A decade on from the financial crash, we are still suffering its long burn
In the autumn of 2008, the world's financial system was in the grip of a downward spiral. In the years since then, a rising sense of injustice has altered our politics, but networks of global finance are still far from safe. Ben Chu looks back at how the crash unfolded and considers whether we have learned our lesson
Cast your mind back 10 years. Survey the political scene. What can you see?
The Labour Party has been in power for 11 years. And it seems to be winning the big argument. The new leaders of the Conservative Party, David Cameron and George Osborne, have stopped calling for tax cuts and are instead pledging to match Labour’s public service spending plans. “Sharing the proceeds of growth” is the mantra.
Survey the economic scene. What’s going on there? Well, there’s much talk on the business pages of newspapers of a somewhat mysterious “credit crunch”. Northern Rock went under the year before. House prices are down. The stock market is looking a bit sickly. The economy seems to be slowing.
Yet a recession warning by the chancellor, Alistair Darling, is viciously stamped on by aides of the prime minister, Gordon Brown. After all, the Treasury is projecting GDP growth only to dip slightly before rapidly bouncing back. The independent Bank of England expects a similar happy ending.
Survey the international scene. Over in America, George W Bush had been spending lavishly on wars and doling out tax cuts for the super rich. Growth is slowing stateside too. But it’s all under control.
The former chief central banker Alan Greenspan had been hailed as the “maestro” of monetary policy, with a knack for cutting interest rates at precisely the right moment to allow the world’s largest economy to ride out downturns with minimal damage.
His successor, Ben Bernanke, is seen as an almost equally safe pair of hands. Further afield China is still booming. And closer to home Europe is growing nicely, defying eurosceptic predictions of doom for the single currency project.
Aside from a few mavericks, most economists seem relaxed about the economy. After all, hadn’t the Nobel Prize winner Bob Lucas ruled that “the central problem of depression prevention has been solved, for all practical purposes”?
Financiers are still heroes, filling public coffers in the UK and the US to the brim with their tax payments. “Let me thank you for the scale of the contribution you make to the British economy,” Brown had told bankers assembled at the annual white-tie Mansion House dinner in the heart of the City of London back in 2004. The sentiment hadn't changed.
“Let me thank you also for the resilience, the innovative flair and the courage to change with which you have responded to the challenge of global competition.”
Every bright young university graduate seems to want to work in the City or Wall Street. And it isn’t just for those million-pound bonuses. A career in finance promises prestige and power. Fred Goodwin, the boss of the Royal Bank of Scotland, now the largest bank in the world, is a knight of the realm.
Hank Paulson, the former boss of the Wall Street firm Goldman Sachs, is George Bush’s treasury secretary.
It was another world.
Then Lehman Brothers went bust and swept it all away.
An economic cliff-edge
In the early days of the financial crisis, which the collapse of the Wall Street bank seemed to have brought to a head, it was not uncommon – even as markets tanked and economic activity slipped off a cliff – to hear people predict that it would all be over; if not by Christmas, then relatively soon.
Those giant banks were extremely well capitalised, we were told. This was just the return of our long-lost friend, the business cycle. The alarm was grossly overdone.
Looking back 10 years on, it’s clear how wrong this all was. This really was the big one. After Lehman went bust the multitrillion-dollar global financial markets simply seized up. International trade experienced a terrifying, sudden stop.
The entire global economy tipped into recession as frightened households and businesses slammed shut their wallets. It was the deepest slump in the UK since the 1920s. In America it was the worst since the Great Depression of the 1930s.
To keep the caravan on the road, central banks slashed interest rates to their lowest levels in 5,000 years. And when rates could be cut no further they had to print money – hundreds of billions of dollars, pounds, yen and, belatedly, euros.
The year after Lehman collapsed two American economists, Carmen Reinhart and Ken Rogoff, produced a timely book showing that when slumps are brought on by financial crises the recoveries tend to be far slower than otherwise.
And so it has come to pass. What the Fed chair Ben Bernanke labelled “the biggest financial crisis in history” has delivered one of the weakest recoveries in history. In Europe, it has turned out to be worse than the aftermath of the slump in the 1930s.
Throughout much of the west, we have seen a decade of stagnant incomes and flatlining living standards. Here in Britain we are in the midst of the most miserable decade for real wages since the Napoleonic War.
