The global financial crash: 10 years later
What has changed since the meltdown
Ten years ago Wednesday, French bank BNP Paribas blocked withdrawals from hedge funds that specialized in U.S. mortgage debt. That Aug. 9, 2007, marked the beginning of a credit crisis that ushered in the Great Recession of 2007-09.
“It’s true that the subprime mortgage crisis in the U.S. started a little earlier, in February 2007, but the money markets did not notice until that day in August,” said Alexis Stenfors, a former trader for Merrill Lynch who lost his company $450 million on currency bets. He is a business professor at Britain’s University of Portsmouth. “We realized that this problem was going to be a lot bigger than American subprime mortgages and that it was going to spread to all markets — everywhere.”
A decade after the meltdown, here’s what’s changed.
BANKS WRITE NEW RULES
Starting in 2008, central banks took coordinated action for the first time in history to save the global financial system by slashing interest rates, recapitalizing lenders, buying up toxic assets and injecting liquidity into economies through government bondpurchase programs.
Never before had the U.S. Federal Reserve, European Central Bank, Bank of England, Bank of Japan and others worked together to try to ward off the threat of global recession, according to Stenfors. “They did things that people didn’t realize central banks could or would ever do on such a large scale,” he said.
REGULATIONS TIGHTENED
The list of financial regulations introduced since the crisis is long. The 2010 Dodd-Frank law in the USA forced banks to hold more capital to cover potential losses, restricted speculative trading and obliged lenders to separate investment and consumer divisions to curtail their ability to use their firm’s money for risky trades. The Trump administration wants to roll back DoddFrank restrictions.
In Europe, policymakers attempted to make the region’s fi- nancial sector more resilient by enhancing the European Central Bank’s powers to supervise banks.
LOW RATES PREVAIL
In August 2007, the U.S. Federal Reserve’s benchmark interest rate that affects credit cards, home equity credit and other consumer loan rates stood at 5.25%.
Today, despite four rate hikes since December 2015, the federal fund’s interest rate is in a meager range of 1% to 1.25%. In the United Kingdom, the rate is a record low 0.25%, down from 5.75% a decade ago. The European Central Bank’s benchmark rate is at zero. It was 4% in 2007. Even rates in high-growth China have come down — to 4.3% from as high as 7.5% in 2007.
These extremely low rates reflect not just the slow global recovery from the Great Recession but extraordinarily low inflation even as growth picks up. Low interest rates have helped those who have mortgages and other debts but has been painful for savers.
OUTLOOK BRIGHTENS — A BIT
Last week, the International Monetary Fund said the economic outlook for France, Germany, Italy and Spain was brightening. Eurostat, the statistics agency for the 19 countries that use the euro currency, forecast annual eurozone growth to hit 2.1% this year, the fastest pace in a decade. The unemployment rate in Spain, one of the nations hardest hit by the financial crisis, recently saw joblessness fall below 4 million for the first time in eight years.
In the USA, stocks trade at record levels, and July’s jobs report from the Labor Department showed a 16-year low unemployment rate of 4.3%. The Bank for International Settlements, which serves central banks, noted in June that the global economy’s “near-term prospects were the best in a long time.”
The recovery has been uneven. In Greece, which struggles with crushing debts, unemployment is about 25%. Brazil’s economy contracted 3.6% last year, and the country is stuck in its worst recession.
“Regulators have made a lot changes and beefed up their capabilities, central bankers have intervened with all these extraordinary measures, but the economies are not doing that great,” Stenfors said.