Blue Tuesday

My brother Jeffrey lost his job at Lehman Brothers today. Based in the Tokyo office, he watched 300 people sacked last year, so was ready for what was coming.

But news is grim. 25,000 jobs lost at Lehmans, 25,000 layoffs at Hewlett-Packard, 60,000 very uncertain jobs at Merrill Lynch after the Bank of America buy-out. Suddenly we are facing up to the implications of a major financial downturn for the rest of the world economy.

My political economy and economic history classes from my undergraduate degree at Sydney University are starting to look highly recommended. For a historical take on financial crashes, I recommend Charles Kindleberger's Manias, Panics and Crashes.

Anyway, bad news for New York at any rate:

New York Gov. David Paterson on Monday said Wall Street might lay off 40,000 workers in a worst-case scenario following Lehman Brother's bankruptcy filing and problems at other big financial firms.

Paterson, speaking a news conference where he also noted the impact of Bank of America's surprise agreement to purchase Merrill Lynch and problems threatening insurer American International Group, said the impact of the financial sector's downturn may not be known for months or even years.

For more read here.

For an analysis by Joseph Stiglitz, the financial economist who has been prpared to spek out against prevailing orthodoxies, see here.

Houses of cards, chickens coming home to roost - pick your cliche. The new low in the financial crisis, which has prompted comparisons with the 1929 Wall Street crash, is the fruit of a pattern of dishonesty on the part of financial institutions, and incompetence on the part of policymakers.

We had become accustomed to the hypocrisy. The banks reject any suggestion they should face regulation, rebuff any move towards anti-trust measures - yet when trouble strikes, all of a sudden they demand state intervention: they must be bailed out; they are too big, too important to be allowed to fail.

Eventually, however, we were always going to learn how big the safety net was. And a sign of the limits of the US Federal Reserve and treasury's willingness to rescue comes with the collapse of the investment bank Lehman Brothers, one of the most famous Wall Street names.

The big question always centres on systemic risk: to what extent does the collapse of an institution imperil the financial system as a whole?