David Parkin­son and Bar­rie McKenna

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS -

re­port on the cost of sav­ing the global econ­omy

It’s ap­par­ent that sav­ing the world came at a price. The global econ­omy, although bet­ter and health­ier, has still not re­turned to its nor­mal state as busi­ness in­vest­ment, wage growth and em­ploy­ment con­tinue to lag

In mid-Septem­ber of 2008, as Henry Paul­son stood face-to-face with one of the most dan­ger­ous fi­nan­cial melt­downs in his­tory, his days were so hec­tic that he didn’t have time to fear he might screw it all up.

But at night, the U.S. trea­sury sec­re­tary would lie awake, stare into the dark­ness and be­come over­whelmed with doubt.

“In the night, lit­tle prob­lems seem big, and big prob­lems seem in­sur­mount­able,” Mr. Paul­son re­called this week in Wash­ing­ton, dur­ing a panel dis­cus­sion com­mem­o­rat­ing the 10th an­niver­sary of the col­lapse of U.S. in­vest­ment bank Lehman Broth­ers. “I would look into the abyss and see food lines, see an­other Great De­pres­sion.”

The cri­sis had been build­ing since 2007, but Lehman’s bank­ruptcy fil­ing on Sept. 15, 2008, was a piv­otal event – the domino that top­pled so many oth­ers. Within hours, fail­ing in­vest­ment bank Mer­rill Lynch was pur­chased in a fire sale by Bank of Amer­ica, fail­ing in­sur­ance gi­ant Amer­i­can In­ter­na­tional Group was saved by a mas­sive gov­ern­ment res­cue plan, and fears mounted about just how deeply and widely the fi­nan­cial sys­tem was in­fected with toxic as­sets.

Mar­kets went into freefall, and in­vestors barred up their doors. Au­thor­i­ties around the world raced against time to stanch the bleed­ing, halt the spread and get fresh money flowing through a fi­nan­cial sys­tem that was in real dan­ger of seiz­ing up en­tirely.

Mr. Paul­son looks pretty re­laxed talk­ing about it now. Sit­ting in an easy chair along­side two other key play­ers in U.S. eco­nomic pol­icy a decade ago – for­mer Fed­eral Re­serve chair­man Ben Ber­nanke and Tim Gei­th­ner, who was head of the pow­er­ful New York Fed­eral Re­serve when the cri­sis be­gan and Pres­i­dent Barack Obama’s trea­sury sec­re­tary when it ended – Mr. Paul­son can live com­fort­ably in the knowl­edge that he and his col­leagues suc­ceeded where and when it mat­tered most.

The cri­sis was cer­tainly painful: In the en­su­ing months, stock mar­kets lost half their value, cen­tral banks cut their in­ter­est rates to near zero, the North Amer­i­can auto in­dus­try re­quired a gov­ern­ment bailout and al­most half a mil­lion Cana­di­ans and six mil­lion Amer­i­cans lost their jobs. But the con­sen­sus is that the fis­cal, mon­e­tary and reg­u­la­tory pol­icy moves made in the United States, Canada, Europe and else­where saved the world from an all-out col­lapse of the fi­nan­cial sys­tem – and a sec­ond Great De­pres­sion.

But a decade af­ter the Lehman tip­ping point, it’s ap­par­ent that sav­ing the world came at a price. The global econ­omy, though health­ier, has still not re­turned to nor­mal.

Growth has been frus­trat­ingly slow. The global econ­omy has never re­cov­ered all that it lost – has never got­ten back on the tra­jec­tory it was on prior to the cri­sis. Growth in wages has been stub­bornly weak.

Busi­ness in­vest­ment and trade growth have failed to re­cover.

In­ter­est rates set by cen­tral banks re­main far lower than his­tor­i­cal norms, which has en­cour­aged ex­ces­sive risk-tak­ing in cap­i­tal mar­kets and has fu­elled record global debts.

Some of th­ese are old prob­lems that proved hard to re­solve, or re­turned as the econ­omy and fi­nan­cial mar­kets clawed their way out of the deep hole dug by the re­ces­sion.

Other is­sues were ex­ac­er­bated by the cri­sis. But some of the world’s cur­rent set of eco­nomic ills can be linked to the un­prece­dented pol­icy ac­tions – fis­cal, mon­e­tary and reg­u­la­tory – taken to stave off to­tal dis­as­ter dur­ing the cri­sis.

“When you’re in a cri­sis, by ne­ces­sity you have to shorten your hori­zon. You don’t have the lux­ury of think­ing about long-term struc­tural con­se­quences. The first pri­or­ity was to sta­bi­lize the fi­nan­cial sys­tem,” says Tiff Mack­lem, dean of the Univer­sity of Toronto’s Rot­man School of Man­age­ment, who, as sec­ond-in-com­mand at the Bank of Canada a decade ago, played a key role in erect­ing Canada’s own cri­sis de­fence strat­egy.

“There’s no doubt that it has had some un­in­tended con­se­quences.

“The cri­sis has cast a very long shadow.”

The cur­rent re­cov­ery is one of the long­est on record – but also one of the weak­est. In the decade lead­ing up to the cri­sis, Canada’s econ­omy was grow­ing an av­er­age of al­most 3 per cent a year. Be­tween 2009 and 2017, growth av­er­aged just 1.7 per cent a year.

