Six years on, we still haven't learned the real lessons from Lehman collapse

On Monday, it will be six years since the collapse of Lehman Brothers. With the US economy still operating below par and Europe struggling to stay above water, the question is whether the right medicine was given after 2008.

The mainstream diagnosis was that the problem lay in excess credit and there was a need to control banks and shadow banks through more regulation and capital. Since politicians were not willing to push fiscal policies to the limit, central bankers opted for massive quantitative easing to stimulate the economy and simultaneously tighten regulation to restrain the naughty bankers.

But who allowed the excess credit in the first place to create asset bubbles at excessively low interest rates before 2007?

One can fully understand that, under crisis conditions, we need to stimulate the economy and control bankers. But in controlling the bankers, why have banks spent more than US$100 billion so far in legal settlements, with another estimated bill of US$150 billion, after quantitative easing subsidised them to the tune of US$300 billion, according to estimates?

These lofty central bankers and regulators have forgotten that finance is a derivative of the real sector. If the underlying asset (the real economy) is sick, fixing the derivative (finance), won't solve the problem. Fixing finance is like strengthening the cart but ignoring the horse. If the horse is overleveraged, giving it more debt won't make it run faster. Thus, it makes more sense to inject capital into the real economy, rather than the banking system.

Indeed, asking bankers to top up capital does not make any sense. If the government has to increase debt, let it inject capital into small and medium-sized enterprises and infrastructure to push for real growth.

In other words, the world is short of equity, not more debt. There are several culprits for our mistake of favouring debt over equity.