Ripples from crisis of 2008
SOME OF THE LASTING EFFECTS OF THE CRISIS WERE NOT FINANCIAL AT ALL, BUT SOCIAL
On this weekend 10 years ago, US investment bank Lehman Brothers declared bankruptcy, triggering the Great Recession. The anniversary invites a host of questions, some of which are answerable, some not. What has changed since then? Could the global recession that followed have been avoided? Are we safer now than we were then?
These are all mighty issues that include everything from the grand theories of modern economics to more specific questions about the nature of banking and banking regulation. They even stray into the sociopolitical construction of the modern era and human psychology.
But in the beginning was the dramatic unravelling of a grand, century-old institution, Lehman Brothers. The bank had aggressively ridden two historical waves: the global rise in the value of real estate, which was closely allied to the creation of new financial instruments designed to leverage the profitability of this change. It was, in short, an asset bubble placed on top of a financial transaction bubble.
The curiosity and tragedy at the time of Lehman’s implosion were two-fold. First, the interconnectedness of banks around the world was then viewed as a strength, but it worked against banks when things unwound, dragging them all down one after another. Second, there was a sudden realisation that almost nobody had recognised this potential weakness.
Fast-forward 10 years. Are we safer now? The answer is mixed. As central banks quickly added liquidity to the markets to protect them from seizing up, public debt has increased enormously. Global government debt more than doubled between 2008 and mid-2017 and is now around $160-trillion, according to a McKinsey report. Private debt has declined slightly to around $70-trillion, while corporate debt has doubled over the past decade to hit $66-trillion. The notion that the world would deleverage after the crisis has simply not come to pass.
On the other hand, the housing bubbles that were evident during the crisis have retracted somewhat. For example, in the US house prices plummeted and have only now reached the levels they were in 2008.
The big effect of the crisis was to seriously reduce the scale and scope of the trading activities of banks. The new era of banking and financial regulation hit banks hard, and they have to carry much larger levels of shareholder’s equity and retained earnings.
The crisis also seems to have caused a long-term retraction in cross-border capital flow, which exploded during the crisis from around $2-trillion to $13-trillion in 2007. This means the global financial system is less vulnerable to contagion, the McKinsey report concludes. But it also means lower profitability. For better or for worse, globalisation has been pared back.
For SA, the crisis was an oddity. SA’s comparative insularity from aspects of the global trading system (notably excluding the currency), meant that initially SA’s banks were not too badly affected. Remaining exchange controls ironically protected SA. But as cross-border capital flows retreated, commodity prices declined. SA felt the sting but in a delayed and roundabout way.
Some of the lasting effects of the crisis were not financial at all, but social. The economic crisis has caused major disruptions to global politics, with a decline in democracy and liberty. Populist political outbreaks are evident all around the world as political cleavages have widened and hardened.
The weight of the crisis fell on ordinary people, mostly the middle classes, and it has tended to exacerbate inequality, which was already expanding before the crisis. The result has been more fractured social mores and a frayed social contract.
We are sadder but perhaps also wiser as a result of the crisis. If the crisis was underpinned by hubris, the pendulum has swung arguably too far the other way. The best thing about the anniversary is that it’s over and the world can now concentrate on getting its mojo back.