This is a slightly revised version of a piece that appeared on the Washington Post’s The Hearing today.
In her testimony before the Joint Economic Committee today, Dr. Romer, Chair of the CEA, presented an explication of the progress of the financial crisis and the economic downturn, the anticipated effects of the measures undertaken and planned, and the outlook going forward. On most points, we’re in agreement, so I’ll only highlight some key issues of interest.
The outlook
I would characterize the description of the economic outlook as guardedly optimistic. We can’t say much more, since Dr. Romer — in line with historical practice — did not provide specific forecast numbers associated with her testimony. She did indicate that the CEA forecast is in line with the Blue Chip forecast, of -2.1% annualized growth in 2009Q2 and leveling off in 2009H2. What specifically “in line” means is up for some debate; in early March, I observed that — given the dispersion in individual private sector forecasts — the CEA’s short term outlook seemed well within the consensus range.
I think Dr. Romer is right to be guardedly optimistic with regard to this near term outlook, despite the fact that yesterday’s annualized GDP growth rate of -6.1% was toward the bottom of the range of forecasts. In addition to the factors she identified, including housing starts and consumer confidence, I would look to the point Jim Hamilton highlighted, namely that inventory disinvestment accounted for negative 2.8 percentage points of the growth rate. To the extent that inventories are now at quite low levels, production is more likely to ramp up next quarter. In addition, the rebound of consumption growth suggests that there will be some demand to sustain continued increases in production.
Is (was) there a credit crunch?
The testimony devotes some attention to describing the unfolding of the crisis. It’s a narrative I largely agree with. One notable passage contains to this retrospective glance:
Last fall, there was some debate about whether credit was actually all that important. Some pundits suggested that we should just let the financial system fend for itself because it really didn’t matter. The horrific falls in employment and production over the last five months have largely ended that debate. Shuttered factories across the country simply scream that Main Street and Wall Street do indeed intersect.
As one who heard a surprising number of academic macroeconomists dismiss the importance of the freeze in the credit markets, I think this particular quote calls for some economists to reassess the usefulness of their theoretical framework for assessing this particular downturn. It should also signal that, going forward, in determining who we pay attention to, we should look to their previous record of statements.
Risks
While I agree with the view there is some cause for optimism, especially after the passage of the ARRA, I do believe there are two major risks to the outlook. The first concerns the effectiveness of interventions aimed at restoring the solvency of the banking sector, and spurring the resumption of lending. In light of the increase in the IMF’s estimate of financial institution losses ($2.7 trillion vs. January estimate of $2.2 trillion for assets and loans originating in the United States), it is not at all clear that the US government currently has sufficient resources to recapitalize the system, and thereby restart lending.
Dr. Romer’s testimony clearly indicates an intellectual understanding of the perils confronting us:
…Japan’s experience in the 1990s shows the costs of skimping on bank rescue. Until banks are cleansed of highly uncertain assets and robustly capitalized they will be hesitant to lend, and lending is what we need them to do…
So far, we can’t be sure that the appropriate steps to avoid this path will be taken, given the popular resistance to further resource transfers. Certainly, the incipient rebound in financial sector bonuses, and bank management resistance to additional regulation, seems likely to make it harder to build up a constituency for the difficult choices that will likely have to be made in the near future.
As Dr. Romer pointed out, there is a synergistic aspect to the measures undertaken; stimulus without repair of the financial system will, on its own, be insufficient to pull the economy out of recession. Similarly, repair of the financial system will be much more difficult if asset prices continue their decline. On the first point, we have little experience with measuring the effectiveness of fiscal policy in conditions of severe financial distress. The range of estimates that the CBO uses in generating its high-low forecasts pertain to the results obtained over periods when the financial system was operating in a normal or near normal manner. As one can see from the CBO’s assessment of the effects of the ARRA, this range of impacts is quite large:
Figure 1 from CBO, Estimated Macroeconomic Impacts of the American Recovery and Reinvestment Act of 2009, March 2, 2009.
