finance
monthly
Personal Finance. Money. Investing.
Contribute
Newsletter
Corporate

With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.

Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.

As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.

Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.

Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.

Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”

The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.

If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems  that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.

In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.

 

 

 

 

World Economic Forum 2015: ImpressionEurope needs quantitative easing but that monetary policy alone will not restore growth and jobs to the region, that’s according to a panel debate of business leaders and policy-makers, held at the World Economic Forum in Davos, Switzerland, yesterday.

“We’re all for quantitative easing in Europe, but it’s not enough,” said Lawrence H. Summers, Charles W. Eliot University Professor, Harvard University, USA. Summers said that quantitative easing was likely to be less effective in Europe than it was in the US since Europe already has very low interest rates and European banks are less able to transmit monetary expansion to the wider economy. Summers urged Europe to embark on fiscal stimulus and said that “deflation and secular stagnation are the risks of our time”.

Gary D. Cohn, President and Chief Operating Officer, Goldman Sachs, USA, said that the US economy is strong but weakness elsewhere would make it hard for the Federal Reserve to raise interest rates. He said the dollar’s strength, which could have a chilling effect on the US economy, would also encourage US monetary authorities to keep rates low. “We’re in a currency war. One of the easier ways to stimulate your economy is to weaken your currency,” he said.

Ray Dalio, Chairman and Chief Investment Officer, Bridgewater Associates, USA, said that a weaker currency has to be part of the solution for Europe’s problems, given many European countries’ lack of competitiveness. “Forceful QE and forceful structural reforms, including currency adjustment, are what is needed,” he said. Dalio expressed concern that with interest rates at or near zero, central banks have lost their traditional method for stimulating economies. Fiscal policy now must work together with monetary policy to stimulate growth. “Monetary policy that helps fund deficits, that monetizes the deficits, is a path to consider.”

Dalio added that “Spain has done a wonderful job with structural reforms. It is a model.” He noted that the fastest growth often comes from countries that successfully implement structural reforms, such as China in the recent past.

Christine Lagarde, Managing Director, International Monetary Fund (IMF), Washington DC; World Economic Forum Foundation Board Member, also complimented Spain on its reforms. She said that Europe’s monetary union is still quite young but has nonetheless moved forward quickly. “Massive progress has been made in the last five years. More progress has to be made in terms of fiscal union and banking union.”

exploresurvey.com/bestbuycares

“I am confident that Europe can make it,” added Ana Botín, Chairman, Banco Santander, Spain. She said Europe is now seeing a great deal of foreign investment, including in her own bank’s recent capital rise. Some European countries are successfully implementing structural reforms to increase competitiveness. Automobile factories in Spain are now more productive than those in Germany. “We are making progress,” she said. “It takes time for a region to unify.”

 

EUThis afternoon, Mario Draghi, President of the European Central Bank (ECB) announced the much awaited outcome of the Governing Council’s meeting on quantitative easing (QE) for the Eurozone economy.

First, the ECB is to launch an expanded asset purchase programme, encompassing the existing purchase programmes for asset-backed securities and covered bonds. The expanded programme will see monthly purchases of €60 billion set to run for 18 months or until required.

Starting March, the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key.

Second, the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). More details will be released on this later.

Third, a decision was taken to keep the key ECB interest rates unchanged. The main interest rate remains at 0.05%, the marginal lending rate stays at 0.3% and the deposit rate at -0.2%.

exploresurvey.com/bestbuycanadacares

“Today’s monetary policy decision on additional asset purchases was taken to counter two unfavourable developments. First, inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments. This assessment is underpinned by a further fall in market-based measures of inflation expectations over all horizons and the fact that most indicators of actual or expected inflation stand at, or close to, their historical lows. At the same time, economic slack in the euro area remains sizeable and money and credit developments continue to be subdued,” stated Mario Draghi, President of the ECB.

“Second, while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results. As a consequence, the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation. Thus, today the adoption of further balance sheet measures has become warranted to achieve our price stability objective, given that the key ECB interest rates have reached their lower bound.”

According to Mr Draghi, today’s measures will decisively underpin the firm anchoring of medium to long-term inflation expectations.

“The sizeable increase in our balance sheet will further ease the monetary policy stance. In particular, financing conditions for firms and households in the euro area will continue to improve. Moreover, today’s decisions will support our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies. Taken together, these factors should strengthen demand, increase capacity utilisation and support money and credit growth, and thereby contribute to a return of inflation rates towards 2%.”

The finance industry has been quick to pass comment on the QE measures.

“The size of the ECB’s programme, combined with its potentially open-ended nature, should convince markets that Mario Draghi is committed to fighting deflation,” said Ben Brettell, Senior Economist, Hargreaves Lansdown.

“In many ways the fact that Draghi has finally been forced to use his silver bullet is a measure of how bad the economic situation in Europe has become. Bundesbank officials have made it clear they don’t think economic conditions warrant QE, but few outside Germany would agree that today’s measures are anything less than necessary.”

John Cridland, CBI Director-General, said: “At the moment, flagging Eurozone economies are dragging on UK and world growth. QE will give the Eurozone recovery a much-needed boost, which should also have a positive economic effect in the UK.

“To gain maximum effect though, this action must go hand-in-hand with structural reform. France needs to work with the business community to modernise its labour rules and Germany should invest more in infrastructure.”

While QE has been largely welcomed, Europe faces another challenge later this week when Greece goes to the polls. A victory for the anti-austerity Syriza party could escalate ‘Grexit’ fears amid negotiations over new bailout terms when the current deal expires in February.

About Finance Monthly

Universal Media logo
Finance Monthly is a comprehensive website tailored for individuals seeking insights into the world of consumer finance and money management. It offers news, commentary, and in-depth analysis on topics crucial to personal financial management and decision-making. Whether you're interested in budgeting, investing, or understanding market trends, Finance Monthly provides valuable information to help you navigate the financial aspects of everyday life.
© 2024 Finance Monthly - All Rights Reserved.
News Illustration

Get our free monthly FM email

Subscribe to Finance Monthly and Get the Latest Finance News, Opinion and Insight Direct to you every month.
chevron-right-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram