October 18, 2011
“We face another Lehman moment,” Institute Faculty Fellow Mark Blyth writes this month on the website of Deutsche Welle, Germany’s international broadcaster. “The sea is rising and the wall isn't high enough so it should be in the self-interest of the core banks to take precautions and raise more capital to withstand the flood – right? Haven't they learned anything from 2008?”
In the article, “Greece, Lehman, and the Policies of Too Big to Fail,” Blyth, an international political economist, questions whether big banks have learned anything since the collapse of Lehman Brothers and the banking crisis of three years ago. But with a second banking crisis looming, Blyth argues banks have simply learned to capitalize on bailouts and further their own self-interests.
“They have learned from Lehman that they are now bigger and more systemically important than ever,” Blyth writes. “So if they refuse to recapitalize, then the problem is simply passed back to the state to sort out.”
Blyth writes that Germany's “entire banking industry has just joined forces to attack the EU's recapitalization plan.”
“They know there is trouble coming, but sorting it out themselves would cut into profits,” he writes, adding, “Far better to pass it back to the state with a reminder of the consequences of their failure.”
“The lesson of Lehman has indeed been learned,” Blyth writes. “It's good to be too big to fail.”
“We used to live in a world where banks bailed out sovereigns,” Blyth writes, “but now sovereigns bail banks that are too big to fail – and the banks know it.”
“Capitalizing upon this is now a business model.”
Blyth is also a professor of international political economy in Brown’s Department of Political Science, and director of the University’s undergraduate programs in development studies and international relations.
By Watson Institute Student Rapporteur Lauren Fedor '12