Ten years after the collapse of Lehman Brothers and the financial crisis that followed, it is clear that far from being safer, the world is a more unstable and worrisome place. In the UK, average wages remain below pre-crisis levels and inequality is high. Investment in equipment and hi-tech processes, the cornerstone of future growth, is low.
Not surprisingly, given the emphasis on extracting funds from companies rather than investing them, the productivity of the average worker, as measured by their output per hour, is well behind that of comparable developed nations.
In the G7 countries, the picture is not much better. They might boast higher levels of productivity, but investment is low by historical standards and growth is slow.
Where economies expand at an accelerated rate, it is always with the help of government stimulus, which is certainly the case in Donald Trump’s US, where annual GDP growth has topped 4% following $1.1tn in tax cuts that mostly benefited the richest.
These trends fuel widespread discontent and destabilise mainstream politics. All across the developed world democracies are under pressure to reduce inequality, only to find that many of the solutions either require money that most taxpayers are unwilling to supply or rule changes and tax reforms that cannot find enough support. Answering the call for progress, politicians flounder.
Some things have improved. While total debt-to-GDP ratios are high in the countries that were hit hardest in 2008, including the US and UK, they have been broadly stable in the past five years. Trump’s tax cuts will push the US public debt ratio higher over the coming years, but the debt ratio of American households, which rocketed ahead during the noughties, is now much lower than in 2008.
Lehman Brothers filed for bankruptcy on 15 September 2008. With $639bn in assets, it was the biggest bankruptcy filing in history – 10 times the failure of the fraud-riddled energy company Enron.
The collapse of Lehman, which was the oldest and fourth-largest US investment bank, with 25,000 employees (including 4,500 in Canary Wharf), sparked the global financial crisis.
Lehman’s demise was driven by its exposure to subprime mortgages. Too many home loans had been extended to borrowers with no chance of ever repaying them. There was even a nickname for them – “ninja” loans – for people with no income and no job or assets. Those risky loans were sliced up and bundled with less risky ones and sold off in parcels to banks around the world. The belief was that these collateralised securities offered high returns at minimal risk. The belief was that not all mortgage borrowers would default at the same time. That belief was wrong.
Lehman’s fate was sealed when Alistair Darling, the then chancellor, refused to provide state guarantees for the bank’s takeover by Barclays. Bob Diamond, who was then the head of Barclays’ investment bank, had been trying to broker over the weekend of 13-14 September. Darling later recalled: “I could not imagine standing up in the House of Commons on the Monday morning explaining that we had put the UK taxpayer in hock so that Barclays could buy Lehman. Half the Barclays board was relieved.”
At 1am in New York on Monday 15 September the bankruptcy of Lehman Brothers was declared. Reporters and photographers descended on its offices, taking those now-famous photos of Lehman employees carrying out their belongings in cardboard boxes. Rupert Neate
In a similar vein, there has been a reduction in the amount of risky lending by banks, including sub-prime mortgages; banks themselves are better capitalised; and property and share prices have soared but are not as overvalued as they were a decade ago.
Where sovereign debts have climbed to fresh highs, such as in China, and taken the total for global debt into new territory, the state’s control of the financial sector makes for a much more stable situation.
History suggests debt accumulation on the scale experienced in the world’s second largest economy must end badly, but the financial system is relatively closed, most of the debt is denominated in local currency and the Chinese government has the means to rejuvenate the banking sector with extra reserves without pushing the public debt burden to worrying levels.
Yet a crash in Beijing would ripple out to the rest of the world, and although banks in Europe and the US might be better prepared to withstand the shocks, the lack of worker productivity – an economy’s main source of income growth – and the depleted stock of firepower in finance ministries and central banks leave the west vulnerable.
Some economists regard the worrying trend for low productivity and household incomes as the developed world’s achilles heel going into the 2020s.
The trend is for global GDP to run at 3-3.5%, down from 4-4.5% a decade ago. The result will be slower wage and profits growth, leading to lower tax receipts at a time when debt servicing costs are rising. That leaves finance ministers with less money to spend when a crisis hits. Persistently low interest rates deny central bankers the ability to cut the cost of credit in a downturn, leaving them with not much more than reassuring platitudes for the public.
Central banks may have sufficient room to counter a mild recession with conventional rate cuts, but a sharper downturn would almost certainly require them to resort to more quantitative easing.
QE no longer has the shock and awe impact that it had in 2008. And without it, only paper soldiers stand in the line of defence against another crash.
Electric cars are the future: it’s time to unfreeze fuel duty
Motorists will naturally be worried at the prospect of the oil price climbing even higher, as the world’s energy watchdog warned it would last week. Petrol prices have, after all, already increased 11% in the past year.
But the answer does not, as some Tory MPs and motoring groups have argued, lie in shying away from a rise in fuel duty. As the chancellor, Philip Hammond, told parliament, the tax needs to go up to pay for the NHS and other public spending. The prize is too big – the Treasury has already lost out on £46bn from the fuel duty freeze.
The smart response to rising oil prices, for drivers and policymakers alike, is to speed up the switch to electric vehicles.
Moving to battery-powered cars would also help address another of Britain’s big problems – illegal levels of air pollution that are causing thousands of premature deaths. As Norwegian politicians put it, tax what you want less of and promote what you want more of.
There are signs that Downing Street understands this: Theresa May announced £106m last week for green vehicles. But there appears to be little appetite for bringing forward the government’s unambitious goal of a ban on new petrol and diesel cars sales from 2040.
Consumers are already voting with their wallets, won over by cheap running costs and cleaner technology. Electrified vehicles – hybrids, plug-in hybrids and 100% electric cars – accounted for one in 12 cars sold in August. Jaguar only delivered the first of its flagship electric cars days ago but expects to sell more than 100 this month.
Now is the time for ministers to hit the accelerator and steer towards the electric revolution. It is not the moment for letting polluting vehicles dodge essential tax rises.
Engaging in party politics could cause a schism
Naivety is not necessarily a bad quality in an archbishop of Canterbury. One doesn’t want the head of the Church of England to be too worldly-wise. Yet Justin Welby would have done himself a favour this week by employing some common sense before giving us his political views.
One mistake wasn’t terribly serious. The fact that Amazon – a company denounced by Welby for paying “almost nothing” in taxes – is a top-20 holding in the Church of England’s investment portfolio is not surprising. It is hard for any organisation with a large and diversified pool of investments to avoid having some exposure to the world’s second-largest public company. Since Welby won’t be taking the investment decisions himself, he can hide behind the plea that the Church wants to “engage” with Amazon, even if Jeff Bezos probably isn’t quaking in fear.
More seriously, Welby railed against zero-hours contracts while failing to mention that two cathedrals are advertising jobs on precisely such terms. On that score, he can fairly be expected to have the facts at his fingertips. If he is going to call zero-hours contracts “the reincarnation of an ancient evil”, he is open to the charge of hypocrisy.
If one disregards that failing, Welby’s speech itself was strong. As a standalone analysis of deep causes of poverty in modern Britain, it would enjoy a sympathetic response from liberal quarters. The problem is the political context and where he chose to make his pronouncements, namely from a platform at the TUC conference.
In doing so, the archbishop of Canterbury strayed into party politics by appearing to ally himself with the Labour party. It cannot be a good look for the Church of England to be seen to be so close to one political party. If the position were reversed, and the archbishop was closely echoing Tory policies, there would be uproar. Welby is a well-meaning and serious figure, but his tactics are misguided.
