Monday, September 15, 2008


Lehman Brothers is as venerable an institution as America has ever had. The company was founded in 1850 by a Bavarian immigrant and his brothers. Before trading in fancy derivatives it was originally a dry-goods store. The family firm successfully weathered the Great Depression and many other down periods but could not escape our latest financial crisis. Today the firm, now a publicly traded company, formally acknowledged it would file for bankruptcy. Perhaps no other country has so embraced Schumpeter's creative destruction, but even here it can be hard to accept at major turning points like this.

We are used to seeing companies rise and fall and few tears were shed when Internet startups suddenly went bust in 2000. But there is something different about watching a once mighty institution like Lehman fall. In this environment it is easy to let doubt creep into our thoughts. And the problems we face in our financial markets are but one of many and they are perhaps not even the most challenging. Our infrastructure is crumbling and our bridges are literally falling down. We face deficits in the short term and a massive national debt. Perhaps most depressing of all, approval ratings of Congress are so low that even our current president looks popular by comparison.

Facing a recession, high food and energy prices, and wages that are not keeping up with inflation, it is natural to be pessimistic. But pessimism isn't really our style. We are, if nothing else, a resilient nation. Recent events brought to mind a thought provoking article in Foreign Affairs by Stephen Flynn, entitled America the Resilient (link):

Resilience has historically been one of the United States' great national strengths. It was the quality that helped tame a raw continent and then allowed the country to cope with the extraordinary challenges that occasionally placed the American experiment in peril. From the early settlements in Virginia and Massachusetts to the westward expansion, Americans willingly ventured into the wild to build better lives. During the epic struggles of the American Revolution, the American Civil War, and the two world wars; occasional economic downturns and the Great Depression; and the periodic scourges of earthquakes, epidemics, floods, and hurricanes, Americans have drawn strength from adversity. Each generation bequeathed to the next a sense of confidence and optimism about the future.

But this reservoir of self-sufficiency is being depleted. The United States is becoming a brittle nation.
The article is ultimately optimistic, but sadly our problems won't be solved by just buying lottery tickets (oddly enough I didn't win in last Saturday's drawing.) The author's focus is on security and terrorism, but his policy proposals extend into all areas of policy.

We've now experienced the destructive part of capitalism and while the creative part currently seems elusive, our economy will recover. The fate of Lehman Brothers is unclear, and Merril Lynch, another giant is now gone, but this consolidation will spawn new opportunities and new ventures. But before we get caught up in new dreams we should pause to consider what's happened recently and how we can reform our institutions to better deal with our modern world.

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