Can Crash of 2008 Happen Again
On Monday September 15th, 2008, Americans woke to the news that Lehman Brothers, 1 of the giants of Usa banking, was filing for bankruptcy. Boob tube screens were filled with images of thousands of shocked Lehman employees streaming out of the depository financial institution's headquarters on Seventh Artery in Manhattan carrying paper-thin boxes holding their possessions. By the end of the week, the then president George W Bush had announced an unprecedented $700 billion bailout, Bank of America had bought Merrill Lynch and the Federal Reserve had staged a multi-billion dollar rescue of insurance behemothic AIG.
Lehman's collapse was dramatic. But in reality information technology had been a long time coming.
Wall Street had been basking in an unprecedented period of wealth cosmos afterward it emerged from the postal service-9/11 downturn, helped past cheap credit and an unflinching optimism nigh the power of the market place.
But by 2007 there were signs that something was amiss. By the cease of that year America officially entered recession, while in financial markets concerns were brewing about trade in sub-prime mortgages – loans that had been extended to people with low credit ratings.
September and October of 2008 was the worst financial crisis in global history, including the Great Depression
Complex financial instruments had emerged in the years running up to the crash. Credit default swaps – where investors would insure against the possibility of a debt default – became an instrument of pick for investors. Securitisation – the process of repackaging bundles of loans and selling them on under fancy names such equally "collateralised debt obligations" – also took off.
The trouble was that many of the investors and banks who invested in these instruments didn't grasp the risk involved. The reality was that part of the makeup of many of these products were underlying loans that were highly risky.
Lehman was at the forefront of the dependence on securitisation, having aggressively moved into mortgage-backed avails in the preceding years. While this high-chance strategy meant record profits, information technology also left the bank acutely exposed to any fall in nugget value.
Throughout early 2008 there were signs that the financial system was coming under threat every bit the sub-prime mortgage marketplace began to buckle.
Bear Stearns was the showtime bank to fall. The investment bank collapsed in March 2008 and was sold to JPMorgan Chase. On September 7th, 2008, the US government stepped in and took command of mortgage lenders Fannie Mae and Freddie Mac.
Over the weekend of September 13th and 14th, then treasury secretary Hank Paulson and Federal Reserve chairman Ben Bernanke summoned the main executives of Wall Street's main investment banks in a bid to save Lehman. They knew that the bank was unlikely to exist able to open on Monday. A last-ditch bargain to sell the bank to Bank of America and British lender Barclays ultimately vicious through. At midnight Lehman Brothers filed for Chapter eleven – the largest bankruptcy filing in American history.
X years on, the anniversary of the collapse of Lehman Brothers has sparked some soul-searching across America.
The financial crisis of 2007 and 2008 is notwithstanding seen as one of the biggest economic crashes in history. Every bit Mr Bernanke famously said: "September and October of 2008 was the worst financial crunch in global history, including the Great Depression."
The ramifications of the near-plummet of the financial markets were punishing for ordinary Americans. Unemployment soared, peaking at 10 per cent in October 2009, while trillions were wiped off the value of retirement and savings accounts. By 2015, more than than 9 million Americans had lost their homes to foreclosure as a result of the 2007-2008 meltdown.
'Our country is doing great!'
A decade subsequently, how is America faring? According to standard economic indicators the Us economy is performing strongly.
GDP growth hit 4.two per cent in the 2d quarter of this year, its best performance in almost iv years. Unemployment is at 3.viii per cent, having declined steadily since its 10 per cent pinnacle in 2009. Stock markets have been on an upwardly trajectory, and are at present enjoying what some analysts believe is the longest bull market in history, shirking off corrections before in the twelvemonth.
Unsurprisingly the upbeat economic picture show has been seized upon past president Trump. "Our state is doing groovy!" he tweeted afterward the publication of the contempo GDP figures.
But below the experience-good gene, there have been concerns about the longer-term wellness of the US economy. While consumer sentiment and companies are benefitting from the recent $ane.5 trillion Republican tax cutting, that boost is probable to be short-term. Similarly, in that location are fears that escalating trade tensions and tariffs introduced by Mr Trump may hurt the economic system. The Us debt now stands at more than $21 trillion, while the federal upkeep deficit is projected to reach $1 trillion by 2020, according to the Congressional Upkeep Office.
There have besides been worrying signs of a slowdown in firm-building this summer.
On Wall Street, x years on from the fiscal crash that led to one of the biggest government bailouts in history, earnings are back as disinterestedness markets appear to exist on an upwardly trajectory. In the immediate aftermath of the crisis, a moving ridge of regulations were introduced.
In the United states of america, this centred around the Dodd-Frank Human action of 2010. This massive slice of financial regulation signed into constabulary by president Barack Obama included new protection for consumers from decadent lending practices, tougher liquidity and capital requirements for banks and greater powers for the Federal Reserve to arbitrate if a bank is failing. The utilize of many of the riskier financial instruments was curtailed.
But some observers believe the lessons of 2008 may not have been fully learned.
