddie Mac, could not meet their obligations and were taken over by the US government.      However, the prices of mortgage-backed securities and credit-default swaps continued to plummet. This dealt a mortal blow to AIG, the world's biggest insurance company, which had guaranteed hundreds of billions worth of CDSs and could no longer honour its commitments. Central banks' billions turned the tide  IT WAS also a mortal blow to the big four investment banks —Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs — which had huge holdings of both MBSs and CDSs. For survival, they sought friendly takeovers. With official backing, Merrill Lynch was bought by Bank of America, but Lehman Brothers was allowed to go bust. Morgan Stanley and Goldman Sachs would have gone bust too, had they not been allowed to convert themselves into commercial banks, reducing their mark-to-market obligations and giving them access to the repo window of the Fed. A few days later, AIG was taken over by the government.      Thus, in just two weeks, the world's two biggest mortgage lenders, four biggest investment banks and the biggest insurance company all went under. Suddenly, financiers everywhere realised that no company, however exalted, was safe. So, the global financial system froze — nobody trusted anybody. Many experts now blame the US government and the Fed for not taking over Lehman Brothers. Yet, the collapse of so many of the world's biggest financial companies would surely have struck terror into markets whether or not Lehman was rescued.      The US had slipped into recession in December 2007, and many had hoped this would end by late-2008. Instead, Black September plunged the US — and the entire world economy — into further turmoil. Panicky US households, that had been living beyond their means, suddenly started saving, and demand collapsed even as production collapsed for want of finance. This soon led to the bankruptcy of the world biggest auto company, General Motors, and Chrysler. The nadir came in March 2009, when Citibank, the world's largest bank, looked like collapsing, but was rescued by the government. The negative feedback loop between finance and industry threatened to take the world into another Great Depression.      This did not happen because governments everywhere went for huge fiscal and monetary stimuli. The US Fed bought up trillions of dollars worth of assets that the market would not touch, and so gradually restored liquidity. All norms of budget discipline and inflation-fighting were thrown overboard by governments across the world. The crisis was so deep that it could be countered only by throwing trillions of dollars at it, but the trillions were indeed forthcoming.      Once it became clear that limitless trillions would be deployed against any eventuality, fear was replaced quickly by greed. In April, billions of dollars suddenly started flowing into emerging markets to snap up assets at bargain prices. India had suffered an outflow of $12 billion in 2008, but in April 2009, it enjoyed an inflow of $1.3 billion. In the first half of May, another $1.87 billion came in. And then, when the UPA won the Lok Sabha election, another $2.4 billion came within two weeks.      India was not a special darling, it was simply getting a fair slice of billions flowing into all emerging markets. Global investors were suddenly chasing every sort of asset earlier considered risky and now considered undervalued. Thus, the earlier negative feedback loop (from finance to industry) was replaced by a positive one. Tata Motors, which once begged the UK government in vain for money to revive Jaguar Land Rover, suddenly found that in the new conditions it could get the money from the market on reasonable terms. In India, industrial production has picked up from zero earlier to 6.8% in July. Bank credit is still growing at a slow 14%, but corporates are reporting rising future prospects.      Similar promising news is pouring in from all corners of the globe. Even the US housing market seems to have bottomed out. The battered economies of Eastern Europe have all got large IMF rescues. A double-dip recession cannot be ruled out yet. But animal spirits are visibly rising the world over, and that ultimately is what drives economic recoveries. When Oliver Stone reprises Gordon Gekko for a sequel to his 1987 classic Wall Street, this might be one of the posters. And Gekko, with a Dick Fuldian streak, will have a go at everything. This time, he won't require the parenthesis in Greed — for the lack of better word — is good. He would just drop it and say: GREED IS GOOD. Or: GREED IS GOD. For governments world over — from Obama's to Manmohan's — have lifted capitalism from its sick bed with an unending supply of stimulus injections. If the collapse was colossal, the recovery is just as staggering, and perhaps speedier. A world that didn't have the stomach to take any risks a year ago is now well fed and all its appetite for risk has returned. The money is flowing into all corners, with all its colour and carefree abandon