Where would we have been without the crash? Andy Haldane of the Bank of England estimated that the total cost of the slump measured in foregone economic growth was between $60 trillion (£46 trillion) and $200 trillion, or between one and four times the planet’s GDP.
“To call these numbers ‘astronomical’ would be to do astronomy a disservice,” he observed.
Haldane has also hypothesised that a kind of primitive “dread risk” – an imprint left in the minds of households and businesses by the traumatic financial collapse – is the reason economic animal spirits have been so weak this past decade.
There has been a generalised national economic withdrawal. Cross-border capital flows have slowed dramatically. International trade as a share of GDP has been declining. Globalisation isn’t dead, but it seems to have peaked. Donald Trump’s trade war and his assault on the World Trade Organisation could conceivably deal the coup de grace.
In the months after Lehman, as tax revenues evaporated, governments allowed their budget deficits to swell. Many even deliberately ratcheted up spending or cut taxes as a form of fiscal stimulus. Anything to put a floor under cratering demand.
It’s amazing to look at a chart showing the evolution of debt in the developed world in the years after the crisis. As finance sector debt drops like a stone in 2008 through banks deleveraging en masse this is almost exactly matched by a surge in government liabilities.
It was as if the debt was simply handed over from the private to the public sector. Total debt as a share of global GDP is now higher than it was a decade ago, mainly due to a colossal burst of stimulatory bank lending in China.
Yet policy in the west changed suddenly in 2010. Faced by that astonishing surge in borrowing governments seemed to collectively decide that it was time for fiscal consolidation. It was, of course, a heinous policy mistake. The recovery was far from secure. The time for such retrenchment is during the boom not the slump. And growth duly dipped again, as Keynesians warned.
For some politicians the austerity turn was a result of a genuine, albeit misplaced, fear that bond investors were about to dump government debt and force a national solvency crisis. For others the shift from stimulus to cuts had a more ideological motivation – shrinking the state in order to cut taxes.
Either way, the financial crisis gave birth to what David Cameron himself called an “age of austerity”.
The era of zero-sum politics
When economies are growing, the pie gets bigger and politics is a positive sum game. A consequence of weak growth or stagnant incomes is that political arguments are increasingly about the division of the pie. One person’s gain becomes another person’s loss. Rancour and desperation abound.
There’s an endless squabble among economists about whether inequality has actually worsened since the financial crisis. Different data supports different interpretations. Wealth inequality has almost certainly grown, in no small part because emergency money printing by central banks automatically boosted asset values and those with lots of assets in the first place got richer.
Moreover, public perceptions are pretty clear. Recent polling found that more than half of people in the UK believe the economy has become more unfair over the last decade, while just 10 per cent believe it has become fairer.
Economic disappointments and a rising sense of injustice over the past decade have changed our politics. It’s hard to imagine a left-wing protest politician like Jeremy Corbyn becoming the Labour leader and utterly transforming the party if the financial crisis had not detonated a bomb under the New Labour model of funding public services and welfare through ever rising City tax receipts.
It is difficult to imagine a slim majority of the British people ignoring the advice of all mainstream politicians, almost every major employer and the archbishop of Canterbury, and voting to rip the UK out of the European Union without that mass discrediting of elites a decade ago.
Theresa May’s policy agenda when she became prime minister – workers on boards, capping energy prices – was well to the left of anything that David Cameron produced. It was actually to the left even of much of Tony Blair’s record.
This Tory swerve was a recognition of that shift in the public mood. Even once-staunch laissez-faire Brexiteers like Michael Gove have pandered to the new popular feeling with promises of interventions in the economy that they would surely previously have decried as socialism.
It’s important to recognise that the economic effects have been very unevenly felt. The pay of people in their twenties in the UK is still well below where that of the same cohort was in 2008. Pensioners, by contrast, have been protected. Averages can conceal as much as they reveal.
Youth unemployment across the eurozone reached eye-watering levels and still remains extremely high. The labour force participation rate for young men in the US has not recovered since the crash. Like some kind of a cursed diamond, economists warn that the psychological scarring of a period of unemployment early in life lasts for a lifetime.
Perhaps we shouldn’t be surprised that this luckless generation, which has entered the workforce since the crash, harbours a much more negative attitude towards finance and free markets than older generations.
European politics, in particular, has undergone a revolution in the past decade. Mainstream social democratic parties have collapsed in support across Europe. The radical left and populist right have been the primary beneficiaries. The catastrophically handled eurozone crisis is the proximate cause – but the emergency was brought on by the bursting of the global bubble in 2008.
