Ten years ago today, the Wall Street bank, Lehman Brothers, collapsed. But this event wasn’t about a 150-year-old bank. Lehman was a key part of a chain reaction, one which ultimately threatened to unravel the global financial system.
Banks across the United States had been offering housing loans to people with bad credit for years, so-called “subprime mortgages”. Those loans were packaged into risky products and sold onto global institutions with very little or no regulation. Lehman triggered widespread panic over fears that the system was riddled with bad debt. Thus, credit dried up and banks stopped lending to each other. Governments had to bail out banks and enact emergency measures.
Taxpayers money was pumped into the global financial system to keep it alive. The loss of confidence in the system led to a global recession and a huge collapse in consumer wealth, with after effects still being felt today.
So, what’s changed since Lehman’s collapse?
Global growth has recovered since the great financial crisis and the recession that followed. The world is on track for 3.9 percent growth in 2018, according to the IMF. But that recovery is very uneven.
We’ve seen a decade of record-low interest rates and new rules and regulations to shore up the banking system. But the emergency measures used to stimulate the economy and bring it back to life has been in use for much longer than intended. Quantitative easing or government buying of assets helped preserve wealth for those that had it. But young people today can’t afford to acquire assets. That wealth gap is on the increase.
Globally, total debt is now worse than before the collapse of Lehman Brothers. The global economy currently has a $237 trillion total debt, some $70 trillion higher than before the Lehman Brothers collapsed, according to the Financial Times.
Addressing income inequality is something which will help to save the current system, rather than undermine it.
Russell Jones, partner, Llewellyn Consulting and ex-employee of Lehman Brothers
Those record-low interest rates in the developed world meant it was cheaper for developing nations or emerging markets to borrow in dollars or euros. About $40 trillion was added to the debts of emerging markets since 2008, according to the Institute of International Finance. And we’re now entering an era in which central banks like the US Federal Reserve aren’t keeping rates low any more, thus lending support to the dollar. So as the dollar rises, it’s now costing those emerging markets a lot more to repay their debts.
“Although the international financial system is a lot safer than it was in 2007, or at least better equipped to deal with the sort of crisis which began in 2007-2008, there are still some outstanding problems – not least in the area of economic policy,” explains Russell Jones, a partner at Llewellyn Consulting and an ex-employee of Lehman Brothers.
“We are overly dependent upon the monetary policy. The mix of fiscal and monetary policy is still too skewed in favour of what central banks have to do. There’s been a lot of shortcomings where structural or supply-side policy is concerned and that’s left us with a lower potential rate of growth in the advanced economies.”
“I am also concerned there’s an element of backtracking on some of the financial sector reforms in the United States. This is something we see quite often: the desire to reform the financial sector after a crisis tends to weight-in the longer we’re in the recovery … and you can see that in some of the things the Trump administration’s done recently.”
Jones expressed concern that “the cooperation between the major economies is under a great deal of pressure at the moment. Mr Trump has launched quite an attack on the international financial institutions and it was through the guise of those financial institutions (IMF, World Bank, OECD) that a lot of policy measures that were taken at the depth of the crisis were conducted through or with the help of, and we’re now in an environment where there’s a lot more bilateralism, there’s a lot less multinationalism because the American government is undermining these institutions and that’s extremely troubling.”
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