Banking crisis: Lessons from a man-made tragedy

07 September 2009
In the media
Published at
The Guardian
Cites Hilary Wainwright
Two global events will define this decade, and they hang on either end of it in a rough and ghastly symmetry. First came the terrorist attacks on America on 11 September 2001. The second fell on 15 September last year: the collapse of Lehman Brothers, and the climax of the international banking meltdown. The chain of events that triggered the worst financial chaos since 1929 is revealed in the investigation we are publishing this weekend. As it illustrates, this catastrophe – which caused banks to go bust, the global economy to sink into its deepest recession in decades, and millions to lose their jobs and their homes – did not drop out of a clear blue sky, but was years in the making; and its consequences will be with us for many years to come. This weekend's meeting of Alistair Darling and finance ministers from the G20 group of significant economies, as they argue over how best to tame the banking industry, is part of the aftermath. So too is this autumn's pre-budget report in which Mr Darling and Gordon Brown will try to strike a balance between reviving a recession-hit economy and repairing a wrecked public balance sheet – and the general election in which they will be judged by voters on their efforts. But this turmoil is still likely to be felt many years from now, as central bankers have to manage a much choppier economy, and government ministers no longer squabble over who receives most money but who must make the biggest spending cuts. Before Lehman Brothers went bust last autumn, it was still (just about) possible for politicians, businesspeople and taxpayers to believe that the world economy would in time revert to the placid norm of the previous decade; after it broke, it was only a question of how much things would change. If the full impact of last September's terrible events have yet to percolate into public debate, that is partly a tribute to the speed and intelligence with which the British government contained the collapse of the banking system and tried to mitigate its worst effects on the economy. Yes, the Labour government spent a decade paring down financial regulation. But when the crisis hit last autumn, Mr Darling and the Treasury worked around the clock and came up with a plan that was followed around the globe. Compare that with yesterday's reports of Hank Paulson, then treasury secretary of the world's most powerful economy, phoning around to find a rescue bid for Lehman – and failing. That horrific failure at least clarified one big policy argument. Before 15 September 2008, it was possible to argue that a market solution could always be found for failing banks – that they could be allowed to go bust, or be sold to a willing bidder. Lehman's collapse showed the consequences of sticking to that line – and at least Mr Brown knew better. Whatever the prime minister's numerous other flaws, the height of the banking meltdown was his finest hour. The idea of Mr Cameron in the same hot seat does not bear much thinking about. Yet it is the Tories who will surely take power come the next general election, and there lies a political puzzle best summed up by Hilary Wainwright in a comment the editor of Red Pepper made to this paper last month: "The crisis of the financial markets has become a crisis of public spending. Public servants are going to be scrutinised down to the last paperclip, while bankers are not going to be scrutinised down to the last million they have received from the government." Mr Brown failed to turn from firefighting tactics to a strategy of reforming finance and reshaping the economy. It is left to Adair Turner and Mervyn King – a financial regulator and a central banker – to warn against City excesses and an economy over-reliant on its banking sector, even while Labour ministers refuse to bring bankers to heel. A year on from Lehman, such timidity is unwise in both politics and policy terms. The banking system is past the worst of the crisis, while still reliant on government guarantees and taxpayer money. Now is the time to be cracking down on excessive bonuses and superfluous financial innovation. Now is the time to be laying out plans for banks to be split between their utility and their speculative arms. Now is the time to wean the UK economy off its dependence on City tax revenues. Otherwise, the events of last autumn will be more than a historical anniversary; they stand to be repeated. The Guardian