SoCal economists ponder Lehman's collapse a year later

Economist Ed Leamer says a year ago this month, he and his colleagues at UCLA's Anderson School of Management were expecting the economy to soften in the rest of 2008.

Then Lehman Brothers collapsed.

Leamer, who directs UCLA’s Anderson Forecast, says the Lehman bankruptcy turned a softening economy into a “catastrophically bad” one.

Ed Leamer: "But a lot of that had to with fear rather than the real circumstances, in the sense that consumers started worrying about the 'Great Depression.' And businesses started to worry about the 'Great Depression.' And they all cut back spending in the fourth quarter.

"That’s why it was so bad. But we’re, that fear has to a large extent dissipated now and we’re back to a kind of, a kind of struggling forward, turning the corner kind of economy right now."

How much can the Golden State blame Wall Street for its sluggish economy? Chris Thornberg of Beacon Economics told KPCC’s Patt Morrison that California, especially California homeowners, had a long, symbiotic relationship with Wall Street's big financial houses, Lehman Brothers included.

Chris Thornberg: "They pumped our economy full of cash, which in turn drove asset prices, primarily housing, up to levels that were clearly unsustainable. But in the short run, it generated nice juicy returns for Wall Street, which gave them nice profits, which caused them to put more cash into Southern California and so on and so forth. That cycle, of course, was bound to end in collapse and all sorts of financial chaos."

Now the question whether that will be repeated.

President Barack Obama called today for an ambitious overhaul of the federal government’s financial regulations. His speech on Wall Street reassured UCLA's Ed Leamer. He says he’d started to worry that signs of an economic recovery had knocked the need for new rules off the radar screen.

Leamer: "There were a lot of articles in various papers over the last week saying that now that the financial sector seems healthy again, we’re gonna forget completely the catastrophic situation that they put us in. But the power of that Obama speech was extraordinary. He just saying to all of us, 'We’re not gonna let this happen again.'"

Ed Leamer and the team of UCLA economists will release their latest Anderson Forecast on Wednesday.