In times of financial sector stress, households and firms may opt to rebuild balance sheets instead of increase consumption and investment, thereby short-circuiting the Keynesian multiplier process. A recent IMF analysis suggests that two years after a peak in output, on average output will be 3 percent lower in a recession occurring in conjunction with a financial crisis compared to a recession occurring in the absence of financial crisis. (I will note as an aside that if one believes this effect is operative, then government purchases of goods and services is then a relatively more effective mode of stimulus than tax cuts, unless those tax cuts are directed to highly liquidity constrained households — see here)
Figure 2: Year-on-year growth rate of GDP (blue, left scale), in exports (red, right scale), goods imports ex.-oil (green, right scale), in percent. NBER defined recession dates shaded gray. Source: BEA, GDP advance release of 29 April 2009, NBER, and author’s calculations.
We have not witnessed declines of this magnitude for over 30 years.
Last Thoughts
It’s clear that we have some challenging times ahead of us. In my view, the Administration’s made the first right steps. But in some respects, the biggest challenges lay ahead.
“So far, we can’t be sure that the appropriate steps to avoid this path will be taken, given the popular resistance to further resource transfers. Certainly, the incipient rebound in financial sector bonuses, and bank management resistance to additional regulation, seems likely to make it harder to build up a constituency for the difficult choices that will likely have to be made in the near future.”
Stop trying to socialize the losses. The people who did NOT fall for greenspan’s attempt to create more debt from housing should be rewarded.
If banks made loans to customers who were not creditworthy, their shareholders and bondholders should pay for their mistakes.
IMO, it is not the banks that need recapitalized. It is the lower and middle class. That is where the break in the chain of payments is.
IMO, another problem is that most economists believe that creating more debt and/or forcing an economy to be a net exporter is the solution to all macroeconomic problems. I do not believe that is correct with the Great Depression and calculations that negative interest rates are needed as examples. One more problem is that most economists seem to be living in their 1970’s supply constrained world. No mention that the world has probably become demand constrained.
MENZIE: I have to disagree when you say “stimulus without repair of the financial system will, on its own, be insufficient to pull the economy out of recession. Similarly, repair of the financial system will be much more difficult if asset prices continue their decline.”
You can pump banks as full of money as you like, but if there is a shortage of qualified borrowers (demand) then you will not see a restoration of credit.
On the other hand, if you have strong demand from qualified borrowers, then you’ll see asset prices rise, and the banks will suddenly become solvent again.
Banks are pro-cyclical — this is obvious from how their capital requirements work, and how their capital adequacy is calculated. Sufficient increases in aggregate demand, and hence asset prices, will “miraculously” recapitalize banks, just as falls in aggregate demand (and asset prices) “miraculously” left banks undercapitalized.
Fix the real economy, and banks will fix themselves. Pump banks full of money and you get rich bankers, but the real economy will continue to stagnate/decline until something restores aggregate demand. The notion that healthy banks are necessary for a healthy economy is putting the cart before the horse, and while it’s great for further enriching bankers, has been terrible for the real economy.
“The horrific falls in employment and production over the last five months have largely ended that debate. Shuttered factories across the country simply scream that Main Street and Wall Street do indeed intersect.”
I doubt this is true, at least not in the way the speaker intends it. The statement sounds like rather flippant post hoc ergo proper hoc reasoning. It also sounds like the opinion of someone who thinks the financial collapse caused the decline in asset values. IMO, asset values were largely unchanged, but assessments of the values became, very suddenly, more realistic.
To me, it is counterproductive to delay adjustment by propping up the asset overvaluations. Better to use government spending to ameliorate the decline in aggregate demand. The worst policy is to use taxpayer funds to prop up the banks by buying or guaranteeing their existing bad loans.
Hope this one posts today!
In the real world, the credit is still frozen. Until, the folks out here in middle class world, either finish paying down their debt load or the credit that used to be extended to them is restored, there can be no recovery in the U.S.
As I tried to post yesterday, the boomers had their 401k’s halved and are past their consumer years, their kids cannot find jobs with the exception of growth in government and their grandchildren are in debt b4 they even learn to walk. It will be five years of stagnant/negative growth with creeping inflation! Our best days are gone and cannot be restored by smoke and mirrors!
zanon said: “You can pump banks as full of money as you like, but if there is a shortage of qualified borrowers (demand) then you will not see a restoration of credit.”
And “Fix the real economy, and banks will fix themselves. Pump banks full of money and you get rich bankers, but the real economy will continue to stagnate/decline until something restores aggregate demand. The notion that healthy banks are necessary for a healthy economy is putting the cart before the horse, and while it’s great for further enriching bankers, has been terrible for the real economy.”
Good comments!!!
