The GFC: When will it end?

While the Lehman Bros collapse in September 2008 marks the acme of the global financial crisis, the train started running off the rails more than a year earlier – around this time a decade ago.

In the space of a few weeks, ratings agency Standard & Poor’s finally put securities backed by American sub-prime mortgage loans on credit watch, mortgage giant Country Wide warned of trading difficulties and Bear Stearns – which ultimately had to be bought out in a rescue deal in March 2008 – liquidated two hedge funds with heavy exposures to junk loans.

There’s been plenty of anniversary commentary on the crisis – and there’ll be a lot more - but the critical misconception is the crisis is an event of the past. The crisis is still going. And it has spread beyond the financial system.

Certainly, the aftershocks of this seismic event continue to jolt the financial system a decade later: Italy has just bailed out two banks. Canada and Spain have also had to euthanise some institutions which had effectively been on life support.

The global regulatory reformation which commenced in response to the crisis may be closer to the end than the beginning but crucial elements remain to be decided. While experts continue to debate how much safer the system actually is.

Take Italy. According to Fabio Panetta, deputy governor of the Bank of Italy, “after going through an unprecedented recession and setting out on a path of capital strengthening under very difficult conditions, the positive performance of the real economy has now created the pre-conditions for Italian banks to move out of the stage where they are just reacting to the crisis”. The “pre-conditions”….

Protracted

Such a protracted recovery from the worst economic catastrophe since the Great Depression is hardly surprising. Even as it struck economists were warning the aftershocks from a financial crisis would be different in kind and degree to a more run-of-the-mill recession. This year also signifies the 20th anniversary of the Asian financial crisis and that is still rippling through economic policy in the region.

Indeed, the bigger question for this 10th anniversary of the global financial crisis is how has the contagion spread?

The always erudite Martin Wolf in the Financial Times wrote (and appeared in) an incisive item last week about the broader political and cultural damage wrought by the crisis. He argued previously unthinkable events like Brexit and the election of Donald Trump were symptoms of the crisis – although it wasn’t the only cause.

“Economic and cultural phenomena are interrelated,” Wolf argued.

In discussing the rise of populism, he noted research which considers immigration a cultural shift. He counters “it can also be reasonably viewed as an economic one”.

“More important, the study does not ask what has changed recently. The answer is the financial crisis and consequent economic shocks. These not only had huge costs. They also damaged confidence in - and so the legitimacy of - financial and policymaking elites. These emperors turned out to be naked.”

This outbreak of Imperial nudity has exposed and exacerbated other cultural and economic factors, notably the shrinking share of economic output going to the middle and lower classes via wages relative to the growing share of wealth going to the owners of capital.

As many have noted, no one went to jail for the financial crisis and corruption of the sub-prime mortgage market yet millions globally had their lives impacted. This perceived inequity was further aggravated by the fact the measures adopted to combat the crisis – which were correct – included fiscal stimulus, monetary easing and quantitative easy which inflated the value of assets predominantly owned by the wealthy such as shares and property.

Profits in the run up to the crisis had indeed been privatised while the massive losses were socialised.

It is in this environment tat the savage reaction to the elites – even when, as in the case of the crisis, they actually averted greater catastrophe – has fomented into rebellion.