The worst thing is that another economic shock could take us back to the brinkby George Magnus / September 10, 2018 / Leave a comment
This coming Saturday, 15th September, marks the 10th anniversary of the day Lehman Brothers filed for bankruptcy. It was a seminal moment that I remember well. The build-up to and speculation about the Lehman crisis had been going on for some time. I recall walking around the main fixed income (or bond) trading floor the previous Friday—normally a boisterous and noisy place—but this time, you could hear a pin drop, such was the tension and the angst on the floor. I have other personal reflections, as an economist, partially successful soothsayer, and now also one of many trying to figure how we got into the mess we are in today.
At the time of the crisis, I was a senior economic adviser at the investment bank UBS, having been Chief Economist until 2006. Though I have made many errors of economic judgment in my career, the extra research freedom allowed me to spot the oncoming financial crisis in late 2006. US home prices had peaked in July that year, and the consequent unravelling effects on the real estate market, financial institutions, and the banking industry’s loan, funding and collateral structure were rapid and remarkable.
By the beginning of 2007, some discussion was growing around a so-called Minsky Moment. This was named after the US economist Hyman Minsky, who figured rarely if ever in university economics syllabuses, but whose principal teaching was about the recurrent causes of financial instability. Minsky taught that leverage accumulates in “good times,” culminating in a third and final phase when borrowers are dependent on new loans to amortise and service debt. Once the main asset(s) on which the leverage depends rolls over, chaos ensues. For Minksy, systemic financial crises were endogenous to (but not only to) capitalism. To mitigate or avoid them requires rethinking the role of banks in society and what we prioritise in the economy, for example jobs, investment, and income inequality.
I emphasise Minsky to underline that it isn’t true that no one saw the crisis coming. I know people who were working at the time in the IMF and Bank for International Settlements who were on the case. Some economists who you may know such as Paul McCulley, Raghuram Rajan, Nouriel Roubini and Steve Keen were also prescient in their warnings, as well as several major…