One year after Lehman: banks and “the prerogative of the harlot”

By Chris Cook

When history is written, the collapse of Lehman Brothers will be seen as a moment which defined the collapse of a complete economic paradigm and its accompanying ideology.

That this was so became apparent to me during a ten day visit to Iran in the immediate aftermath of the collapse during which I met many of the elite. On the one hand there was unrestrained glee at the fact that the very financial sanctions which were aimed at driving Iran to the negotiating table had protected Iran from the then ongoing financial meltdown.

But as it sank in that the entire economic raison d’etre of the Iranian “reformists” – ie privatisation and debt-fuelled economic growth – had been bankrupted alongside Lehman, and that there was no “Plan B”, then the initial glee was rapidly replaced by more sober reflection.

One year later, it is appropriate that the best commentary I have read so far on the subject of the Lehman collapse was that in the Financial Times yesterday (15th) by the historian Niall Ferguson.

In essence his point is that if it had not been Lehman which failed, then it would pretty soon have been an even bigger bank, such as Citigroup, and in that case the fallout would have been that much greater. Ferguson’s view was that in the months that followed, the opportunity to reconfigure the banking system was lost and he concluded:

“If only we had learned from Lehman that no bank should be “too big to fail”, we might still have a real capitalist system, instead of the state-guaranteed monstrosity that is the real legacy of last year’s crisis. If only.”

In a system where money is created by banks as interest-bearing credit, the true economic function of a credit institution, aka a bank, is in fact to provide a framework of trust in respect of those to whom they extend credit, i.e. borrowers.

This implicit guarantee by credit institutions of the borrowers’ credit has historically been backed by proprietary pools of capital of an amount specified by the Bank of International Settlements in Basel. The interest charged by credit institutions essentially comprises three elements: operating costs; default costs; and profits to shareholders.

Now that the principal economic rationale of a credit institution – that of guarantee – has been assumed by the State then we have the worst of all possible worlds. As Stanley Baldwin said in 1931, in demolishing the power of the press barons, Rothermere and Harmsworth, the surviving banks now enjoy

“Power without responsibility – the prerogative of the harlot throughout the ages”.