Ten years ago this week massive financial businesses in the United States started collapsing.
In New Zealand, the Global Financial Crisis was a short term catastrophe that caused many people to lose their jobs, trade to fall, business confidence to plummet, and real fear that we were about to be plunged into the same cruel poverty we had witnessed after the Great Depression of the early 1930s. But it was more.
Ten years after the Global Financial Crisis, the world is rather different. Interest rates are much lower. In most advanced countries since the crisis, real GDP capita growth has been insipid at best.
Global spending and investment appear very cautious, and seem likely to remain so for some time given the overhang of debt before the crisis. In advanced economies, deleveraging the private sector appears to have stared, but it will take a generation. Very cautious households are a large part of the slow and fragile recovery. They have been hit hard by sustained labour market weakness, and in the U.S. and some other advanced economies this has been compounded by loss of housing wealth and balance sheet weakness. It is only now, in 2018, that we are seeing – still unevenly – a full throated recovery in the U.S.
A decade later since these events, very few people are financially stronger.
New Zealand has since 2008 also experienced a city-levelling earthquake, major drought, another earthquake snapping the nations’ transport spine and damaging another city, and our two largest local businesses in significant trouble (Fletchers is known, Fonterra result on this Thursday).
But the GFC still stands out.
Now, after 9 years in which there was no active economic management or state assistance as a development partner in the economy or in society, few believe things are going to get better for them.
There’s an economic historian called Charles Kindleberger who did a great book if you’re keen on a history of financial disasters called Manias, Panics and Crashes (1978). Roughly, it goes, new financial techniques always overreach themselves, and always burst.
Marxist economists love crises because economic crisis is supposed to be where revolutions start that will overcome capitalism and usher in a communist order.
My personal favourite, though, is Crisis and Leviathan by Robert Higgs, which shows how after each crisis, the state grows in power and in regulatory force, and retains and constantly ratchets up its power even when the crisis recedes. What we resolutely did not see, however, after this GFC crisis, was a return of the Keynsian state in which huge borrowing takes places in order to support damaged people and damaged lives.
Instead, particular large financial and insurance companies were bailed out, and huge quantities of fresh money were pumped into the system which is known as quantitative easing.
Sometimes what gets lost is the long term damage. The families whose house equity was destroyed when they lost their job and could not afford the mortgage will be affected for generations because there is no equity to hand down. That’s the equity that could have supported a child or two through university, or got them a deposit into a starter-home: gone.
Carmen Reinhart and Kenneth Rogoff did a history of financial crises spanning eight centuries. From their work the lesson was clear: recessions initiated by financial crises tend to cut deeper and produce a long “hangover” period of slow growth.
Instead of the post-1929 Depression, New Zealand and much of the developed world mirrored the late 1870s to 1890s with a similar long stagnation.
That is exactly what we still see in much of the developed world over the last decade – particularly the E.U.
The crisis of 2008 was not sufficient to smash institutions or make fresh new ones. Ratings agencies are still doing the same old thing, as are mortgage brokers, as are governments. Regulations of financial institutions remain weak here. Australia had a massive and public banking investigation, where so many of the cruelties of the finance industry were laid bare. Barely a peep here. Apart from greater assurance that banks will not fall over, little has changed here either.
New Zealand will continue to have external financial crises and international trade crises, and local environmental catastrophes. We need a state with the foresight and the capacity to prepare and withstand them. We don’t have it yet. We need a business community who can prepare for their own resilience instead of being bailed out. We need a society with the strength to do the same. We sure don’t have either of those. We remain, most of us, so brittle that we couldn’t afford a month without the pay of a good job.
Some, like conservative historian Niall Ferguson has said, say that money drives the course of history.
More accurately, as the GFC showed us, it is the history of debt and the force of its collected instruments to repay debt.
But even if there really were a Great Jubilee and all debts were wiped off the face of the earth, what the legacy of responding to the GFC with a long term mismanagement by those in power has caused, is a strong sense something is missing.
What is missing is: people have simply lost belief that things will get better for them.