Ten years ago, today, Lehman Brothers, the fourth largest investment bank in the US, declared itself bankruptcy. It was a mistake for the ages. The failure of United States regulators to step in and save Lehman caused a financial tsunami that threatened to destroy the world economy.
The immediate result was the near collapse of the US insurance industry, which caused a run on markets that lasted for almost six months. By many estimates, the US was weeks away from a complete economic failure — a reality that finally forced the US government to intervene just one day after Lehman’s collapse.
But the damage was done. Panic quickly spread to many other parts of the world, impacting global growth for years. People lost their jobs, their homes, and their livelihoods. Governments everywhere were forced to find ways to protect their economies during the Great Recession. The losses ultimately resulted in populist demands for economic protectionism and a backlash against immigration.
Considering its impact, you would think that regulators, banks and investors would have erected walls to prevent another global financial crisis from happening, but nothing more than token measures have been enacted. Instead, banks and investors have learnt they will not be held accountable for their actions because governments will bail them out to prevent another crisis.
Regulators are hamstrung, as their decisions are scrutinised and second-guessed by politicians who are demanding economic growth for millions of people who are still suffering as a result of the financial crisis. The laws passed in the wake of 2008 to create oversight for regulators and limit risky behaviour are being slowly eroded away in the name of profits and are only slightly stronger now than they were before the crisis.
A horrifying number of economists have stepped forward to say the situation today looks incredibly similar to 2007. Banks have returned to selling asset-based securities (ABS), replacing auto loans for mortgages, creating a new pool of sub-prime assets to bet against — a root cause of the 2008 crisis. Central banks are still struggling to raise interest rates or simply choosing to stick to easy-money policies, simultaneously creating the possibility of new asset bubbles, such as ABS or Bitcoin, while depriving themselves of the tools necessary to defend their economies against a recession, which looks increasingly likely due to the growing trade wars, which themselves are nothing more than an attempt to replace jobs and economic activity lost during the financial crisis.
Governments, banks and investors need to wake up and face the reality of these situations, because next time — and the next crisis is only a matter of when, not if — the world’s governments may not be able to save us. The fall of Lehman Brothers should stand as a warning, but people are still refusing to listen.