The Real Lehman Shock

The real Lehman shock, according to Dan Gross, is the impact it had on the rest of the world. By its impact on the commercial paper market, Lehman's collapse had a devastating effect on world trade.

Yes, the United States had been in recession since the beginning of 2008. But world trade had held up quite well. But after the Lehman shock, all world trade began to shrink rapidly. Starting in September 2008, the volume of world trade began to plummet sharply. As the World Trade Organization reported in March, "the months since last September have seen precipitous drops in global production and trade, first in the developed economies, then in developing ones as well." In late 2008, world trade was contracting at a 40 percent annual rate. In Japan, exports, which had held up well in 2008, fell 57 percent between August 2008 and January 2009. (Go here and click on "exports.") Through the first half of 2009, they were down nearly 40 percent from the first half of 2008. In Germany, exports in July 2009 were 25 percent below the level of July 2008. China's exports have fallen, too, although less dramatically.

Also, interesting is this report that bankruptcy courts in England are still working on the Lehman collapse.

Lehman Brothers' European clients and creditors could have to wait another two years before they get back billions of dollars of assets tied up in the bank when it collapsed a year ago.

Tony Lomas, partner at PwC and administrator for the bank's European operations, said he had hoped to have "broken the back" of the case by this time next year, substantially reconciling claims, returning assets to clients and putting in place a process for paying dividends to unsecured creditors.

As Tyler Cowen notes, one should think about this delay when arguing that a bankruptcy of a large interconnected bank would be superior to the bailout.

The Economist has an interesting article on how the post-Lehman world of finance may shape up.