2018: ten years after Lehman, what has changed?

Ten years ago, the world understood the too big to fall concept. In 2007, Lehman Brothers was one of the four main investing banks in the United States. It passed all stress tests and norms of the highly regulated bank sector, and barely five months before the bankruptcy, it managed assets valued in 639 billion dollars, which is half of the current Gross Domestic Product (GDP) of Spain. 

But it dropped, and what came afterwards (the great recession and the crisis of the euro) was a domino effect from which Europe barely started to recover the year 2014. Ten years later, experts are wondering if the world is ready to face a new recession.

In an article published last October, on the occasion of the last perspectives report and the anniversary of Lehman’s collapse, Maurice Obstfeld, the chief economist at International Monetary Fund (IMF) explained that in order to evaluate “the severity of the threats to growth” one has to wonder how governments would answer if risks were materialised and a generalised recession took over again. “The answer -he stated- is not comforting”.

Analysts coincide that the next crisis is right around the corner, and that only time will tell if the lessons learned after Lehman have really been of use

“We have significantly progressed, but not enough; the system is safer, but not in the proper way; growth has bounced up, but not for all” resumed, on her part, Christine Lagarde, president of the entity, in another article on the occasion of Lehman’s bankruptcy anniversary. “We are now facing new, post-crisis, fault lines—from the potential rollback of financial regulation, to the fallout from excessive inequality, to protectionism and inward-looking policies, to rising global imbalances. How we respond to these challenges will determine whether we have fully internalized the lessons from Lehman”, concluded she.

The banking system, germ of the last recession, is today safer and more stable than ten years ago. Banks have concentrated: in Spain, there are little more than a dozen of the 55 there were before the crisis, and the value of the assets managed by five of the top banks in Europe and America have multiplied by five.

Furthermore, regulation has increased. In 2007, Lehman could not have been rescued because it was an investment bank, not a credit entity which held deposits, and therefore the guarantee fund of American deposits did not have authority so as to intervene. Today, both authorities in the United States as in Europe could intervene in any banking entity and banks are required to have a contingency plan to manage bankruptcies in an ordered way. But experts insist that these are all recipes to avoid the crisis of ten years ago, motivated by synthetic bonds based on trash mortgages, but not to avoid the one coming.

When the next recession arrives, it will strike a global economy with a high degree of inactivity

Moreover, when the new deceleration comes, it will strike the world with a much more engrossed debt: in the first quarter of 2018, the global debt ascended to 247 trillion dollars, the same as 218% of the world’s GDP. In Spain, the debt has tripled since 2007. This high inactivity is a consequence, partly, of the ultra-expansive currency policies taken to fight the previous crisis, with generalised lows of rates, QE (quantitative easing) and the notorious “I will do whatever it takes, and believe me, it will be enough” of Mario Draghi, president of the European Central Bank, in 2012.

In that sense, the credit rating agency Moody’s underlined in October that “overall, the amount of wiggle room available to mitigate the impact of another crisis is reducing”, which leaves Europe in a “vulnerable” position once the new recession comes.

To this melting pot is furthermore added the peak of populisms, another indirect consequence of the closure of Lehman ten years ago. The crisis’ resulting inequality, from which one part of the population has not managed to recover yet, has motivated the apparition of protectionist movements in the main mature markets, putting another stone in the wheels of global growth.

The crisis, as all analysts coincide, is right around the corner, and it is the world’s responsibility to learn from the mistakes of the past and prevent the future ones, which will determine if what’s coming will be a slight bump or a new global economic collapse.