Something similar
http://globaleconomicanalysis.blogspot.com/2009/02/have-your-cake-and-lend-it-too.html
“The efforts by president Obama, Treasury Secretary Geithner, Congressman Barney Frank, and others to “unthaw credit” are seriously misguided.
Most of the big banks are severely undercapitalized and should not lend more even if they wanted to. There are some well capitalized banks that want to lend, however, there are few credit worthy borrowers. And the final piece of the puzzle is credit worthy borrowers for the most part, simply do not want to borrow.
Attitudes of lenders and would-be borrowers have both changed.
The reason is simple: It makes no sense to borrow in a deflationary environment where asset prices are falling and there are few jobs to be found. Yet the plan in Congress, and that of Geithner as well, amounts to telling banks to have their cake and lend it too. Clearly the policy is doomed from the start.”
Something that often puzzles me about macro stories is well summed up here:
“In times of financial sector stress, households and firms may opt to rebuild balance sheets instead of increase consumption and investment, thereby short-circuiting the Keynesian multiplier process.”
It seems to me that rebuilding balance sheets is not instead of investing; it is a part of investing. The resulting low interest rate causes firms to invest in very low-return projects. Eventually, the growth in potential GDP hastened by this investment should rebuild asset values to the point where balance sheets are healthy, and consumption returns to a normal level (which may not be the pre-recession level). Full employment should anticipate this full normality a bit, as investment will be higher than normal in the meantime.
Clearly, this is not instantaneous, and it is not hard to believe that it quite slow by the scale of humans out of work — which is how I have always understood Keynes’s famous reference to mortality. But “instead of investing” seems to imply I suffer a deeper misunderstanding.
Humble Microeconomist: You’ll find some discussion of this here.
Is there systematic evidence that net lending has increased since the Lehman and ensuing TARP & other USG policy debacles of last September/October?
It’s not clear to me that credit has expanded at all. Certainly not credit to individuals–mortgages, credit cards, auto loans, etc.–and maybe not to businesses. If this is true, why would we expect expansion in the months ahead?
Do the data show differently than my suspicions?
Since my reply is so long let me add that I had great hopes for the Obama economic team when they added Christina Romer. She quickly burst my bubble with this statement from her February 27, 2009 report The Case for Fiscal Stimulus: The Likely Effects of the American Recovery and Reinvestment Act:
Before I dive in, I want to apologize in advance for occasionally sounding like an Administration cheerleader. Like any normal parent, I am sure I find the baby I helped raise just a tad more perfect than it actually is. But, at the same time, I will strive to do my CEA best to give a balanced, dispassionate assessment.
Can you imagine any serious analyst making such an unprofessional statement? But this is so typical of the Obama worshipers, they simply cannot contain themselves, and the hero worship could be the seed of a serious political mistake. Since she has been in the administration Romer has been apologizing for Obamas economic gaffs, truly a sad state for such a potentially great economist.
Now to the post.
The outlook
We can’t say much more, since Dr. Romer — in line with historical practice — did not provide specific forecast numbers associated with her testimony.
The truth here is while it has been historical practice Dr. Romer as was true with her predecessors – will use her numbers to determine policy going forward. The reason they do not want you to know their numbers is because they do not want to have to take responsibility for the variance between actuals and their divining of the future. After all they are in government rather than business so they do not have to deal with market disciplining their failures. As Menzie observes, What specifically “in line” means is up for some debate.
In addition to the factors she identified, including housing starts and consumer confidence, I would look to the point Jim Hamilton highlighted, namely that inventory disinvestment accounted for negative 2.8 percentage points of the growth rate. To the extent that inventories are now at quite low levels, production is more likely to ramp up next quarter. In addition, the rebound of consumption growth suggests that there will be some demand to sustain continued increases in production.
This is a typical mercantilist analysis of the problem. If the government can get customers in the door then there will be production. But what about profits? Profits? What profits (they belong to us)? Besides you dont need profits; you can always make it up on volume!
Is (was) there a credit crunch?
Last fall, there was some debate about whether credit was actually all that important. Some pundits suggested that we should just let the financial system fend for itself because it really didn’t matter.
This is a total red herring. I never heard anyone say that credit was not important. The debate was about what should be done not the fact that there was a problem.
The horrific falls in employment and production over the last five months have largely ended that debate. Shuttered factories across the country simply scream that Main Street and Wall Street do indeed intersect.
