Do you remember yesterday?
It’s ten years since the fall of Lehman Brothers. Ten years…. but it seems much longer. I look back on the mid-2000s as if they were a past century. Those days are gone forever, and the future is increasingly dark and uncertain. How a single event can change the course of history...
“Do you remember yesterday, that was a hundred years ago?” cries Lucretia in Benjamin Britten's The Rape of Lucretia, shortly before committing suicide. Lucretia's death was the event that brought about the fall of the Tarquin dynasty and the establishment of the Republic of Rome. A fundamental re-ordering of Roman society was triggered by a single act of betrayal. Tarquinius raped the wife of one of his senior generals. She committed suicide. Appalled, the Roman army overthrew him. No doubt Tarquinius had raped many other women. But Lucretia was a noblewoman and the wife of a loyal supporter. It was too much.
History is scattered with similar triggers for earth-shattering political changes. The pin that, when pulled, blew up four of the great 19thcentury empires was the assassination of Archduke Franz Ferdinand and his wife. Now, we know that appalling period of destruction as the First World War.
The Wall Street Crash of 1929 similarly ushered in the worst depression in recorded history, followed by radical social reform in the United States and disastrous political upheaval across much of Europe. Who would have foreseen that? It was just another stock market crash.
The fallout from such "trigger" events can extend far further than we imagine. I remember watching the news of the fall of Lehman, seeing the people leaving Lehman’s London headquarters carrying cardboard boxes containing the contents of their desks. At the time, it did not seem particularly significant. A year before, Northern Rock had failed, and since then there had been other failures, such as Bear Sterns and Merrill Lynch. It was just another bank failure.
But over the next few weeks, as the dominoes fell, it became apparent that this was not “just another bank failure”. We did not know it, but Lehman was the linchpin that held together the global financial system. When it failed, the whole thing collapsed.
Or rather, when it was allowed to fail. All the banks that failed over the previous year were rescued, one way or another – Northern Rock through nationalisation, Fannie Mae and Freddie Mac through government conservatorship, Bear Sterns and Merrill Lynch by being bought by other banks. It was not Lehman itself that held together the global financial system, but an implied guarantee that said “Global banks cannot be allowed to fail”. Over that fateful weekend when the Barclays deal fell through and the U.S. government refused to bail out Lehman, that implied guarantee became worthless. The financial system froze as everyone looked suspiciously at everyone else, wondering who would be the next to collapse.
Unprecedented intervention by central banks and governments around the world eventually got the financial system functioning again. But the damage was done. The world slid into the deepest recession since the 1930s. It has never really recovered.
Since the fall of Lehman, there have been innumerable attempts to end the “too big to fail” status of global banks. But the reality is that no-one now would allow a Lehman Brothers to fail in that manner. “Too big to fail” is even more deeply entrenched than it was ten years ago.
The price that the big banks pay for the world accepting that they really are “too big to fail” is heavy and intrusive regulation. This has opened the field to a host of smaller, nimbler financial companies, many of them offering digital financial solutions. These little businesses buzz around building new constituencies while the big banks, encumbered by regulation and weighed down by their own history, can only watch. The fall of Lehman Brothers has enabled new providers, and new technologies, to flourish.
Perhaps the big banks, like the big dinosaurs, are doomed, and the future lies with these new digital companies. After all, small dinosaurs weren’t killed off by the asteroid. They evolved into birds.
Though I’m not sure I would write off big banks that quickly. There are plenty of big companies that have successfully reinvented themselves when their original offering became obsolete. IBM, for example, or AT&T. Big banks are already investing in digital technologies and buying or partnering with smaller fintech companies. Perhaps some big banks will become the digital finance powerhouses of the future.
For central banks, the decade since the fall of Lehman Brothers has been a golden age. Never have they been so powerful.“Bring back the good times!” cried desperate financial markets, governments and people. And central bankers, basking in their new-found fame, promised them that they would. A short period of low interest rates and a dose of QE, and the economy will be back to normal, they said – “normal” meaning the globalised, consumption-driven, debt-laden world of the mid-2000s.
Cynics said “Central banks can’t do it all”. But no-one was listening. Secure in the belief that central banks had their backs, governments imposed tax rises and welfare cuts on their populations to reduce the public deficits caused by the bank bailouts and, above all, by the deep recession. Ordinary people paid for bankers’ folly. As the recovery fizzled out, wages stagnated and living standards fell. Popular anger grew.
Bizarrely, popular anger was not aimed at the bankers. Whipped up by right-wing media, the anger of people who had jobs was aimed at those who had not; the anger of those who were fit and well was aimed at those who were sick and disabled; the anger of those who were securely rooted was aimed at those who, through no fault of their own, had no permanent home. Governments responded with harsh repression of the jobless, the sick, the disabled, single mothers, the homeless, immigrants and refugees.
