A new ‘uglier’ crisis is around the corner

Professor of Practice in International Political Economy at City, University of London

ON September 15, 2008, the US investment bank Lehman Brothers collapsed and the global financial crisis began.

Ten years later, that situation has not really ended. Worse, many economists — me included — think a new crisis may be around the corner.

So what happened, why, and what might happen next time?

Lehman crashed because it had run out of money. Within weeks, the crisis had spread.

In October 2008, then Chancellor Alistair Darling was told Royal Bank of Scotland was just hours away from also running out of cash.

And RBS going down was not an option.

Lehman Brothers was not a high street bank, RBS was. So too were Lloyds, HBOS and Bradford & Bingley. All were heading the same way as Northern Rock, which had collapsed a year earlier.

Mr Darling could let the banks fail — as the US had let Lehman Brothers fail — or bail them out. But the truth was that he had no choice.

If RBS went down, millions of people in the UK would have had no access to money.

And that might also have been true of hundreds of thousands of businesses. If a bank like RBS failed, it was likely others would go down.

On average most British households have no more than three days food in stock.

People and supermarkets without banks would have meant panic and food riots.

So Mr Darling bailed out the banks, as any responsible Chancellor would have done.

But most of us have been paying for that ever since.

Between 1998 and March 2008, the Government borrowed £186billion to keep the economy going.

From April 2008 to March 2018, the Government borrowed £990billion.

The difference is, roughly, £25,000 a household. You paid through austerity. Only two groups were protected. One was pensioners. And I cannot argue with that. The other group was bankers. And that was just wrong. Bankers benefited through quantitative easing, jargon for the Government buying back its own debt.

And almost all the benefit of that has gone to bankers who have used that money to push up house prices, share prices, and maybe even commodity prices in which they trade.

The result has been most banks have recovered to be seriously profitable again — and for bankers, unlike almost everyone else, the pay rises and bonuses have flowed.

And that is despite — let’s be absolutely clear about this — the bankers caused the crash.

They did this by reckless lending, mainly for mortgages that often exceeded the value of the houses they were funding to buy. It overheated the economy and the bubble the bankers created burst.

Yet they seem to have learned nothing. Right now, there is as much lending to the UK public compared to our income as there was in 2008.

The result is we are almost certainly heading for another crash. But this time, the Government cannot slash interest rates. So, this crash might be uglier.

The bank crisis left homes in America abandoned