A ten-year crisis

What has changed, and what has not, since Lehman Bros fell

In the 10 years since storied investment bank Lehman Brothers collapsed, sending shock waves through the world of international finance and sparking a lengthy global financial crisis, what is perhaps most surprising to many observers is that so little has changed. The genuine changes are, however, under the surface — and those too need to be examined carefully to see if they still retain their usefulness and significance as crisis resolution becomes less of a priority. On the face of it, the financial sector has paradoxically changed the least. There are still institutions that are “too big to fail”, skewing incentives and threatening public money if they ever become unstable. The top five banks in the US, for example, still control almost half of banking assets in that country. The primacy of Wall Street in the world of global finance, in spite of the fact that the errors started there and in the City of London, has also not changed. The continuing power in the world economy of the sector, companies and individuals who caused the last crisis is disquieting. Naturally, that disquiet is only enhanced by the fact that there has been very little punishment handed out for the crisis. No high-profile banker has been sent to jail for fraud, in spite of credible accusations of mis-selling in the lead-up to the crisis. Instead, compensation has, on average, continued to grow. Meanwhile, public debt grew as governments absorbed the errors that the private sector had made. This apparent lack of change in the financial sector has led to a political backlash. “Wall Street vs Main Street” narratives have taken hold not just in America but in the rest of the world. Global finance is now seen as a threat to national cohesion and to solidarity. In fact, US President Donald Trump’s former chief strategist Steve Bannon has explicitly argued that his father’s loss of his life’s savings in the 2008 crash contributed directly to his own radicalisation, which has helped shape Mr Trump’s “America First”, anti-globalisation agenda. The retreat from globalisation in the West is partly a backlash against finance, as well as against the trans-national “experts” who didn’t prevent the crisis. Meanwhile, globalisation’s defence falls to the government of the People’s Republic of China, which believes itself ideologically empowered by the apparent failure of the Western system. This broad political trend is deeply worrying for countries like India that need a transparent, equitable and open global economy to ensure their own continuing development. Finally, the general narrative that finance has not changed in large part is flawed in several respects, and these too need to be kept in mind. The growth of extraordinary monetary policy measures, alongside greater regulation, has meant that finance has abandoned its duty to examine and price risk for speculation on the future direction of such measures. Banks’ search for growth, especially in the developing world, has largely ended, and handed off instead to high-value hedge funds and private equity firms. This means that Indian companies find it difficult to access global bank finance, relying instead on the equity markets, high-value investors or local resources. This is a big change since 2008, and lies at the root of India’s current capital funding crunch. The development cost of the response to 2008, and not just the crisis, needs to be properly evaluated.