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Money: 10 Years on from the Global Financial Crisis. It is still resonating

14 Sep 2018

10 years ago, Wall Street imploded. The huge investment bank, Lehman Brothers, was allowed to fail on 15 September 2008. Although the bank failure didn’t start the Global Financial Crisis, it did define it.

A 10-year anniversary of the Great Depression which began in 1929, where they let thousands of banks in the US fail and unemployment soared to 25%, would take us to 1939 and the start of World War II. We are not quite there yet.

But we do have the populist, Donald Trump, as the leader of the free world, Vladimir Putin as leader of the rest, Britain trying to exit Europe, nationalism on the rise in Europe as well as the rise of anti-establishment political movements around the world.

This is the real cost of the 2008 Global Financial Crisis (GFC), according to Adam Tooze in his new book, “Crashed: How a Decade of Financial Crisis Changed the World,” as described by John Cassidy in The New Yorker.

Tooze argues that we are living with the political fallout of the GFC today in that the American response of injecting $US700 billion into the American banking system and the secret funding of the European banks to the tune of many trillions of US dollars which saved the global banking system was especially good for wealthy people with financial investments and debt and particularly hard for people with neither.

The saving of the world’s banking system amounted to the rebuilding of the status quo and for those at the bottom it all seems grossly unfair. Parts of the population have never forgiven the governments that engineered it.

The standard response to a financial crisis is to lower interest rates to keep indebted institutions afloat and to help those wanting to borrow, to keep the money circulating and to keep people in jobs. That also means propping up banks, using taxpayer’s money to keep these essential businesses running, while conditions return to ‘normal’.

Over the past 10 years you have done very well if you owned shares and property with returns of 10% to 12% per annum compound and if you had debt, you have done well with interest rates at very low levels and property prices up. But for poor people at the bottom of the heap, wage rates have been stagnant over this period. The gap between the rich and the poor has widened.

Jobs have disappeared with advancing technology and many people are not able to retrain and start again. Added to that, in the US we saw the ‘greedy and incompetent bankers’ being propped up with tax-payers money appearing to get away with their skulduggery that led to the GFC in the first place. A sense of bitterness has developed amongst portions of the population, according to Andrew Sorkin in the New York Times.

The post-GFC crisis in Europe took longer to unravel than in the US as the Germans insisted on austerity in the weaker parts of the European Union. The Germans were still recovering from the expensive absorption of East Germany into their union. This policy, according to Tooze, produced a lost decade in Europe and contributed to the rise of anti-establishment parties in Greece, Spain, Italy, Poland, Hungary and Denmark, amongst others.

Now, 10 years on, we can see there was a political price to pay for the GFC that no-one considered in the immediate aftermath. According to Neil Irwin in The New York Times, “It is hard to overstate how deeply Americans despised their government’s response to the GFC. It has helped shape the last decade of American politics, fueling distrust of powerful institutions and speeding the drift towards ideological extremes.”

Hence the increase in radical responses with those on the left in the US turning to Bernie Sanders and on the right turning to Donald Trump, both populists of their type. Likewise, in Britain and Europe with increasingly polarised populations shouting at each other.

Andrew Sorkin reckons that deep crises always lead to populist responses, which can lead to conflict and in some extreme cases, war. “Financial crises tend to radicalise the population,” said Amir Sufi in his book, “House of Debt”.

And now we have the US under Donald Trump using protectionism as a lever against friends and foes alike. Trump has been heard to say that trade wars are easy to win. This is not too dissimilar to what happened after the Great Depression in the early 1930s. At that time the US used trade sanctions including an oil embargo against the Japanese, placing restrictions on doing business with Japan and freezing Japanese assets in the US.

Sorkin again – “There are, of course, many steps between populism, protectionism and war but there are similarities between the global environment that preceded World War II and the one we see today. That is reason enough to not forget our most recent crisis and its lessons.”

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