The global econ­omy has sim­i­larly slowed, grow­ing an av­er­age of 2.9 per cent a year since the cri­sis, down from 3.3 per cent a year from 1999 to 2008.

The cri­sis has also left deep wounds – af­fect­ing com­pa­nies, work­ers and, more broadly, con­fi­dence. “One of the last­ing le­ga­cies of the fi­nan­cial cri­sis is psy­cho­log­i­cal scar­ring,” says Craig Alexan­der, se­nior vice-pres­i­dent and chief econ­o­mist at Deloitte Canada. “Even though it’s been 10 years, peo­ple still re­mem­ber what a bad re­ces­sion looks like.”

Com­pa­nies, in par­tic­u­lar, re­main ex­traor­di­nar­ily risk-averse, and that is still weigh­ing heav­ily on their de­ci­sions. Cor­po­rate prof­its bounced back af­ter the cri­sis, but com­pa­nies are still re­luc­tant to spend and de­plete their cash re­serves. Cana­dian busi­nesses have not been spend­ing enough to re­place old ma­chin­ery and equip­ment, let alone make new in­vest­ments.

“All th­ese com­pa­nies are be­hav­ing ra­tio­nally,” Mr. Alexan­der ex­plains. “But when all those busi­nesses act in the same cau­tious, risk-averse way, you end up with an econ­omy that is un­der-in­vest­ing.”

The slow pace of the re­cov­ery is typ­i­cal of the af­ter­math of a fi­nan­cial cri­sis, says McGill Univer­sity econ­o­mist Christo­pher Ra­gan, a mem­ber of Fi­nance Min­is­ter Bill Morneau’s Ad­vi­sory Coun­cil on Eco­nomic Growth.

The com­bi­na­tion of rat­tled busi­ness con­fi­dence and the delever­ag­ing of fi­nan­cial in­sti­tu­tions is like a dou­ble whammy for the econ­omy.

“It’s an un­usu­ally slow re­cov­ery if this had been a nor­mal re­ces­sion, but it’s a nor­mal re­cov­ery from a fi­nan­cial cri­sis,” he says.

The cri­sis isn’t en­tirely to blame for slower eco­nomic growth. De­mo­graph­ics are also at play. In 2011, the first mem­bers of the mas­sive baby boom gen­er­a­tion be­gan hit­ting 65 and re­tir­ing in droves. With each pass­ing year, more leave the work force, slow­ing the growth of the labour mar­ket, which is a key driver of growth.

On the sur­face, the job mar­ket ap­pears to have re­cov­ered strongly in North Amer­ica: Un­em­ploy­ment in Canada re­cently dropped to its low­est rate since 2007, while U.S. un­em­ploy­ment re­cently dipped to its low­est since 2000.

But the labour force has yet to get back to its pre-cri­sis state – and it may never. Many work­ers, par­tic­u­larly in man­u­fac­tur­ing, lost jobs that no longer ex­ist, ei­ther due to au­to­ma­tion or be­cause fac­to­ries moved else­where. Canada’s labour force par­tic­i­pa­tion rate – the share of the work­ing-age pop­u­la­tion that is em­ployed or ac­tively look­ing for work – re­mains lower to­day than it was in Au­gust, 2008, at 65.4 per cent ver­sus 67.4 per cent – the equiv­a­lent of about 590,000 fewer peo­ple in the labour force.

The Great Re­ces­sion also put a dent in global de­mand for many of the com­modi­ties that Canada ex­ports, send­ing the price of oil and other re­sources plung­ing. Prices for many of th­ese com­modi­ties re­main be­low pre-cri­sis lev­els.

The pop­u­lar per­cep­tion is that gov­ern­ments bailed out bankers in the cri­sis while leav­ing peo­ple on Main Street to fend for them­selves. To an ex­tent, it’s true.

No doubt the cri­sis would have been much worse with­out the ex­tra­or­di­nary in­jec­tion of cheap money into the global econ­omy by cen­tral banks. But the ben­e­fits of all that liq­uid­ity have not been spread equally across so­ci­ety, widen­ing the gap be­tween the mid­dle class and the very wealthy, par­tic­u­larly in the United States.

That’s be­cause low in­ter­est rates cre­ated a prop­erty and stock mar­ket boom, which boosted the wealth and power of share­hold­ers. But they also pun­ished savers, in­clud­ing pen­sion funds and their ben­e­fi­cia­ries.

“Low in­ter­est rates stim­u­late as­set price in­fla­tion, and that’s where the one per cent live,” ex­plains econ­o­mist Dan Ci­uriak, for­mer deputy chief econ­o­mist at Global Af­fairs Canada. “We’ve come out of the cri­sis with more or less full em­ploy­ment, but we have de­pressed wages, el­e­vated cor­po­rate prof­its and dis­torted in­come dis­tri­bu­tion.”

Low in­ter­est rates have also af­fected the rel­a­tive value of ma­chines ver­sus peo­ple in the minds of em­ploy­ers, ac­cord­ing to Mr. Ci­uriak. And that’s hold­ing back wage growth.

“Why pay for labour if you can buy a ma­chine with cheap money?”

Wages in the world’s wealth­i­est coun­tries are now grow­ing at a mea­gre 1.2 per cent a year, af­ter fac­tor­ing in in­fla­tion, ac­cord­ing to the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment’s re­cently re­leased an­nual em­ploy­ment out­look. That’s down from 2.2 per cent be­fore the fi­nan­cial cri­sis.



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