What has Lehman taught the world

york — Ten years ago, amid a worsening subprime mortgage crisis, the US government did what few have dared: It allowed a major global investment bank, Lehman Brothers Holdings Inc, to file for bankruptcy.

Within days, the shock waves crippled the nation’s largest insurer, triggered a run on money-market funds, and accelerated a cash crunch that would ultimately destroy millions of jobs.

Only by pledging trillions of dollars to prop up the financial system, and spending hundreds of billions more on fiscal stimulus, did the government manage to prevent the worst economic disaster since the Great Depression from becoming the worst ever.

The repercussions of that debacle endure today. In the US alone, an estimated $1.4 trillion in annual economic output will never be recovered — a loss that has weighed most heavily on the poor. The cost of shoring up economies has left advanced-nation governments deeper in debt than at any point since the Second World War, and depleted the financial resources central banks will need to fight the next recession. The populism that has gripped the developed world, and that brought Donald Trump to power, can be traced to the way the crisis — and the spectacle of governments left with no choice but to bail out those responsible undermined confidence in the establishment.

Given the scale of the damage, the experience should be seared into the memories of politicians everywhere. It’s shocking to see how quickly they’ve forgotten, and how fragile the financial system remains. The lessons of the 2008 crisis are clear. Banks had too much debt and too little equity, so they couldn’t bear the losses they faced. Government overseers were flying blind: The system was so opaque that they couldn’t see risks building or know who was connected to whom. And even if they had perfect visibility, they couldn’t safely dismantle a large, global financial institution. The Lehman failure demonstrated their awful options: Bail out banks at taxpayer expense, or tempt Armageddon.

After the crisis, legislators and regulators worked to ensure that the system would be better prepared, adopting thousands of pages of laws and rules. In some cases, the changes are unnecessarily burdensome.

In general, they have fallen short. Regular stress tests have improved banks’ risk management, but aren’t nearly as stressful as a real crisis.