The one thought I have on the first anniversary of the Lehman Brothers collapse is whether 9/15 was more harmful than 9/11. The latter episode has changed the way we travel, the way we view the world, especially the Muslim world, and it has heightened all sorts of authoritarian tendencies in the erstwhile liberal societies. In this sense, Osama bin Laden was a change maker. Yet there has been no repeat of 9/11 on American soil, though around the world, Bali, Bombay, Madrid, London we have had terrorist attacks. We do not need to dispute any longer whether the world is globalised.
When Lehman Brothers collapsed , we were not unprepared as we were before 9/11. After all the recession in output growth and employment had started in the second quarter of 2007 in the US. Commodity price inflation had led to a tightening of interest rates and the slowdown in house price inflation had begun. The UK had already faced the Northern Rock collapse in September 2007.
By March 2008 we had the Bear Stearns takeover and AIG followed soon. Famous names were being gobbled up by other famous names?Merrill Lynch, for example. There was fear in the air and to echo the words of Chuck Prince the embattled head of Citibank, the music had stopped.
Still the collapse of Lehman Brothers triggered a panic which was as unprecedented as it was unexpected. Here was a brokerage firm and as such it was like a signalling system at the centre of a vast and complicated set of transactions. When it went, the machine juddered to a standstill. Credit dried up. There was a meltdown. The banks could fail and other banks could buy them. But the failure of a middleman firm wreaked havoc.
It was at this point that the conflation of an output recession and a financial system failure led to great anxiety. Comparisons were made with the Great Depression. Economists were denounced (often by fellow economists) as myopic, overpaid arrogant peddlers of implausibly unrealistic theories. Mathematics, the assumption of rationality, the evil genius of Chicago economists and many other villains were cited. Some were even more hopeful that here was the collapse of Capitalism itself.
The sight of George W Bush?s Treasury Secretary asking for $800 billion to buyout banks raised the joyous spectre of bank nationalisation. Could socialism be far behind ?
Now, a year later, it all seems back to normal. The OECD economies appear to have turned the corner and a V-shaped recovery is on the cards. Though it is yet not certain, there is unlikely to be a double dip recession. As crises go , the 2007-09 recession is comparable to the 1980s , not the 1930s. The financial system meltdown was a new factor and globalisation made it spread across the world. But the system has proved resilient. Capitalism is alive and well and dwells in the restored fat bonus packages of American and British bankers.
Where did it all go so right? Why have Left parties made few gains politically across OECD countries and why have market friendly parties survived? The answer lies in the new breed of central bankers in the US and UK at least, but also elsewhere who are all by and large academic economists with sufficient knowledge and confidence to be able to innovate when necessary. Mervyn King at the head of the Bank of England and Ben Bernanke at the Federal Reserve had learnt the lessons of the 1930s as pointed out by Milton Friedman in his classic study (jointly with Anna Schwartz) of US monetary system. Liquidity had to be poured into the system regardless of fiscal scruples. Keynesian remedies had been absorbed long ago by way of built-in stabilisers and governments stepped in to provide extra fiscal stimulus. It took time to unwind the commodity price inflation and restore enough liquidity in the system to stave off the worst effects.
Even the intervention by which central banks and governments poured money into private banks was not the old fashioned nationalisation but the smarter way of demanding preference shares against the money loaned. As the stock markets revive, the governments are getting their money back, with a capital gain as well.
Of course, some things such as the balance sheets of banks will take time to recover their previous health. Every previous innovation?railroads for instance?led to a bubble and its collapse. But then the innovation did not die out but became a part of the improved economy. Financial innovations such as securitisation and hedge funds will be the same. Read Schumpeter.
The G -20 may yet get around to imposing tighter regulations on the financial system but the speed at which the market has recovered is far faster than the pace at which politicians move to reform the system. Don?t hold your breath. Enjoy the recovery.
?The author is a prominent economist and Labour peer