Quite a day — what will the Lehman Chapter 11 bring?

So much for inflation. The underlying trend in many major asset categories has been deflationary for a while, fundamentally on account of ever-restricting credit standards in the marketplace. This has been masked by the speculative bubble in commodities, which would appear to be over. If it isn’t over yet, the (necessary but sad) Chapter 11 filing of Lehman Brothers, the shotgun wedding of Merrill and BofA, and the meltdown of AIG, are all moving us further and further down that path. Oil is now off $50 from its high, and in our view may well have the better part of another $50 yet to fall. WSJ:

Light, sweet crude for October delivery was recently down $5.40, or 5.3%, at $95.78 a barrel on the New York Mercantile Exchange. October Brent crude on the ICE Futures exchange, which expires Monday, was down $5.24 to $92.34 a barrel. Nymex crude earlier fell to $94.13 a barrel, the lowest price since Feb. 14

Meanwhile, China is trying to address future anemic growth through easing lending restrictions, which as we have said many times, probably won’t be enough to keep growth where it needs to be in that country.

UPDATE

Oops, the day got a little worse. WSJ:

The Dow Jones Industrial Average, which languished with a loss between 200 and 300 points for most of the day, saw its losses accelerate in the last hour of trading. It ended down by 504.48 points, off 4.4%, at 10917.51. All 30 of its components fell, led by a 60.8% plunge in American International Group. The Federal Reserve on Monday asked Goldman Sachs Group and J.P. Morgan Chase to help make $70-$75 billion in loans available to the company, according to people familiar with the situation…

Bank of America was also a big decliner among Dow stocks, off 21.3%…Goldman was off 12.1%, while Morgan Stanley fell 13.5%…Washington Mutual tumbled 26.7% as investors feared it wouldn’t be able to find a buyer…”We’ve re-established ‘moral hazard,'” a person involved in the Lehman talks told the Journal…”Is that a good thing or a bad thing? We’re about to find out.”

One hopes that, in allowing the failure of Lehman Brothers and the stampede that followed, the current crop of regulators is steering a course to avoid some of the really devastating mistakes of the past.

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