Ten years after Lehman’s failure we live in a far larger financial world
Ten years after the failure of Lehman Brothers nearly caused the international financial system to collapse, the US stock market is now in the midst of a record bull run.
After the global recession passed, the subsequent period was characterised by slow, unspectacular growth, but at least a great depression was avoided. Panic in 2008 and 2009 largely gave way to frustration at the slow pace of recovery giving rise to frequent doubts about its sustainability, and yet the US economy is now in its 10th year of expansion.
Forecasting the next meltdown became almost commonplace, but just as the optimism before the great financial crisis proved to be wrong, the bouts of pessimism in its aftermath were also misplaced.
Not surprisingly the anniversary of such momentous events has given rise to numerous retrospectives about what has been learnt and how such events can be avoided in the future.
While commentaries are littered with warnings that financial crises are becoming more frequent, this is only natural as financial markets deepen and spread into more parts of the world.
So, while the US stock market is scaling new heights, some emerging markets are currently experiencing bear markets.
But 30 years ago many of the emerging markets – where bear market behaviour is being observed today – did not exist, just as the financial market instruments that contributed to the Lehman Brothers failure were unheard of only a few years before it happened.
Global economic imbalances also develop and change over time, and with growth they almost inevitably get bigger and more complicated, constantly posing even bigger challenges and risks to policymakers.
Even 10 years on from Lehman, the transmission of news and information is much quicker due to technology, which can also contribute to the frequency of financial market turbulence, bubbles and crashes.
Thankfully, with time and experience the ability of policymakers to respond to crises has also got better.
The salient policy response of the last 10 years has been the reliance on monetary policy, with zero interest rates, even negative ones, and “quantitative easing” all entering the lexicon of even casual commentators in such a relatively short space of time.
A decade ago, this kind of vocabulary was largely the preserve of academics and historians. What we now know is that it works or can work in real-time, not only theoretically or in the relatively abstract historical context of the 1930s.
What we tend to forget is that what now feels like an unqualified success felt like a great experiment in 2008.
However, we may also have learnt that the persistent reliance on QE and zero/negative rates may also have some counterproductive aspects, as they can exacerbate or extend crises by inducing fear that “emergency” measures are necessary, thus dampening consumption by ‘deflating’ expectations.
Fiscal policy was perhaps overlooked during the crisis, possibly for understandable reasons given abiding concerns about expanding budget deficits and debt-GDP ratios. But the perceived wisdom of the need to balance budgets before they get out of control could have contributed to the relatively patchy nature of the recoveries, at least in the early post-Lehman years.
The world is also more aware of the role of regulations, the stress-testing of banks and the capital ratios that should be maintained to ensure corporate and financial stability.
However, as with monetary policy, there are some arguments that these may have gone too far, and may in fact be creating the conditions for future crises.
Regulatory overkill, for example, may inhibit risk taking, while the risk there still appears to reside in some of the biggest global institutions which may still be “too big to fail”.
Financial crises and the business cycle have not been abolished, and debt, the principal cause of the Lehman collapse, has actually got bigger in the wake of the crisis, not smaller. The persistence of low interest rates has encouraged this.
Fortunately our ability to deal with crises has also improved, a skill that will no doubt be tested again when they emerge, as they surely will, sooner or later.
Global economic imbalances also develop and change over time, and with growth they almost inevitably get bigger and complicated