Yanis Varoufakis: Risk has not been diminished, just taken out of sight
Ten years after its near-death experience, capitalism is back to its old ways.
Bailouts for the few and austerity for the many have caused global debt to rise 40% since 2007. Yes, British and European banks have contracted (as US authorities required Barclays, Deutsche Bank etc to shrink their dollar business) and tougher national rules constrain balance sheets.
However, this has causedfinancial intermediation to shift from banks to capital markets. By making some banks safer, the risk has been moved to the shadow banking system, which has grown from $28tn in 2010 to $45tn in 2018, and from the west to emerging markets, which have borrowed $3.7tn in the last decade – with the results we now see in Turkey and Argentina. In short, risk has not been diminished, just taken out of sight and dispersed geographically. Moreover, toxic politics has ensured that the two states that saved capitalism in 2008, the US and China, cannot repeat that double act.
What should be done? First, we need a global green investment programme to put the global glut of idle savings to useful purpose. A multilateral partnership of public investment banks could issue bonds in a coordinated fashion, which their respective central banks would support in the secondary markets. In this manner, global savings would be energised into major investments in jobs, the regions, health and education projects, and the green technologies that humanity needs.
Second, trade agreements must commit governments of poorer countries to minimum living wages for their workers. Third, we need a new Bretton Woods agreement to rebalance trade, re-couple trade and capital flows, put the financial genie back in the bottle, and create an international wealth fund to alleviate poverty and support marginalised communities across the world.
• Yanis Varoufakis is the former finance minister of Greece.
Ann Pettifor: To prevent another crisis, bring back Keynes
The lessons have not been learned. The crisis manifested itself as a way of consolidating the existing global financial order. Business is better than usual for bankers now, largely backed by government guarantees and central bank largesse. There was some tinkering at the margins of the traditional banking system. Banks were told by regulators to hold more capital against their risk-taking. But very little was done to curb risk-taking, or to regulate the newly expansive shadow banking system.
Now, backed by the world’s most powerful governments and central banks, globalised private financial institutions are too big to fail and their bosses too big to jail.
So, no, the world is not safe.
To make the world safe will require democratically elected governments to take responsibility for managing the now globalised financial system, instead of leaving management of that system to invisible, self-regulating and self-interested players in global capital markets. Of greatest importance is the management of cross-border capital flows, the exchange rate, credit creation and the rate of interest applied across the spectrum of loans.
Until democratically accountable regulators manage cross-border flows, it will not be possible to tax global corporations that operate beyond the remit of regulatory democracy. Until central banks manage exchange rates, volatility and financial and trade imbalances will continue to plague governments. Until credit creation is managed and directed at productive, not speculative activity – then expect unpayable levels of debt to inflate. Unless central banks take responsibility for management of the rate of interest across the spectrum of lending, expect entrepreneurs to find borrowing for productive, long-term investment unaffordable.
Keynes taught these lessons after the Great Depression. To prevent another crisis, bring bank the monetary theory and policies of Keynes.
• Ann Pettifor is director of Prime: Policy Research in Macroeconomics and a fellow of the New Economics Foundation
Mark Littlewood: Regulators are refighting the last war, not planning for the next
Politicians and regulators seem to have learned two lessons from the crash: that the cause was an unregulated financial services market; and that we should be trying to make banks safe from as much risk as humanly possible. This seems to drive them towards a worldview that, instead of a vibrant and competitive financial services sector, we should be trying to preserve the current system in aspic.
First, the idea that the financial services sector was some sort of unregulated wild west prior to 2008 is derisory. Even during the Thatcher years financial regulation was constantly being toughened, and becoming more complex. Since the crash, this has gotten worse, with an estimated 50,000 new regulations added across the G20, and the EU’s MiFID II regulations alone adding 1.5m paragraphs. The idea that even large firms or regulators can understand every element of these new regulations is laughable.
But more than the scale of the regulation is the way that it is targeted. Regulators have been spending most of their time dealing with higher bank capital requirements, but not looking at how the overall financial services sector could be protected from the failure of individual banks.
There will never be a time when businesses do not fail. It is the essence of capitalism, and without it a market system cannot operate. In their efforts to create a “safe” banking system, regulators (like generals) are focusing on refighting the last war rather than planning for the next. One day there will be another bank failure. Instead of worrying about how we can make banks safer, policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely. The shareholders and employees of the bank should feel the consequences. A single bank failure should never be a systemic risk.
• Mark Littlewood is director general of the Institute of Economic Affairs
David Blanchflower: Central bankers’ credibility is shot
Ten years ago Lehman Brothers failed and everything went downhill from there. But the event was a symptom, not the cause. When I was on the Bank of England’s monetary policy committee (MPC), I started voting for rate cuts in October 2007 when bank rate was 5.75% as the signs of financial collapse were all around. The failure of Lehman wasn’t exactly a surprise given the prior collapses of Bear Stearns, Countrywide and Northern Rock. Banks that depended on wholesale money markets for cash had been in trouble for a while.
We now know that the US had been in recession since December 2007 and the UK and most European countries since the spring of 2008. Central bankers were caught flat-footed as they were focused on inflation which was high because of a spike in oil prices. That turned out to be a major error. It remains unclear whether or not economic forecasters will spot the next downturn before the event. Central banks have been forecasting a pickup in wage inflation and productivity every month since 2008, which hasn’t happened. Their belief in reversion to the pre-recession mean has been laughable. Their credibility is shot.
By the spring of 2008, US consumer and business confidence had collapsed – as had real consumption and retail. House prices and activity including housing starts and permits to build had tumbled. The UK had seen exactly the same with a lag of a few months.
