This summer marked the 10th anniversary of the global financial meltdown that is still not completely over. Lessons have hopefully been learnt as some decisions taken by regulators helped to prevent an even bigger recession.
It is the right time to recall the failures that brought about this catastrophic meltdown and to understand the changes that have been put in place to prevent a similar crisis in the near future.
The financial crisis started on August 9, 2007 when BNP Paribas blocked withdrawals from hedge funds that specialised in US mortgage debt.
Soon after a credit squeeze saw the fall of Lehman Brothers as US regulators decided that this bank was not too big to fail. No one anticipated this meltdown even if the weaknesses in the global financial system were evident.
In 2007 Alexis Stenfors was a trader for Merrill Lynch. He gained notoriety when he lost his company US$450 million on currency speculations. Now a business professor in the UK’s University of Portsmouth, he said: “In 2007 we realised 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.”
The consequences were indeed bigger. Starting in 2008, central banks took concerted action to prevent world economies from entering a period of depression the likes of which had not been seen since the 1930s.
The tools they used included slashing interest rates, recapitalising banks, buying up toxic loans, and injecting enormous liquidity into economies through government bond-purchase programmes.
These combined tactics were never tested before in such a global damage-limitation strategy.
The worst may be over for most EU countries but structural economic weaknesses persist
The perception of many people on the function of central banks changed suddenly as the central banks of the US, UK, EU and Japan stepped in where market forces and politicians failed to put the global economies back on track.
Perhaps the most important change that the 2007 crisis brought about was the tightening of regulation on banks.
In the US the Dodd-Frank law forced banks to hold more capital to cover for dodgy lending, restricted speculative trading and obliged lenders to spate investment and consumer divisions to limit their ability to use their bank’s money for risky trades.
The sad reality is that some politicians have very short memories and will do anything to keep to their misguided political promises to those who elect them. In the US the Trump administration wants to roll back Dodd-Frank restrictions on banks.
The EU took equally taxing measures on banks by establishing a single supervisory mechanism whereby large and strategically important banks in the EU are now supervised directly by the European Central Bank.
Bank stress tests have become more rigorous and not just aimed at propping up confidence in financial markets and among investors.
Now European politicians, including our own, complain about how banks are starving small businesses from much needed lending to help member states economies grow and create jobs.
The decision of central banks to reduce the rates of interest to historically low levels has helped big businesses to borrow at a low cost.
Similarly this helped keep the sovereign debt market buoyant at a time when some countries were losing the support of investors who at one time were prepared to sell sovereign debt of countries that had a poor fiscal management reputation combined with massive national debt.
Those who had mortgages to pay benefitted from the low interest rate regime but savers saw their hard earned cash earning next to nothing. One area where low interest rates failed to hit their objective was that of consumer spending which remained sluggish as people feared about their future and saved as much as they could.
A decade on, one can say that things have improved considerably. Many EU economies are growing again and central banks are cautiously trying to restore interest rates to more normal and higher levels than they have been for the past decade.
The financial services sector is stronger than it was before the financial crisis but economic growth continues to be sluggish in some important countries like the UK, Italy, and France. Unemployment is understandably high in countries that are showing slow economic recovery.
The worst may be over for most EU countries but structural economic weaknesses persist. Anti-trade globalisation may well be pushing us towards another economic recession that this time round will be caused by short-sighted political strategies.
johncassarwhite@yahoo.com