We still don’t know how this movie ends - Lehman Brothers ställde in betalningarna den 15 september 2008
The chairman of the Fed doesn’t have a magic wand to levitate an economy that is already stumbling or a stock market about to do the same.
Take the start of the rate-cutting cycle in 2007
The Dow Jones Industrial Average had its largest gain in more than four years, rising 336 points, the equivalent of about 1,000 points today.
Lehman Brothers shares were among the top performers, surging 10%.
But, as we know now, stocks were just three weeks from their bull-market peak, a recession would begin in January 2008, and Lehman would collapse less than a year later in the largest-ever U.S. bankruptcy.
By that time, the Fed had cut rates six more times—moves of 25, 25, 75, 50, 75 and 25 basis points, in that order. The moves took rates to 2%, their lowest in nearly four years.
In the two months following the Lehman panic, the Fed made three more steep cuts, slashing rates to zero (technically a range of 0% to 0.25%) for the first time ever.
Stocks surged then too, with the benchmark S&P 500 jumping 4.7%. The Dow’s gain of 360 points would be nearly 1,700 today.
Yet they erased all of that day’s rally in less than a week and would go on to shed another quarter of their value before bottoming in March 2009.
In a classic of the genre, then Bear Stearns chief economist David Malpass wrote a Wall Street Journal op-ed, “Don’t Panic About the Credit Market,” in August 2007 after a two-month retreat in stock prices.
Claims that the U.S. economy could soon contract aren’t very convincing at the moment, and a sharp pullback of a third or more in stocks would be unusual unless the economy stalls.
That helps explain why stocks are near record highs and the usual signs of market caution so subdued.
U.S. stocks have rarely been so expensive, concentrated or dependent on a single theme—the promise of AI.
And government indebtedness around the world has never been as high, making the response to the next recession trickier.
We’re not in Kansas any more.
Spencer Jakab Wall Street Journal 21 September 2024
https://www.wsj.com/economy/central-banking/sorry-the-fed-cant-save-us-from-a-bear-market-fad99617
15TH ANNIVERSARY LEHMAN COLLAPSE
Lehman Brothers ställde in betalningarna den 15 september 2008
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