Concerns were expressed in 2008 that there was a wage explosion coming, but there wasn’t. Mark Carney and the current MPC keep telling us that a wage explosion is upon us – but real wages haven’t risen for the last two years. Same old same old. Real wages in the UK are 6% below their September 2008 levels.
Banks are in better shape, but policymakers have few weapons to deal with the next crisis. Negative rates and lots of quantitative easing are on the horizon. Fiscal policy may not come to the rescue given the politics. The downside risks to growth seem huge from both Brexit and a possible trade war. In short, not much has been learned in a decade. Oh dear.
• David Blanchflower was an external member of the monetary policy committee at the Bank of England from June 2006 to May 2009
Olli Rehn: Debt makes the global economy vulnerable to future shocks
The recent dangerous trends of populism and protectionism have their breeding ground in the global financial crisis. This is why we need to identify the right lessons from the crisis, and act accordingly. This work is far from complete.
From my experience in the eurozone financial fire brigade, the foremost lesson is just how vital financial stability is for the whole macroeconomy, including growth and employment. This fact was neglected before the crisis. As a result, we Europeans paid a bitter price in the form of a double-dip recession – and a huge number of people have endured years of unemployment. The difficulties were amplified by the two-way doom loop between the creditworthiness of banks and sovereigns.
To counter this, the banking union was launched in 2012. Since then, significant progress has been made by creating euro-area bodies for bank supervision and resolution. Euro-area banks are now more resilient as their capital buffers have been doubled from the pre-crisis 8% to today’s 16%. Public finances of the member states have also been much improved.
In the euro area, the key priority now should be completing the banking union with common deposit insurance and strengthening the European stability mechanism. At the same time, the US and the UK should protect their regulatory achievements. It would be a big mistake to roll back what was achieved in the post-crisis years.
There is much talk about “normalisation”, especially in monetary policy. But the word itself is misleading as it suggests a return to some past state of affairs. I would prefer to talk about a journey towards a new equilibrium, which should be more sustainable, equitable and resilient than the old one.
On that journey, a key worry at the global level is the now apparent dependence of growth on the accumulation of even more debt. Debt accumulation makes the global economy and all of its parts increasingly vulnerable to any future shock. This suggests that the rebalancing of the world economy is far from complete, a necessary condition for sustainable growth and better employment, the ultimate goals of economic policy.
• Olli Rehn was European commissioner for economic and monetary affairs and the euro from 2009 to 2014
Nicky Morgan: The toxic culture of the banking industry must change
Since the financial crisis 10 years ago, the banking sector has become significantly better capitalised, and the largest players are much less dependent on one another for funding. Yet in many ways, this still-concentrated sector looks remarkably similar to the one that threatened to bring the global economy to its knees.
One of the roles of the Treasury committee is to look under the bonnet of the financial services sector to shine a light on any of its shortcomings. The committee concluded in 2009 that the bonus culture was partly to blame for the banking crisis. The toxic culture that existed in certain corners of the industry was exposed very vividly by the crisis. Public trust in banking duly waned.
The changes introduced in the aftermath of the crisis, including those targeting remuneration and incentives, represent a step in the right direction. The senior managers and certification regime, too, should ensure that those guilty of misconduct are held personally accountable.
Ultimately it is for the general public themselves to decide whether the industry and policymakers have done enough to restore trust in financial services, but memories of the recklessness that precipitated the crash will not fade overnight.
While reductions in bonuses can be quantified, changes to other aspects of culture are more difficult to measure. In our report on women in the finance industry, the Treasury committee concluded that an alpha-male culture is still prevalent in finance, and that it remains a deterrent for women seeking to progress in the sector.
The benefits of greater diversity include better financial performance and reduced groupthink, with the latter flagged by many as a key contributor to the crisis of a decade ago.
Policymakers have been busy over the last 10 years: now the industry itself must prove that things have changed. Until the public is confident that the sector’s cultural flaws have been rectified, trust in banking will remain low.
• Nicky Morgan is the Conservative MP for Loughborough and chair of the Commons Treasury committee
Micah White: The collapse was a social crisis – and unlike the economic crisis, it has never stopped
Implicit in the question of whether the world has learned the lesson from the collapse of Lehman Brothers is the sense that the economic crisis of 2008 was punishment for a collective misdeed. The underlying logic is that the crisis was avoidable and, moreover, should have been avoided. That it happened is treated as retribution, evidence of our societal wrongdoing and a global wake-up call to change our behaviour.
But 10 years later, when we seek to identify exactly what that wrongdoing was, so that we may judge if we have appropriately changed, there seems to be no clear consensus. Or rather the answers that are given are entirely unsatisfying.
The solution to this dangerous ignorance is not as simple as continuing to question economists, policymakers or corporate CEOs. I wish it were. I respect their expertise. This is not a kneejerk rejection of educated elites. Instead, although the collapse of Lehman Brothers was ostensibly part of an economic crisis, I believe that the real cause is elsewhere.
Beyond being an economic crisis, the collapse of 2008 was a social crisis. It was a great revealing of the deeply immoral financial arrangement of our societies, the criminal ineptitude of our regulators, the disastrous corruption of our democracies by money. What broke in 2008 wasn’t primarily the economy: it was the people’s faith in the reigning world order. The economy has been fixed somewhat but this faith has not been restored.
This social crisis, unlike the economic crisis, never stopped – everything we’re experiencing on the global political stage today, from the rise of social movements beginning with Occupy Wall Street to the clamorous appearance of ethno-nationalist populism, is a symptom of the unresolved social crisis of 2008.
What remains to be done is obviously a revolution that transforms global governance. Both left and right increasingly agree about that. So I suppose from that perspective, yes, the world has learned the most important lesson from 2008.
• Micah White is co-creator of Occupy Wall Street and author of The End of Protest: A New Playbook for Revolution