Yes, this should have ended the debate. It is almost universally understood that the crash was caused by out of control consumption creating an unsustainable artificial expansion. Shuttered factories are not because of lack of consumption but because of over stimulation of the economy wasting resources through malinvestment that can never be recovered. This typical mercantilist analysis ignores the fact that these suggested solutions are the original root causes of the problem.
As one who heard a surprising number of academic macroeconomists dismiss the importance of the freeze in the credit markets, I think this particular quote calls for some economists to reassess the usefulness of their theoretical framework for assessing this particular downturn. It should also signal that, going forward, in determining who we pay attention to, we should look to their previous record of statements.
A great suggestion. Look at Chrysler. Hasnt the government done a great job increasing auto production? This is a prime example of government throwing good money down the black hole of a bad project. Many of us were calling for allowing the auto manufacturers to go bankrupt last year. Those on the mercantilist side assumed that throwing money at the problem would bail Chrysler and GM out. Now the government is appropriating more billions to engineer bankruptcies that should have been allowed by law – a year ago. This whole policy prescription has failed and destroyed wealth that can never be recovered and now we are seriously considering trying it again?
Risks
I do believe there are two major risks to the outlook. The first concerns the effectiveness of interventions aimed at restoring the solvency of the banking sector, and spurring the resumption of lending. In light of the increase in the IMF’s estimate of financial institution losses ($2.7 trillion vs. January estimate of $2.2 trillion for assets and loans originating in the United States), it is not at all clear that the US government currently has sufficient resources to recapitalize the system, and thereby restart lending.
Let me interpret. It is impossible to do what is being suggested to do because there is not enough money. But dont worry. We wont let a little thing like that stop us.
Dr. Romer’s testimony clearly indicates an intellectual understanding of the perils confronting us:
…Japan’s experience in the 1990s shows the costs of skimping on bank rescue. Until banks are cleansed of highly uncertain assets and robustly capitalized they will be hesitant to lend, and lending is what we need them to do…
Again, those of you who remember the entirety of the Japanese meltdown did you ever hear anyone saying that there was a problem with the Japanese NOT propping up their failing banks? No! Over and over the Japanese were criticized for propping up losing corporations through the banks and pouring good money after bad.
This is actually nothing more than a call for more crony capitalism – can you say Goldman Sachs. Now that the US government is doing the same thing as Japan the rhetoric has changed, but the result will be the same (the definition of insanity).
So far, we can’t be sure that the appropriate steps to avoid this path will be taken, given the popular resistance to further resource transfers.
Thank God. But it aint over yet. I am sure they will overcome the resistance so they can waste more resources.
Certainly, the incipient rebound in financial sector bonuses,
Guaranteed by the Treasury Department in league with Sen. Chris Dodd, for those with short memories (something government apologists count on).
As Dr. Romer pointed out, there is a synergistic aspect to the measures undertaken; stimulus without repair of the financial system will, on its own, be insufficient to pull the economy out of recession.
Another naked grab for power stealing freedom away from citizens. There are synergistic aspects to the measures undertaken only they are negative not positive. As can be seen in the Swagel paper at Brookings every time the Treasury interfered with the economy their projections became “too small.” It doesnt take a rocket scientist to see that their cure, bleeding the patient, was making the problem worse. The solution, bleed him just a little bit more (does this have a familiar ring?).
On the first point, we have little experience with measuring the effectiveness of fiscal policy in conditions of severe financial distress.
You cant be serious. There has been more analysis and more written on the Great Depression than on any economic event in history. Sadly, most of it is revisionist and as this statement demonstrates totally unenlightening becuase of political concerns.
In times of financial sector stress, households and firms may opt to rebuild balance sheets instead of increase consumption and investment, thereby short-circuiting the Keynesian multiplier process.
This is fall-off-the-chair funny. “Those pesky consumers simply will not cooperate with our Keynesian ideas and they keep preventing our multiplier from working – whine. If we could only control their total spending WE could ‘help’ them do what is best for them.”
We have not witnessed declines of this magnitude for over 30 years.
Exactly! Richard Nixon redux.
Last Thoughts
It’s clear that we have some challenging times ahead of us. In my view, the Administration’s made the first right steps. But in some respects, the biggest challenges lay ahead.
