Ten years ago, the bankruptcy of the American investment bank Lehman Brothers triggered the biggest financial crisis since World War II and a severe recession which hurt every developed country. Comments are abounding regarding the responsibilities and the efficiency of the measures decided after the crisis to avoid its reproduction. Unfortunately, the chosen date shows that all the lessons have not been learnt and that the search of the responsibilities is incomplete. The starting point of the crisis was not Lehman Brothers bankruptcy caused by the rejection of the Federal Reserve Bank of New York to do “whatever it could do” to avoid it but on 2007 August 9th the closure by BNPParibas of three of its funds which included assets coming from the securitization of subprimes loans issued in the United States. During that day when you asked to a banker how much the bank had lost, he replied:” we don’t know and it is going to take a long time before we know”. The crisis really had started at that moment.
The triggering was provoked by the multiplication of defaults by American households who heavily indebted themselves to acquire their home and whose financial situation (subprime) would have dissuade lenders to offer these loans. To get round that risk, these lenders hurried to locate these highly doubtful debts in vehicles they introduced on the financial markets through securitization. It was these securities that the funds managed by BNPParibas had bought to resell to their clients. The waking up to the growing incapacity of the borrowers to reimburse their loans generated massive withdrawals and the bank reacted by the suspension of the quotation of its funds. Doubt regarding banks and all the issuers of sophisticated products as these supposed to offer a protection against financial risks (CDO and CDS) was taking hold on financial markets.
The first victim will be the prestigious New York investment bank Bear Sterns in March 2008. The Federal Reserve Bank of New York had to refloat it before it was taking over by JP Morgan. Ten years before, in September 1998, it had already forced banks to rescue the LTCM fund to avoid a chain reaction of bankruptcies. In September 2008, the Lehman Brothers situation is hopeless but that time the Federal Reserve abstains from any intervention because the amount of money at stake is ten times higher and the bankruptcy is decided. The financial crisis is then taking its full dimension. Due to the internationalization of the financial markets and to the size of the related transactions, the crisis expended outside of the American borders and acquired then a systemic character. Each State, from 2008 autumn, took massive financial and budgetary measures to support its economy. China had anticipated what was going to happen and since July 2008 had launched a large rebound plan which will allow to the country to just suffer a slight slowing. For the others, it will be in 2009, the deepest recession of the post-war period.
The debate about the persons responsible for the crisis is not over today. It has been focused on the denunciation of the “finance world”, on its excesses, on the deliberate complexity of its activities to escape from the control of the authorities in charge of its regulation. Since that, important measures have been taken to have a better supervision of the behaviors and new international rules have been adopted, the most important of them being issued by the Bank of International Settlements. Everybody must comply with them. Each State has adapted them, sometimes in strengthening them, to its own situation. Even if in the United States some are thinking about a coming back to the past with, notably the put into question of the Dodd-Franck Act, the taking into account of the risks associated to banking and financial practices is now present in the minds.
It is not the same about the economic analysis which was deeply failing and unable to launch the necessary warnings in front of the risks the evolution of the American economy was taking. The Queen of England herself, during a visit to Cambridge University in 2009 asked the annoying question to the economists:” Why didn’t you see what was coming?” On the brink of the crisis, American economy with a higher growth rate than other developed countries and a very low unemployment is considered as an example. Yet, that prosperity is “an illusion and precarious” (1). Growth is high but what is produced is not paid. It results from an unhealthy increase of household indebtedness. But nobody, or almost nobody and in any case no economists, are taking this point into account. Their subject is only interested by the flows and not by the assets of economic agents. It is a little like if the financial situation of a company was appreciated only by its revenues and ignoring its balance sheet. The American economy one, on the brink of the crisis, is too much unbalanced. It is what the economists, the media and the politicians who rely one on each others, missed. In the research of responsibilities, the first ones have a place at least as important as the managers of the financial institutions.
The next question is, of course: “When the next crisis comes and where it will starts?” In the growing order of risks, there are first the emerging countries. The collapse of currencies and the runaway inflation which are affecting Venezuela and in a less dramatic condition Argentina and Turkey are worrying. The political crisis which may occur in Brazil after Lula impeachment to run for the next presidential election and the likely success of Bolsonaro constitutes also a threat. But these countries haven’t an enough weight to constitute a systemic risk and to generate disruptions at the world level. There is also China whose economic results are the purpose of many critics with, notably, the very important rise of public and private debts. But 2018 China is not 2007 United States. The country can rely on huge currencies reserves, more than 3 000 billion dollars, and foreign exchanges structural surplus which is anyway what United States are blaming to it. If an incident, like the Lehman Brothers bankruptcy, occurred, Beijing has all the necessary tools to cope with it without create collateral damages, and definitely would have the political will to do it.
There is, at last, the American technological bubble. The most valued companies are frequently these which are at the mercy of a regulation change: all kinds of platforms, social networks, self-driving or electric cars notably. Le level of their market capitalization gives them a systemic character. A heavy fall on the market of one of these companies, caused by a regulatory change which is at the heart of its business model, will generate massive sales of other companies shares and a global loss in the developed countries financial markets, as when in 2000-2001, the Internet bubble exploded. The real economy, the American one first, followed by Europe and Asia will be unavoidably affected. The media will not necessary to have more to use again the word “crisis” in their mouth and with their pens.
The world is familiar with crisis. Progress accomplished after the last one make unlikely the same kind of disorder to come back. But they are not enough to protect us against as serious imbalances affecting other activities.
(1) See: Alain Boublil “Le monde comme il est”; Le Rocher Editions. 2006. p. 145 and s.