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EXACTLY THREE YEARS ago, at the annual meetings of the World Bank and IMF in Washington, it felt as if the world as we know it was coming to an end.
Lehman Brothers had collapsed. Merrill Lynch was next. One evening, people were desperately trying to find out if the Morgan Stanley party would be going ahead. Rumours were circulating the venerable institution would not open its doors for business the following morning. If that was the case, everyone wanted to be at the wake.
The sub-prime crisis had brought the financial markets to their knees.
Three years on, what has changed? Well, we can at least say that things aren’t that bad. Not quite. But that may be the best thing we can say.
In the intervening period, we’ve been through unprecedented rounds of government intervention in the markets and levels of stimulus never before contemplated. We’ve been through the worst recession in nearly a century – and we might well still be in it. We’ve made fundamental changes to the banking system, to try to make it safer. We’ve done an awful lot.
But the sad truth is, we’ve achieved almost nothing. The sub-prime crisis turned out to be a precursor to the real issue in the economies of the developed world: there is far too much debt. And for all of the action, all of the emergency meetings, all of the policy initiatives, nothing has been done to successfully address that fundamental issue.
Debt has been moved around. It’s the most dangerous game of pass the parcel that has ever been played. Governments that had spent well beyond their means for decades took on huge new levels of debt to bail out the banking system and spend their way out of recession.
Now they are struggling to pay the bills, even through a period of historically low interest rates. There’s no doubt that, taken in isolation, a number of countries should default. But the global nature of finance means a single default would have huge repercussions.
Manufacturing is down. GDP figures are constantly being revised – downwards. Asia’s economies look as if they are slowing. Rising inflation looms over our shoulders. Banks are struggling to make a return on their equity.
What we’re faced with now is probably not a Lehman-style sclerosis. Rather it is a slow and painful non-recovery, punctuated by periods of optimism that rapidly disappear into bouts of panic.
Why? Because we’re finally learning that our optimistic interludes over the past three years were based on a false premise. There was no real recovery. Financial markets remain underpinned by government support. Many governments now survive only because of the support of other nations.
That’s the state we’re in. Is there any way to get out of it?
Four key issues will continue to keep the world in a prolonged period of stagnation:
Sovereign debt
