What did we learn following the Lehman Brothers collapse?
A little over eight years ago, I sat in a Dubai radio studio as news of the bankruptcy of Lehman Brothers came across the wires. I broadcast at the time that we were witnessing “the financial equivalent of 9/11”, alluding to the terrorist attacks on New York of 2001 that in a few hours changed the world beyond recognition.
I remember I got a lot of stick after that broadcast. I was being alarmist, sensationalising a relatively minor event at an American bank that not many people outside the rarefied world of high finance had even heard of before that day. In short, I was a scaremonger looking to boost the station’s audience.
With eight years’ hindsight, I think I deserved some criticism. But not for exaggerating.
If anything, I underestimated the effects of the Lehman collapse.
Given the duration of the aftershocks and the mayhem that has followed, I think now it was at least the financial equivalent of Pearl Harbor, the event that globalised the war in 1941 and sparked years of worldwide carnage.
Quite simply, the banking industry, love it or loath it, will never be the same again. Profits have flatlined since then, their shares have underperformed all the indexes.
All that is unchanged are bankers’ bonuses, which are back at pre-crash levels.
That state of affairs cannot continue, and looks certain to prompt more regulatory action against the banks. Since 2008 banks have been hammered by regulators, paying billions in fines and damages for a whole raft of misdeeds.
High bonuses and high fines are mutually incompatible in the long run.
In this respect too, the post-Lehman shocks are not over.
Outside the world of finance, the global economy managed to avoid the long recession and depression some forecast back then. There was a short, sharp shock, then governments – the US and China in particular – acted quickly to pump money in to head off a global economic collapse.
But that pre-emptive action has come at a cost.
The 2008 crisis was sparked by high debt levels and complicated “securities” (never was anything so misnamed), and it seems we have not learned.
There is now some aggregated US$230 trillion in aggregated debt around the world – three times the level in existence in 2008. We have borrowed our way out of depression, and that could still come back to haunt us.
Central bank actions headed off a disaster back then, but could not ensure a return to the good old days. Global growth levels have been nowhere near the stratospheric numbers achieved up until 2008, especially in the big economy – China – that helped to pull the world out of the mire after Lehman.
The UAE also felt the effects of Lehman, especially highly leveraged Dubai. Disaster was headed off by the quick thinking and deep pockets of the federal structure, and recovery came relatively quickly.
But Dubai in particular has not managed to kick its debt habit. Most experts put the emirate’s current levels of indebtedness at roughly the size of the emirate’s GDP.
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Published: September 20, 2016 04:00 AM