Ten years on from 2008 crash, some events that have been forgotten

Memories are short, and as we remember the 10th anniversary of the 2008 crash, some important lessons from that time have been forgotten.

Article updated: 14 September 2018 10:00am Author: Michael Baxter

Some events are etched into our collective conscience — most of us remember what we were doing when we heard about it — the assassination of President Kennedy was such a date — or so I understand — the death of Diana and 9/11 are two more recent examples. I would put the death of John Lennon in that league — maybe the death of Elvis too. For me, the time when Lehman Brothers went bust is another such moment.

The snag is, the records from that date don’t agree with my memory. I recall being up early in the morning listening to three astonishing events in the history of finance. Lehman Brothers went bust, Merrill Lynch was bought out by Bank of America and AIG was bailed out by the US government. It is just that a lot of the accounts of that time contradict my memory — and it is really bugging me. According to Wikipedia, Lehman Brothers went bust and Merrill Lynch was bought out on Sunday 14th September, AIG was bailed out on the 16th. By checking back on newspaper accounts of that time – articles I wrote are no longer available – it seems that the Lehman/Merrill Lynch events occurred quite late on the Sunday in the US, after I had gone to bed, and made the headlines in the morning of the 15th. AIG was not nationalised for another 24 hours, but speculation of its imminent demise was rife.

I can say it was a momentous day, but maybe we are wrong to just think of it as an event — the crash of that day was the inevitable consequence of extraordinarily stupid mistakes.

The build-up

You may also recall, a couple of weeks earlier, when the then chancellor, Alastair Darling, became a laughing stock for talking about the worst financial crisis in 80 years. Eminent economists who, a few days later were giving us their words of wisdom across the media, were pouring derision on what turned out to be prescient words from the then chancellor.

You may also recall, a year earlier (September 14th, 2007), the run on Northern Rock. It was the worst bank run since Victorian times. The US Treasury Secretary, Hank Paulson, was in the UK at the time, and some media comments suggested it was so embarrassing for us — to suffer such a catastrophe when such an eminent American was in this country.

But 2007 was also a momentous year, the phrase ‘credit crunch’ was haunting markets — August of that year saw a mini stock market crash.

Bankers were the villains of the piece. I often think, though, that greedy bankers were symptoms of a deeper ill.

At the end of 2006, a report from EY showed that median household discretionary disposable income (that’s income after tax plus things we have little control of in the short run, such as rent/mortgage, council tax, costs of commuting to work) had been contracting for years. And yet consumer spending had been rising.

Other data showed that in late 2006, wages to GDP had fallen to their lowest level since 1929.

Household debts had risen dramatically, but we were told it didn’t matter. In the Autumn of 2007, the Halifax said: “Whilst much has been said about the rise of debt, it is important to note that the value of households’ assets has risen at a faster pace. The financial position of households in total has strengthened substantially over the last decade.”

In 2006, the IMF said that thanks to the innovation called ‘mortgage securitisation’ the chances of a banking crisis had significantly reduced.

Frankly, the warning signs were staring us in the face, it was gross incompetency that meant so few spotted what was going to happen.

Could it happen again?

Mark Carney says that the four big risks to the global/UK economy in 2018 are “those areas that have taken on a lot more debt...risks around Brexit… risks related to cyber security...but one of the bigger risks for the global economy are developments in China”, namely the surge in its debts.

I am surprised he did not mention the risks of protectionism — this poses the single biggest risk to the global economy.

Gordon Brown says we may be sleepwalking into another crisis — he may be right.

Bailout

One point gets overlooked. Ben Bernanke, chair at the Fed in 2008, had previously made his name as an academic studying the role of monetary policy in causing the Great Depression of the 1930s. He concluded that the banking collapse of that time led to a massive contraction in the money supply creating the Great Depression. QE and the banking bailouts were all attempts to ensure we did not repeat the same errors of that time.

The long tail of 2008

But the after effects of 2008 are still affecting us — errors made by policy makers, and unscrupulous politicians who have played to popular discontent by wrongly blaming innocent bystanders such as immigrants, globalisation and an ‘elitist conspiracy by the liberals’ — threaten to create something far worse.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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