Who Actually Caused the 2008 Financial Panic?
The 2008 financial crisis is widely remembered as the collapse of the housing bubble and the reckless behavior of financial institutions. However, according to economist Jeffrey Sachs, the real cause of the full-blown financial panic lies in a single, critical decision made by Treasury Secretary Hank Paulson.
The Common Narrative: Housing Bubble and Risky Investments
Most accounts of the 2008 financial crisis focus on the subprime mortgage crisis and the burst of the housing bubble. Banks were issuing risky loans, bundling them into complex financial products, and selling them around the world. When homeowners began defaulting, the entire financial system, which had been propped up on these unstable loans, started to crumble.
But Sachs, in a conversation with Tucker Carlson, argues that this narrative, while accurate to an extent, misses a crucial point.
The Decision That Sparked a Global Panic
According to Sachs, the financial system might have been fragile, but it wasn't doomed to collapse. What pushed the situation from a crisis to a catastrophe was Hank Paulson’s decision to let Lehman Brothers fail.
On September 14, 2008, Paulson had the option to save Lehman Brothers, a major investment bank. Several solutions were on the table, including a sale to Barclays. But Paulson chose to let Lehman collapse, believing that showing toughness by allowing a big bank to fail would calm the markets. Instead, it had the opposite effect.
A Personal Vendetta?
Sachs suggests that Paulson's decision was not just a strategic miscalculation but also possibly motivated by personal bias. Before his tenure as Treasury Secretary, Paulson was the CEO of Goldman Sachs, one of Lehman Brothers' biggest competitors. By letting Lehman fall, Paulson may have sought to eliminate a rival. This decision unleashed a wave of panic across global markets.
The Fallout: Chaos on Wall Street and Beyond
The Monday following Lehman’s collapse, the financial world descended into chaos. Banks around the world, suddenly unsure of their solvency, began calling in loans. This set off a chain reaction that led to massive failures and forced governments to issue unprecedented bailouts.
Sachs points out that the crisis could have been contained had it not been for Paulson's fateful decision. The subsequent narrative, however, has focused more on the broader economic conditions rather than this specific, pivotal moment.
A Crisis That Didn’t Have to Happen
Jeffrey Sachs' insights remind us that the 2008 financial panic wasn't just a result of economic forces beyond anyone's control. It was also a man-made disaster, driven by deliberate, and ultimately disastrous, decisions. The focus on the housing bubble and risky loans has overshadowed the true cause of the panic—the collapse of Lehman Brothers, an outcome that could have been avoided.