The post-crisis flood of economic anxiety helps explain the surge of social resistance to proposed trade deals (like the reviled “TTIP”), both in Europe and America, that now comes not just from the usual anti-globalisation pressure groups but increasingly also the middle classes.
It helps explain the widespread paranoia about robots taking humans’ jobs, even, ironically, as automation proceeds at a snail’s pace and (human) employment rates are high or recovering. The context is torrents of anxiety released by the breaking of the dam of security in the financial crisis.
And then there’s immigration. Despite the bilious propaganda of the populist right, migration flows have not been responsible for people’s economic pain either in Europe or America. But migration pressures on public finances have hit at a time when many families have been under severe financial stress. Migrants have, true to the dismal historic pattern, been a convenient and salient target for public frustration.
And then there’s Trump – an experience-free, overtly racist, self-confessed molester of women winning the White House. Listen to Trump’s invocation at his inauguration address of “rusted out factories scattered like tombstones across the landscape of our nation”, his excoriation of “the false song of globalism”.
Heed, too, the promise of the most powerful politician in Italy, Matteo Salvini, “to give voice to those [European] populations that are cut down by those who only ever cared about financial outcomes and the multinationals and who have offered us a future of precariousness and fear”.
Immigration-obsessed nativists they may be, but they appeal to economic grievance and anxiety. Modern populism’s parentage can be traced back to the financial crisis.
Finance less proud
The first bit of banker bashing, oddly enough, came from Alan Sugar. Publicising the latest series of The Apprentice back in 2008, he declared had no time for the “30-year-old open-collared” bankers who had been sniffy about his hit TV show and laughed at his posturing as a hyper-successful businessman.
“They sit there and criticise me, saying what a bloody wanker I am,” he complained, “and then they lose £1bn and Bear Stearns [the Wall Street bank rescued in March] goes down the drain in the middle of the night.” Such sentiments were rare 10 years ago. Now they are etched deep in our culture.
The political status of bankers and financiers had utterly changed thanks to the crash. No ambitious politician today would dream of presenting him or herself as a champion of finance in the way that Gordon Brown did a decade ago.
In the run up to the Brexit referendum, the official Leave campaign – stewarded by cabinet members Michael Gove and Boris Johnson – even produced an attack video drawing attention to the fact that the Bank of England governor Mark Carney had once worked for Goldman Sachs.
The inference was that his warnings about the likely harm of Brexit were not only to be disregarded as Project Fear, but reviled as the corrupt works of an evil banker.
It’s notable how the voice and interests of the City in the Brexit negotiations have commanded far less respect than they would have a decade ago. The government did not, in the end, lift a finger to protect the single market “passport” for financial services.
A low profile is the new normal. A decade ago a banker would have been happy to announce his profession at a dinner party. Now he hopes that no one asks.
Winston Churchill once said he wanted to see “finance less proud and industry more content”. Manufacturing is hardly content – the sector’s output is barely higher than it was in 2008 and a no-deal Brexit is an existential threat for some firms – but it’s certainly the case that finance has collapsed in esteem.
The popular mood on free markets in general has also been transformed over the past decade. Giving testimony to Congress in 2008 Alan Greenspan, with rather admirable honesty, admitted that he had “found a flaw” in his ideology of naturally self-policing, self-righting markets.
Now we can all see that flaw. “For my friends everything, for my enemies, the law,” said a Latin American president. In 2008, as the bailouts rolled out and unemployment soared, it was socialism for super-rich bankers and the market for the rest of us.
Well funded libertarian think tanks today preach the old religion of the untrammelled free market, privatisation and the rollback of the state, but like the Catholic church after Luther, the majesty is gone. There are vanishingly few buyers among the general public.
The International Monetary Fund is something of a bellwether. In the 1990s it was a font of advice – even instruction – to developing countries: deregulate, privatise, financialise. This was the free market “Washington Consensus”.
Now the fund publishes research on how inequality damages growth; how there can be too much finance in an economy. It’s even recanted over its past “neoliberalism”.
What happened to our new deal?
“Never in the field of financial endeavour has so much money been owed by so few to so many,” was the verdict of the former Bank of England governor Mervyn King on the financial sector’s taxpayer-funded rescue.
But one of the stunning features of the crisis was not just how bankers managed to crash the entire global economy with their greed and recklessness and then get bailed out by the rest of society, but how much outright fraud and criminality in the sector has subsequently been uncovered.
