The Next Recession (Whenever it Comes) Will Be About Sovereign Debt

What made the recession in 2008 the Great Recession was the failure of the Federal Reserve and the Treasury to prevent Lehman Brothers from collapsing. This is not to say this is was the cause of the recession — but it was the major reason that the recession was so painful. Allowing the collapse of an institution that was too big to fail is what started the deflationary spiral that almost brought down the entire global economy. As Alan Blinder, the former Federal Reserve board member and professor at Princeton University, said on the impact of the Lehman collapse:

People argue that if it wasn’t Lehman Brothers it would have been something else,” ….“I don’t buy that. I don’t mean everything would have been great if we had bailed out Lehman. We were in a financial crisis before Lehman. But it had a shock value that just caused everything to fall off a cliff. If you look at data on almost anything — consumer spending, investment spending, car sales, employment — it just drops off the table at Lehman Brothers and I don’t think we needed to have that

Although there is always the risk of another similar misstep in any recession, it would be surprising if any central banker allowed the abrupt collapse of a major bank for another half-century or so. However, while it’s unlikely that the next recession will see another Lehman Brothers, the next recession will likely be worse than 2008 — but for a different reason.