Actually the Administration is doing exactly the same things as the Bush administration (see Swagel paper) only a bigger, much more destructive younger brother is now destroying the wealth.
Wow! At this reading not one post agrees with Menzie. There is hope!
The return to systemic health, a stabilized and growing real economy, will not be possible until the household sector has repaired it balance sheet and has found evidence that further real income gains are in the offing.
After decades of borrowing to consume beyond current income and tapping into the nominal Ponzi inflated values of real assets (homes) and financial assets (equities and some psuedo-debt like instruments), the household sector has realized its folly and is undertaking to repair the damage.
The business sector reacting to the pullback in household’s consuming activities are scaling back operations to bring their operations into balance with demand. Unfortunately, excessive levels of malinvestment financed with borrowed funds in many areas of fixed assets were made in the past targeting production and satisfaction of unsustainable consumption levels.
Consequently, using Potential GDP based upon Aggregate Supply Capability is an inherently faulty starting point to analyze the situation. The presumption is that there is inadequate aggregate demand which leads to the false conclusion regarding the solution.
The solution proposed is to have the government sector attempt to counter-balance the private sector’s rationalization attempts to correct the deficiency in demand by borrowing to increase spending and by borrowing to provide a carry and support system for the toxic assets (household and business debt) being transferred from the banks to promote and restart lending to the private sector.
The problem is one of too much private sector debt and the inability to sustain debt service based upon current, sustainable income. The solution to too much debt is not more debt.
The substitution of perceived public sector credit quality for now exposed as insolvent private sector credit quality will inevitably lead to the poisoning of perceived public sector credit quality. For what are we as a nation, except the sum of our private sector parts. The public sector is nothing but a redistribution and transfer system.
To avoid the zombification of the economy:
1. Liquefy the private sector, redirect the stimulus to the household sector. $13/week is not stimulus, its a sick joke.
2. Stop supporting insolvent institutions. Capitalism is about success and failure from taking risks and the allocation of capital to efficient users. Taking away the punishment of failure continues the rewarding of unwise risk taking. Investors in financial products, be they equity or debt, must accept the consequences of their decisions and bear the associated risk of loss.
3. Break up all “too large to fail” institutions and those that pose “systemic risk” or apply Stiglitz’s Public Utility Model. http://jec.senate.gov/index.cfm?FuseAction=Files.View&FileStore_id=6b50b609-89fa-4ddf-a799-2963b31d6f86
4. Reinstate Glass-Steagall and revoke the enabling Commodity Futures Modernization Act. Derivatives have proven themselves to be toxic waste. http://www.texasobserver.org/article.php?aid=3031 (Causes of the Crisis by
James K. Galbraith)
I have yet to see a good analysis of any proposed de-leveraging process in plain words.
And yet, predicting a path of recovery would appear dependent on balance sheet considerations, in particular, household and financial institution debt. Do we actually understand what’s going on?
Let’s suppose we have a recovery. And let’s suppose, just like the last recession, the degree of indebtedness, which was already near historical highs, falls a bit, and then begins to rise again. Or maybe it just holds flat as a share of GDP.
What is the presciption? Should the Fed, as SF Fed Pres. Yellen has suggested, deflate asset bubbles, even in the absence of overall price inflation? Should de-leveraging be encouraged or mandated, even if it leads to deflation? Should the Fed acquire a third mandate? Should it override the requirement for price stability?
Given that we now seem to have a debt huge problem that apparently no one at the Fed or Treasury recognized as a critical issue at the time (are these institutions really that hollow?), should we not prioritize this matter for further study and understanding?
I wish I could help the feeling that we are all a bit clueless here; or maybe I just don’t get it.
don: I don’t think Dr. Romer’s point was flippant; rather she was highlighting the operation of an adverse feedback loop between output and asset values. I.e., the “financial accelerator” is relevant.
DickF: You write:
I cannot believe you are passing judgment on an economist because her turn of phrase does not match your high standards of eloquence and sobriety. I’m not sure, but I suspect you don’t have 5 AER and 2 JPE articles under your belt. In any case, let’s take a look at some of your sober analysis, and see how it stands up:
In my book, anybody who writes this has little basis for critiquing somebody else as failing the test for balance.
Unemployment means the credit system is broken?
I am with the posters who questioned this premise of Romer’s. How do we know the credit system is broken because everyone is losing their jobs. How do we distinguish a primary cause that affects both employment and credit?