The former UK regulator Bob Jenkins has counted more than 144 scandals, from interest-rate rigging, to insurance misselling, to money laundering. Banks worldwide have been fined more than $300bn since the crisis for such misdemeanours.
Some relatively low level traders have gone to jail. But what about their bosses? “If they knew, then they were complicit. If they did not, then they were incompetent,” says Jenkins.
But there’s been little personal accountability for the bosses of big banks. Goodwin lost his knighthood. Dick Fuld, the boss of Lehman nicknamed “the gorilla of Wall Street”, hasn’t said a word in public in a decade. Many others have disappeared into quiet ignominy.
But as Warren Buffett says: “They went away rich. They may have been disgraced, but they went away rich. I don’t think the incentive system has been improved from what it was 10 years ago.”
Pay and bonuses in finance are still obscenely high, mainly because profits remain plump due to activities that another former UK regulator Adair Turner summed up as “socially useless”. But much of what finance does isn’t just useless, it’s positively harmful.
Like a parasite, it extracts money from households and businesses in the real economy in the form of extortionate fees for facilitating companies’ public fundraising. The Royal Bank of Scotland was accused of asset-stripping struggling small firms for profit. The official regulators’ report found systematic mistreatment of them.
Even with the neverending scandal sheet, there remains a captured branch of the media which still fawns on financiers, treating their opinions with reverence, as if 2008 was all just a bad dream.
And finance is still politically dominant in some respects, not least in the US. Trump railed against Wall Street on the campaign trail, accusing it of “getting away with murder”. But look at the reality in office. He filled his cabinet with ex-Wall Street financiers, including his treasury secretary and his chief economic adviser.
Even more alarming than the personnel is the policy. Trump’s Wall Street deregulation drive, including loosening rules on megabanks speculating, has gone under the public radar amid the president’s other scandals and affronts to decency.
Here in the UK, despite repeated efforts to encourage the big banks to ratchet up their lending to small businesses, they devote virtually all their balance sheets to financing residential mortgages and consumer credit. Aggregate household debt as a share of income, which collapsed in 2008, is growing again.
The Treasury’s desperate efforts to get the Royal Bank of Scotland back into private hands, even if it means crystallising a multibillion-pound loss for the taxpayer, shows how achingly conservative the political establishment remains when it comes to financial reform.
The idea of turning RBS into a network of state-owned banks to lend to small firms, along the lines of the highly successful German model, is apparently unthinkable to ministers and civil servants (although Labour has expressed an interest recently).
The global financial system is still far from safe mainly because true reform – vastly higher capital buffers and fully cleaving retail and investment banking – was dismissed in the years after the crisis as too disruptive and unnecessary.
In reality it was blocked by the vested interests of the financial industry. The sector still spends billions of dollars in the US lobbying Congress, just as it did before the fall of Lehman.
After the Wall Street Crash in 1929, the Pecora Commission, established by the Senate, rigorously exposed the top-to-bottom corruption of American finance. That investigation incensed the depression-struck US public and forced politicians to break up the giant banks and financial trusts of the day, notably cleaving the mighty old empire of John Pierpont Morgan in two.
The vigour of the past casts shame on our timid present. One of those two banks created in those 1930s structural reforms, JPMorgan, today has a balance sheet of $2.5 trillion dollars. That’s 12 per cent of the entire US economy. It’s also up $1 trillion on a decade ago.
The curse of “too big to fail” is still with us. So are its rewards. JPMorgan’s stridently anti-reform chief executive, Jamie Dimon, was paid $29.5m in 2017. Dimon gave an interview recently in which he boasted he could beat Trump in an election adding: “And by the way, this wealthy New Yorker actually earned his money.”
The difference between the 1930s and 2008 is that in 2008 politicians saved the financial system, averting what would have been a Great Depression-style social catastrophe. It was the only responsible decision they could have made. Yet it also generated a deadly complacency. It nourished the view that the old system was not truly broken, that we could go back.
Too many are still trying to jumpstart the old economic engine of ever accumulating consumer debt, super-profitable megabanks and industrial-scale financial speculation. After the calamity of the 1930s Roosevelt offered a “New Deal”. On finance today we’re been offered a revamped old deal.
Much has changed over the past decade in our economic life, in our politics, in our culture. But the hard reality is that, where it really matters, things haven’t changed nearly enough.