The world the crash made

With September marking a decade since the Lehman Brothers implosion, stand by for a slew of economic retrospectives. Any meaningful analysis, though, needs to get beyond historic balance sheets and plunging share price graphs — however dramatic the data.

For the most significant impact of the biggest financial and economic upheaval since the Great Depression has been the growing loss of faith in western liberal capitalism. Politics has been upended by the 2008 crisis — doing much to explain Trump, Corbyn and the broader shift away from centrist parties towards extremes.

The demise of Lehmans, a once-impregnable investment bank, exposed a US financial sector riddled with chronic debts and fraud. That sparked a peak-to-trough plunge of more than 40 per cent across western stock markets — the deepest since the 1929 Wall Street crash.

The ensuing recession saw global trade shrink by a fifth, costing the world economy some $10 trillion (over a sixth of 2008 global GDP). In 2009, total world output contracted in real terms, after inflation, for the first time in history.

Unlike previous meltdowns, the ‘sub-prime’ collapse was an economic trauma of the western world’s own making. There was no external oil embargo, no emerging markets crisis, no all-consuming war. It was caused largely by reckless bankers on both sides of the Atlantic taking advantage of increasingly lax regulations. The money men were facilitated by politicians who were, at best, misguided and often chasing campaign donations from an increasingly powerful financial services industry.

During the run-up to 2008, by allowing banks to hold less capital against their assets, while setting interest rates too low, policy-makers encouraged big financial institutions to take on huge debts and pile in to ever more risky assets. Old-fashioned, prudent bankers were sacked, replaced by youngsters who were happy to bend, and in some cases break, the law.