As the first anniversary of Lehman's collapse approaches, what progress has been made? The former chief executive of Barclays takes stockby Martin Taylor / July 23, 2009 / Leave a comment
At the crisis point of the credit crunch last autumn, policymakers faced three challenges. First, they needed to stop the panic. Secondly, they needed to recreate the conditions for economic growth. Finally, they had to take steps to ensure the disaster was not repeated.
The first of these tasks was eventually achieved, though it proved more difficult and costly than many had imagined. Policymakers were criticised both for being slow to respond to the scale of the problem and for giving too little attention to international co-ordination. But you cannot point both these fingers at once, so to speak, since the search for international co-ordination slows response times. On the whole, governments and central banks performed their daunting job pretty well. The proof of that is that the banking system, although challenged in its long-term funding and risk averse in its lending, is still functioning today. It was not certain last October that one would be able to write those words in mid-2009.
Overcoming the first challenge is a good start on the second challenge—getting the world economy going again—since the restoration of confidence is indispensable for growth. The paradox, though, is that the more rapidly confidence is restored the harder it is to address the third and, in the long run, most vital question: how do we stop it happening again?
The panic is now clearly behind us, and the worst of the inventory shake-out in manufactured goods has also taken place—two fundamental conditions for a cyclical recovery. We are also benefiting from a monetary stimulus of biblical proportions. This must and in due course will be withdrawn. The universal response of governments to the emergence of budget deficits on a scale that could never have been imagined has been procrastination. And overall, things will feel worse, probably much worse for much longer, before they feel better. This should concentrate minds on the “how do we stop it happening again?” question. Political will to tackle this is likely, after all, to fluctuate according to how bad “it” is felt to be.
Three obstacles stand in the way of making sensible progress. One is misdiagnosis: if we don’t understand what went wrong we are unlikely to fix it intelligently. Another is the preference of the political process for small steps over substantive ones. But in banking we are still playing with fire and should not allow ease of implementation to…