The gathering storm
Fears of new crisis seven years after Lehman fall
Britain and the United States were at the epicentre of the financial crisis that claimed Lehman Brothers seven years ago today. the dramatic collapse of the 158-yearold banking giant, on September 15, 2008, plunged the world’s already teetering financial system into crisis and triggered a brutal global recession.
Seven years on, the British and american economies are now among the strongest in the developed world with both the Bank of England and Federal reserve looking at raising interest rates for the first time since the crash.
the Fed, led by Janet Yellen, could make its move this week. But the prospect of higher interest rates comes at a time of mounting concern over the state of the global economy – and the onset of the next crisis.
there is particular anxiety over China and other emerging markets from Brazil and russia to South africa. Uncertainty in Greece and malaise in the wider eurozone economy continues to cause alarm.
it has been a torrid summer for investors with markets around the world swinging violently.
Shares in China were on the slide again yesterday, with the stock market in Shanghai down another 2.67pc, taking losses since June in what has been dubbed ‘the Great Fall of China’ to 39.71pc.
the rout has taken its toll on commodities and emerging market currencies – and left investors across the West in a jittery mood.
Last month was the worst for the FTSE 100 index in London for more than three years and the blue chip benchmark is nearly 15pc off the all-time high reached in april.
Former US treasury secretary Larry Summers warns: ‘We could be in the early stage of a very serious situation.’
Watchdogs, including the international Monetary Fund, the World Bank and the Bank for international Settlements, are concerned about the onset of another crisis.
Consultants at McKinsey believe that global debt has risen by £37trillion or 17pc of global income since the fall of Lehman.
a report by BIS warns that debt levels have reached extreme levels – leaving the financial system vulnerable to higher interest rates in the US.
Claudio Borio, chief economist at BIS, warns it is ‘unrealistic and dangerous to expect’ that central banks ‘can cure all of the global economy’s ills’ through low interest rates and money printing and BIS is calling for an end to the era of ultra-cheap money.
the IMF and World Bank are not so sure and have urged the Fed to delay ‘lift- off ’ until later this year or even next year given the state of the global economy.
Much of the concern stems from China which has become an increasingly important driver of world growth in recent years.
Economic output in China rose by 7.4pc last year – its slowest pace in 24 years – and Beijing looks set to struggle to meet its full-year growth target of ‘around 7pc’ this year.
Figures from the Organisation for Economic Cooperation and Development show growth across the G20 remained steady at 0.7pc in the second quarter.
But while countries such as China, india, the UK and the US continue to grow, Canada, Brazil, Japan and South africa all suf- fered contraction. Growth remains muted in the eurozone and non-existent in France.
Willem Buiter, a former Bank of England official and now chief economist at Citigroup, says there is a 55pc chance of another global slump in the coming years.
Vince Cable, the former Liberal Democrat business secretary in the last Coalition government, insists the world is not heading for ‘a new Lehman moment’.
But he warns of ‘ unknown unknowns’, adding the global economy is ‘very fragile’ and the eurozone ‘is in a terrible mess’.
Lord turner knows what it is like to be taken by surprise. He was appointed chairman of the now defunct Financial Services authority, a week after the collapse of Lehman.
‘We faced the biggest financial crisis in 80 years,’ he writes in his new book, Between Debt and the Devil. ‘ Seven days before i started, i had had no idea we were on the verge of disaster.
turner warns that ‘ excessive’ debt could cause the next crisis.
Of course, he was not alone in being taken by surprise by the last crash. the Queen famously asked in spring 2009: ‘Why did no one see this coming?’
the answer, from the British academy a few months later, was that there had been ‘a failure of the collective i magination of many bright people’.
Seven years on, the storm clouds are gathering once again, as the world struggles to bounce back from the collapse of Lehman and its painful aftermath.