Year 1 a.L. (after Lehman)

One year ago Lehman Brothers’ sanctioned demise triggered the world-wide freeze-up of the interbank market, signalling that the recession which had started in the US one year earlier would spread world-wide via the financial system.

Since then, two G-20 and one G-8 summits and innumerable national and international crisis response meetings have taken place, many of them calling for a change in the way the world had been doing business – remember? Just before the next G-20 meeting at the end of September, it is worth looking at how much of this “will to fundamental change” has survived.

For the first time since World War II global GDP in 2009 will be lower than one year earlier. The recession has struck everywhere, if with different severity. All developed nations experience recessions, some emerging countries, notably China, are still growing strongly, thanks to gigantic stimuli provided by the government. Eastern Europe and beyond is the region most strongly affected by the crisis: It had been growing fastest before, thanks to generous capital inflows and integration processes provided by European countries, now it suffers most. In a large number of developing countries recent advances in poverty alleviation have been reversed: More than 200 million people will fall back into abject poverty. The situation is very grim, since cross-border capital flows to developing and emerging countries are now expected to be only 1/6 of what they were only 2 years ago. And: This capital will not come back in the foreseeable future as a result of risk perceptions overshooting once again as they had done – in the opposite direction – before.

The financial and economic crisis has prompted a rash of welcome international cooperation. Very quickly, the unofficial steering group of the global economy, the G-7 was replaced by the G-20, now including some important emerging countries – progress, but not enough, since developing countries are missing in this line-up. The individual EU members should combine their seats into one and offer the remaining 3 to less developed countries. This would keep the group at a manageable size. G-20 promised to re-capitalize the IMF (most of this money is still missing) and support similar efforts in the development banks (so far the Asian Bank has increased its capital, the others are still in the process); they advocated a new and tougher and globalized supervisory regime of the financial sector in order to avoid regulatory arbitrage and off-balance sheet (speak: off-regulation) activity: This is still work-in-progress, but both the UK and the US have already made their opposition towards centralized global supervision of systemic banks clear, thus once more leaving important room for regulatory gaps and arbitrage.   No talk about the social value of most of the financial market trading activities has even been launched.

Much had been made in these early days about preventing banks from becoming “too big to fail”, since quasi-guaranteed aid by governments would induce them to take extraordinary risks – so far so correct. Today, no politician talks any more about breaking up large banks. It seems that the well-hated EU competition commissioner is the only caller in the desert limiting unconditional aid to banks (and other enterprises) and upholding consumer interests before bankers’ interests. The paltry discussion left is that of personal greed and bankers’ bonuses: important, but utterly inadequate.

Trillions of taxpayer euros and dollars have been expended to stabilize the financial sector, together with massive central bank funds. Nearly universally, governments have shied away from nationalizations and/or strong government influence on banks in the interests of the general economy, and consumers in particular. While a number of hedgefunds were closed, the recent reports of banks’ renewed super-profits in their trading books are alarming: Neither they nor the governments, trustees of taxpayer interests and money, seem to have any will to change these previously so disastrous ways. New merger deals (at rock-bottom prices), new super-duper re-securitization instruments (“re-remics”) promise new excessive profits for the bankers and threaten renewed dangers for the economy. The joyous calls: “stock markets are up, housing prices are recovering”   seem to suggest that no lesson has been learned. The newly announced bonus provisions by the large investment banks and others speak an even more cynical language.

International trade has suffered tremendous setbacks. International banks and governments are providing trade facilitation credit lines: Fine, but maybe also the model of “any trade is beneficial to the economy” needs to be re-thought. It has left many heavily exposed small economies extremely vulnerable, has redistributed income from workers to traders, has led to stagnation of domestic and regional demand – all in the name of unfettered trade. As an example, the Western auto industry has suffered severe setbacks, on account of their own over-capacity, inability to meet energy-efficient demand segments and newly emerging competitors in Asia. The General Motors-Opel saga is a textbook example: gigantic government aid, maintaining all production facilities – and no plan to restructure and downsize this industry based on outdated carbon energy. This would be a clear case for an EU-wide adjustment plan where mobility concerns, sustainability considerations and environmental issues form a strategic agenda. Where is it?

There is consensus that the widespread global macroeconomic imbalances, both with respect to income distribution as with respect to current account (trade) surpluses and deficits were prime causes of the crisis. International income inequality has been addressed on a mini-scale by the G-20 promise to increase aid (all OECD figures point in the opposite direction!!), there is little talk about correcting national inequalities. Wage shares have fallen drastically everywhere, and in most countries the income share of the best-earning 1% of the population has increased significantly. So far, only the UK trade unions have made a strong stance about this economic and humanitarian disaster. Keynes-Kalecki, Stiglitz and Krugman and many others know that an economy needs effective demand to grow and generate jobs and income; many others have pointed to the possibilities of combining business-social-environmental aspects in a way to increase citizens’ welfare without endangering social cohesion and the physical environment. Their calls go mostly unheeded, the interests of the financial sector and its doting policymakers still command overriding attention, admiration and taxpayer money.

So far only the Chinese have called for serious discussions to change the global exchange rate system away from the unhealthy dominance of the US dollar, towards a more balanced one, in order to prevent similar global imbalances in the future. None of the others large countries have taken this call seriously. All talk about “Bretton Woods II”, in memory to the pathbreaking new economic order after World War II, was just talk.

Trillions have been lost in equity world-wide. Hundreds of millions of persons have lost their jobs and been thrown into poverty. The world financial system was close to collapse: Only massive government aid has stabilized it, at least temporarily. The early calls for restructuring the economies were loud, but have faded. To paraphrase a German proverb:”A Mountain was pregnant, born of it was a mere mouse”. Exhilaration at the appearance of a few “green shoots” seems to have turned into policy complacency. The lobbying efforts of those who benefited from the pre-crisis situation and nearly brought the system down, seem to be successful. National and vested-interest considerations top common ones, locational preferences override regional and global ones. A sorry state of affairs.

One year after the event which led to the standstill and near-breakdown of the global financial system pragmatism and populism have crowded out the calls for a more radical re-think of the global economic system. New records in stock prices, new heights in bonus payments, a few green shoots seem to lay the will to act of our political leaders to rest. It is a very important opportunity foregone. The next crisis, even more severe, is just around the corner.


Filed under Crisis Response, European Union, Financial Market Regulation, Global Governance

2 responses to “Year 1 a.L. (after Lehman)

  1. “As for life, it is a battle and a sojourning in a strange land; but the fame that comes after is oblivion.”

  2. Merci pour ces informations.

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