We've let a good financial crisis go to waste

We’ve let a good financial crisis go to waste since Lehman Brothers collapsed
The financial system remains unchanged – banks are still too big to be allowed to fail

With the collapse of Lehman Brothers in the United States, there began the most serious crisis of Western capitalism since the 1930s. Photo: REX
By Jeremy Warner
7:41PM BST 12 Sep 2013
51 Comments
Five years ago this weekend, an event took place that was meant to have changed the world forever. With the collapse of Lehman Brothers in the United States, there began the most serious crisis of Western capitalism since the 1930s. Yet perhaps the most remarkable thing about the Great Recession that followed is how little has changed; the broad parameters of the political, economic and financial consensus remain largely as before.

Those in power at the time the ship went down have virtually all been ousted, but there has been no particular dividend for the political Left from this apparent failure in the free-market system – nor, after an initial flurry of fiscal and monetary action, has it resulted in a notable swing back towards state interventionism and big-government spending. On the contrary, the Right seems once more to be in the ascendancy almost everywhere, as suggested by the outcome of recent elections in Australia and Norway.

No one is denying the hardship and dislocation the economic implosion has caused, but populations have remained surprisingly quiescent, even in countries such as Spain where unemployment has surged to levels that in bygone times might have caused a revolution.

In finance, it is astonishing how little has really changed. The banking crisis has resulted in intense soul searching, worthy debate, bitter recrimination and mountainous new rules and regulations, yet the core proposition has remained basically untouched. Compare what’s been done to the root and branch reform that took place in the 1930s, and it all looks pretty marginal.

Britain finds itself alone in the world in trying to introduce a watered-down Glass-Steagall, the flagship 1930s financial reform that separated retail from investment banking. Yet the UK’s 21st-century version is little more than expensive cosmetics, further clogging up the system for no particular reduction in risk. You wonder what the point of it is.

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Everywhere else, the old, universal model remains intact and unchallenged. For all the policy initiatives, the “too big to fail” issue has not been properly addressed; when next confronted by the age-old choice of either bailing out the bank or waking up to financial and economic Armageddon, the outcome will still be the same – the taxpayer will bail out the bank. We are still a million miles away from a world in which banks can be allowed to fail safely.

On one level, this lack of change is very much to be welcomed, for it demonstrates just how resilient our Western market economies really are. It’s hard to imagine a worse economic crisis than the one we have just had, yet the system has not collapsed, and no plausible, or even remotely appealing, alternative has presented itself. Western democracies have been tested by the storm and survived, if not exactly with flying colours.

Yet on another level, this lack of change is faintly depressing. As with Shakespeare, there seems to be a Winston Churchill quote to suit every occasion. The one that seems most appropriate to Lehman’s collapse is “never let a good crisis go to waste”. Unfortunately, this one has.

After seeing the damage that the collapse of a comparatively small investment bank such as Lehman’s was capable of, governments reacted in the only way they could. They bailed out banks, they applied fiscal stimulus, and they hosed down the system with newly printed money.

It’s hard to argue that this was the wrong approach, for without it there would undoubtedly have been a far more serious depression. It might all have been a very different story to the picture of relative stability and resilience I’ve just described. Every now and again, the free market system has to be saved from itself. Yet these interventions are in the end no more than painkillers; they buy time, but they don’t address the fault lines in the economy and the financial system that cause crises. What is more, by mitigating the crisis they remove the incentive for reform; the effect is to alleviate the symptoms of the disease without addressing its underlying causes.

Five years after Lehman’s, Western economies are at last beginning to recover, yet the more balanced, sustainable form of growth the world economy desperately needs looks as far away as ever. According to official estimates this week, more than a quarter of net new job creation in the UK over the past three months has been among estate agents. Britain needs another house-price bubble like a hole in the head, yet with an election to win a year and a half hence, government policy seems hell-bent on creating one.

Both within and between economies, imbalances remain extreme and largely unaddressed, while in finance, it seems to be back to business as usual. Everywhere, the St Augustinian principle is applied: please make me chaste, but not yet.

This is not an entirely stupid approach. Get the demand going first, and then with a bit of luck, the more balanced form of growth, with more investment, saving, and exports will follow. Yet as everyone knows, you can only really do the sort of painful and unpopular supply-side reform that would guarantee such a future in the midst of a catastrophe. The urgency for such measures retreats with the sense of crisis.

Western economies have survived this 21st-century crisis of capitalism remarkably well, but they have missed the opportunity to lay the foundations for a more sustainable future. No one can say when the next crisis will be, but that another is coming is pretty much guaranteed.