For all the policy decisions of the past three years, nothing has been done to address the fundamental problems facing the economies of the developed world. Four key issues will continue to keep the world in a prolonged period of stagnation. If they all get worse at the same time, the consequences are painful to contemplate. Peter Lee and Clive Horwood look at the state we’re in.
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 arent that bad. Not quite. But that may be the best thing we can say.
In the intervening period, weve been through unprecedented rounds of government intervention in the markets and levels of stimulus never before contemplated. Weve been through the worst recession in nearly a century and we might well still be in it. Weve made fundamental changes to the banking system, to try to make it safer. Weve done an awful lot.
But the sad truth is, weve 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. Its 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. Theres 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. Asias economies look as if they are slowing. Rising inflation looms over our shoulders. Banks are struggling to make a return on their equity.
What were 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 were 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.
Thats the state were in. Is there any way to get out of it?