Bankers' pay in the U.s. has been creeping up to pre-crunch levels, despite widespread acceptance that a culture of excessive pay and bonuses which rewarded reckless risk-taking was partly to blame for the crash.
Moves to gyre back elements of the Dodd-Frank Human action have also been implemented by the Trump administration. Specifically, Republicans successfully inverse a fundamental provision of the Deed, increasing the threshold at which banks are bailiwick to enhanced regulation by the Federal Reserve from $50 billion in assets to $250 billion. Similarly, the Consumer Fiscal Protection Bureau, which is currently headed by Trump's budget chief Mick Mulvaney, has scaled back protections for consumers.
Other remnants of the financial crisis remain in situ. Equally Arturo Cifuentes of Columbia Business organization Schoolhouse has recently written, ratings agencies such as Standard and Poor's and Moody's proceed to wield huge influence despite having been widely discredited during the financial crisis.
Conflicts of interest and a reluctance to address the real value of assets meant that they continued to requite triple-A ratings to tranches of debt that were highly distressed.
'Not safe enough'
This calendar week, IMF director Christine Lagarde warned that the fiscal system is not entirely safe, despite her conventionalities that the immediate policy response to the crisis was "impressive".
"The system is safer, but not safe enough," she wrote this week alee of the Lehman Brothers ceremony, noting that the "too big to fail" concept remains a trouble as banks grow in size and complexity.
In addition, she said that banks, particularly in Europe, "probably" need to exist improve capitalised. "Connected fiscal innovation – including from loftier-frequency trading and fintech – adds to fiscal stability challenges," she added.
Only perhaps the biggest impact of the financial crisis in the United states 10 years ago has been political, both in America and Europe. The ascension of populism, and a rejection of mainstream party politics, can be seen in part as a reaction to the financial meltdown.
Michael Gove's famous assertion during the Brexit referendum that "people have had enough of experts" tin be partially traced dorsum to the crisis of a decade agone, when supposedly competent authorities such every bit the United states government and regulators who should have known ameliorate failed to meet the crisis coming, and sought to protect the arrangement rather than taxpayers.
The feeling that bankers were protected while citizens were made to pick upwardly the tab is still discernible.
Equally economist Paul Krugman put it recently, the chief executives of the largest companies now make 270 times as much as the average worker – up from 27 times equally much in 1980.
"GDP numbers take been good in recent quarters, but much of the growth has gone to soaring corporate profits, while median real wages accept gone nowhere," he wrote. Similarly, Christine Lagarde cited a study which suggests the average American will lose $70,000 in lifetime income because of the financial crisis a decade agone.
Non 'just the economy, stupid'
What all this means for US politics is a critical question as Americans prepare to become to the polls in the mid-term elections in November. On some levels, American society is more than willing to welcome strong results on Wall Street, given the high proportion of regular Americans with stock-market investments either through their own portfolios or retirement accounts. What's skilful for Wall Street is oftentimes good for Principal Street.
The strong economy has been touted by president Trump and Republicans as a guaranteed vote-getter, a belief that has appeared to stand the test of time always since Pecker Clinton'southward 1992 presidential campaign team coined the phrase: "It'due south the economy, stupid."
Only a poll this week suggests that the state's economical performance may not be as big a commuter of voter behaviour in this highly polarised political surround. An ABC-Washington Mail poll this week predicts that Democrats will outperform Republicans in the mid-term elections. At the same time, well-nigh voters – 58 per cent – believe the economy is "fantabulous" or "skilful", the highest such figure in 17 years.
This suggests the economy does non necessarily interpret into votes for the Republican Party. Nearly one-half of voters who are positive well-nigh the economy disapprove of the president'southward job operation. At least for some voters, dislike for president Trump overrides whatever support they may have for the current assistants's management of the economic system. Possibly it's no longer "just the economy, stupid".
One of the oft-forgotten facts about the Lehman Brothers collapse was that it occurred in the last months of a presidential election campaign. In the week running up to the collapse of Lehman in 2008, media coverage was focused on the campaign of Republican nominee John McCain and his running-mate Sarah Palin.
The fiscal plummet changed the dynamic of the entrada irrevocably. Mr McCain was widely lambasted for challenge that the fundamentals of the economy were audio, then announcing plans to suspend his entrada to bargain with the crisis before reversing those plans. Mr Obama, in dissimilarity, who was being privately briefed by senior figures such as Mr Paulson and Mr Bernanke, appeared at-home and in control.
Ultimately, this helped deliver him election victory on November 4th, and managing the fiscal crisis became one of the primary focuses of his presidency.
Whether the economy will be as decisive a factor in voting behaviour in the era of Trump remains to be seen.
Equally America prepares to marker a decade since Lehman Brothers this week, for some, 2022 looks scarily like the pre-2008 world. It may exist too early to assess if this current catamenia of economic expansion can final, but whether information technology volition weigh on voters' minds when they go to the polls in two months' time is another matter.
Source: https://www.irishtimes.com/news/world/us/ten-years-on-from-lehmans-could-the-2008-crisis-happen-again-1.3620641
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