Now, we reap the fruits of that anger; the deaths of Aylan Kurdi and thousands of other refugees in the Mediterranean, the Windrush scandal, the growing evidence that sick and disabled people, especially those with mental health problems, were unfairly denied the means to live. Yet the tabloid press still whips up anger against “scroungers and shirkers”, immigrants and refugees.
And now we also know that the cynics were right. Central banks can’t “do it all”. True, they did prevent a recession from becoming a 1930s-style debt deflationary Depression. But things are far from “normal”. Interest rates are still on the floor, some central banks are still doing QE, and growth remains elusive. In much of Europe, unemployment is still high. In the UK and the US, there are plenty of jobs, but productivity is poor and wage growth flat. Government spending cuts and tax rises have bitten deep into the incomes of the poor, while QE has vastly increased the wealth of the rich. No-one is happy.
Central banks are now being blamed for economic doldrums and ever-lengthening misery. Fairly, since they promised the moon – but also unfairly, because they were seriously impeded in their quest for it. Central banks now face challenges to their independence, and even to their existence. In the coming political realignment, central banks as we know them may disappear, casualties of their own hubris.
The first few years after the failure of Lehman were not just a golden age for central banks. They were also a golden age for bloggers like me. Back in 2010, when I started writing, financial reform was the dinner-party subject of choice, and every man and his dog had an opinion on what to do with RBS. The establishment was completely blindsided by the financial crisis and had little idea what had caused it, let alone what to do about it. Suddenly, the blogosphere and social media became terribly important. Ideas ranging from the reasonable to the lunatic had a ready-made audience. A singing teacher from darkest Kent could make her views on banking known to journalists, economists and policymakers, and be taken seriously.
But in about 2015, the establishment started to fight back. Suddenly barriers started to go up everywhere. Online media publications put up paywalls. Social media started to become hierarchical: Twitter’s “blue tick” segregated amateur writers from professional journalists. People started to ask for the “affiliation” of a writer or speaker and the “organisation they represented”, instead of judging the quality of their ideas. Now, in 2018, it would be much more difficult for an amateur entering the field to make her views known.
At about the same time, far-right movements were appearing all over the developed world. I don’t think this is unconnected. Social media was instrumental in helping these movements to grow, just as it gave a platform to ordinary people with opinions. It is hardly surprising that the establishment clamped down on social media. Ordinary people with opinions were collateral damage.
We call these movements “far-right”, but this is a poor term for movements that aim to overthrow the post-war global consensus and establish a world of antagonistic nation states. Really, this is the rejection of globalism and the resurgence of nationalism. The neoliberal consensus that has dominated political thought for the last thirty or so years is hardly left-wing, and although many of these movements self-identify as “right-wing”, some equally self-identify as socialist. When nationalists of the right and left unite to overturn the existing political system, the “left-right” paradigm becomes meaningless.
Of course, the political establishment, like the academic establishment and the media establishment, is fighting back. We seem now to be locked into a battle between those who wish to restore the globalised, financialised, atomised world of the pre-Lehman days, and those who wish to shatter it to pieces and replace it with something more to their liking.
Nowhere is that tension more acute than in Europe. There, the central bank never tried to do it all. Instead, the establishment sacrificed the people of southern Europe on the altar of the single currency. In Greece, deep spending cuts and tax rises, with no attempt by the central bank to soften the blow, caused a Depression of the same depth as that in the U.S. in the 1930s, and now rather longer. Popular anger grew, not just in Greece, but in countries like the U.K., where the treatment meted out to Greece by the Troika of the IMF, European Commission and ECB fed a growing desire to break the link with the European Union.
The EU’s inept handling of inflows of refugees from the war-torn areas of the Middle East added fuel to the nationalist, anti-establishment flames. In 2016, the people of the U.K. voted to leave the EU. Six months later, the people of the U.S. elected a President committed to closing the borders to refugees and eliminating the existing American political establishment – “draining the swamp”, he calls it. But his aim goes beyond that. NATO, the organisation created to preserve peace in Europe after World War II, is under threat. So too is the EU, which President Trump clearly would like to break up. And even the United Nations is facing existential pressure. The post-war institutions are threatened as never before.
Ten years ago, who would have foreseen that a bank failure would be the trigger for a fundamental reshaping of the global order?
An edited version of this piece appears on The Mint magazine.
Image is a detail from "The Story of Lucretia" by Sandro Botticelli, courtesy of The Yorck Project (2002) 10.000 Meisterwerke der Malerei (DVD-ROM), distributed by DIRECTMEDIA Publishing GmbH. ISBN: 3936122202., Public Domain, at Wikipedia.