Lessons Learned – or Not – From Bear Stearns

What We Didn’t Learn From the Bear Stearns Collapse
Sifting though the conventional wisdom 10 years later.
Bloomberg, March 19, 2018



This weekend marked the 10th anniversary of the collapse of Bear Stearns Cos. The proximate cause of the disaster was a combination of excessive, subprime mortgage-concentrated leverage and poor risk controls. But the overall economic, monetary and regulatory environment were the broader reasons.

On this anniversary, it is worthwhile to review what happened and what lessons were and were not learned. Let’s begin by looking at some of the broadest factors in effect during the pre-crisis era and how they contributed to the collapse.

• Monetary policy: The role of former Federal Reserve Chairman Alan Greenspan in setting rates at ultra-low levels — and keeping them there for a long time — cannot be understated. Credit boomed, especially consumer loans and mortgages, as did items priced in dollars, such as commodities, especially food and energy.

Greenspan was No. 1 in my book, and for good reason.

• Flat wages: Ultra-low rates did not occur in a vacuum; they took place in an environment where real wages had been flat for at least three decades and income inequality had been growing. Few people were willing to admit they were sliding lower on the socioeconomic ladder or lower their standard of living, so they turned to debt to fill the gap.

Lenders made it easy, especially the non-bank underwriters who were not constrained by either Federal Reserve or Federal Deposit Insurance Corp. rules and regulations. Speaking of which . . .



Continues at: What We Didn’t Learn From the Bear Stearns Collapse