The underlying problem is Asian mercantilism implemented via exchange rate manipulations that provide Asian manufacturers simultaneously with the equivalent of export subsidies and protectionist tariffs of many tens of percent.
These make “comparative advantage” appear to exist in cases where in fact it does not, and, basically, subvert the entire world economic system by falsifying the pricing signals we depend upon to guide our consumption and investment decisions.
Many decades ago when I was young, people in my area of the northeast seeing factories close down and jobs go overseas used to ask, “If they send all the jobs overseas, how do they expect people to get the money to buy anything?”
At the time, it wasn’t really a problem, because trade was substantially in balance, so alternative jobs were created in other types of manufacturing. But now Asian exchange rate manipulation makes it impossible for US workers to make much of anything that can be exported to balance the trade accounts.
So the only way many US consumers can get the money to buy anything now is to find a job transporting, warehousing or retailing Asian goods bought with the money we borrow from the Asians. This is why graphs of the US savings rate and of the US trade balance trace out nearly identical trajectories — so similar that without labels few could tell one from the other.
The result was that graphs of the rising indebtedness of US consumers were a portent of doom to reasonable people. Alas, there was an ample supply of Wall Street cheerleaders and academic economists standing ready to point out that the uptrend in indebtedness was “normal”, as it had persisted for many years, and therefore could be expected to continue forever without causing any problems. Those people could also be relied upon to claim that Americans’ wealth in their homes and stock investments was rising, too, so Americans’ net indebtedness really wasn’t rising, and was nothing to worry about. After all, we all know that home prices never fall nationwide, right? And that declines in the stock market are only transient aberrations, right?
As we know now: Wrong!
That “same as savings” home equity and stock market “wealth” has gone poof, and the debt is stil there.
So now we are in a position where there are no jobs for many Americans except in the transportation, warehousing and retailing of Asian imports, which however cannot be sold unless Americans go even more deeply into debt (because though the path may be indirect, Asian goods can be bought by taking on more debt from Asia). But with many Americans having decided on their own that they just can afford any more debt, and many more now being unable to borrow even though they want more, because they can’t get any financial intermediary to lend to them, the mechanisms for recycling money from Asia back into US consumption has broken down.
So the jobs in transportation, warehousing and retailing Asian imports are going away.
And because the Asians still stand ready to seize any manufactured goods order anyone might want to place, they aren’t going to be replaced by new jobs in manufacturing.
Yet most economists still seem to think that somehow the economy can “recover” to the status quo ante, though that can happen only if some new way is found to borrow sufficient money from Asia to import the same amount of goods — in other words, to re-establish America’s trade and savings deficits at the $800 billion annual level at which they peaked.
I submit that that just ain’t gonna happen.
The jobs in transportation, warehousing and retailing Asian imports aren’t coming back, and the only source of jobs to replace them will be infrastructure projects financed by some combination of increased taxation, domestic savings, government borrowing from Asia, and the Fed’s printing press.
Alas, the stimulus legislation enacted to date won’t even begin to generate the number of jobs needed.
So we’re still heading down, and the rate of decline is more likely to accelerate soon rather than to slow. There won’t be a recovery in the second half. And none next year, either.
Here in the northwest suburbs of Chicago numerous cracks are beginning to appear in the economic facade. Vacant office space rental signs are popping out of the turf like mushrooms. Vacant store fronts have become remarkably more numerous in just the last few months. Asking prices for the homes that have been languishing on the MLS for a year or more are starting to slide, yet home sales as reported in the database one can query through the Sun-Times have collapsed, and in about 40% of the reported sales the sellers are banks or “trusts” (usually a foreclosure sale).
aMacLaren
Here is a good, plain-spoken description of de-leveraging.
http://hussmanfunds.com/wmc/wmc090330.htm
The reason that the freeze-up in short term credit was so devestating this time around was that many large corporations had begun financing a good deal of long term needs with short term borrowings, all in the name of saving a few basis points. The effect was that they had bet their company(s) on the continued steady availability each and every day, of access to short term credit. When that dried up, it uncovered the massive risk that they had exposed themselves to and the Fed was forced to step in to provide temporary liquidity by agreeing to purchase commercial paper. The failure of Lehmann should not have caused the fallout that it did. It was inappropriate risk taking by major corporations that allowed a small risk being realized to lead to a major economic near-disaster.