Author Mark Richards

It is 10 years since the global financial crisis of 2007-2009 began. What happened? More importantly, did we learn anything – and could it happen again?

The global financial crisis of 2007-2009 or the Great Depression in the 1930s – which was the worst? Economists and academics are likely to be arguing over that one for a long time to come: what is undeniable is that both did long-term and lasting damage.

Ten years ago the global financial crisis began with the sub-prime mortgage market in the US – simply put, too much lending to people who did not have a history of good credit or the certainty that they could make the repayments on the loans.

The global financial crisis – A simple example of reckless lending

The subprime mortgage market also boomed in the UK – as did some very dubious lending practices. One easy-to-understand example was the ‘self-certification’ mortgage. These were originally introduced for people like plumbers and electricians, whose real income might not accurately reflect their stated income for tax purposes. This is not to cast aspersions on every plumber and electrician, but to simply live in the real world.

We wrote recently about the Taylor Report and Government’s wish to stamp out cash transactions – even down to paying for your haircut with your debit card. Plumbers, plasterers, electricians, painters and decorators: a large percentage of the self-employed are familiar with the phrase, “How much for cash, and can we forget about the VAT?”

That is not to cast a slight, it is simple to deal with the facts. But how could our plumbers and electricians obtain a mortgage if their stated earnings were nowhere near their real earnings? The lenders realised there was a large potential market and introduced the self-certification mortgage – with the borrower ‘self-certifying their income and their ability to afford the repayments. It seemed like the perfect solution. Before long, however, self-certification mortgage was being used by people like teachers and nurses, whose stated earnings very clearly did reflect their real earnings – unless they happened to be completing a mortgage application.

The crisis develops…

The banks gradually came to realise that they had billions of dollars (and pounds) worth of mortgage loans on their books that were unlikely to be repaid, and by September 2008 the crisis claimed its first major victim, when the US bank Lehman Brothers was forced to file for bankruptcy, despite holding $600bn in assets. Long established building society/bank Northern Rock went the same way in the UK and a wholesale collapse of the world monetary system was only averted by a series of massive bailouts and other financial stimuli.

The Great Recession

Despite the bailouts, the financial crisis led to the ‘Great Recession,’ a period of general economic decline affecting most of the world. Some countries – Spain is a good example – have only recently seen their economies recover to pre-recession levels. Last year the International Monetary Fund famously commented that Italy had ‘lost two decades of growth.’ In the UK you could argue that the effects of the crisis are still being felt. In 2007 debt as a percentage of Gross Domestic Product was around 35%: today it is nearly 90%. Local government spending is down in real terms – which obviously affects local services – and wage growth is less than half of what it was before the crisis.

Have we learned anything?

The Global Financial Crisis

Take your pick: Winston Churchill, Edmund Burke or George Santayana. Who knows which of them originally said, “Those that do not learn from history are doomed to repeat it?” The global financial crisis began with problems in the mortgage market: it escalated to reveal billions of dollars’ worth of lending that would never be repaid. It exposed financial mismanagement and incompetence on an epic scale. Hopefully, central banks have learned their lesson, but the simple fact is that banks are still being bailed out. What was the headline in the Guardian less than two months ago? ‘Markets relieved after Italy agrees €17bn bank rescue.’

What a good job the Chinese economy is growing at a remorseless 6.5% per year. Or is it? There have long doubts about the official growth figures in the world’s biggest economy and if you type ‘worries over Chinese debt mountain’ into Google you will find over 1m results to stop you sleeping at night.

So could it happen again?

Banks exist to lend money: human nature means that people frequently need to borrow money. As we have written many times, governments and regulatory bodies can take whatever steps the like to regulate supply, but they cannot regulate demand. And with banks – ultimately – driven by the profit motive then there will always be a lender somewhere who will meet a customer’s demand.

Then there are the world’s politicians to worry about, and their tiresome need to be re-elected. Ease the financial purse strings? Make the electorate feel good? Why not? After all, it will be the next government that has to sort out the mess…

But apparently, there is no need to worry about the Italian banks, Chinese debt or incompetent politicians. At the beginning of July, Janet Yellen, Chair of America’s Federal Reserve (and the US equivalent to the Governor of the Bank of England) said that she did not expect there to be “another financial crisis in our lifetime.”

Can we take comfort from that, or is it the equivalent of Michael Fish’s weather forecast in October 1987, just before the south of England was wiped out by a hurricane?

Speaking in London, Yellen said that reforms of the banking system since the 2007 to 2009 crash had minimised the risk of a similar disaster happening again. “Would I say there will never, ever be another financial crisis?” she said.

“Probably that would be going too far, but I do think we are much safer and I hope it will not be in our lifetimes – and I do not believe it will be.”

Phew! That is alright then. Except that Ms Yellen’s boss is now a man who promised further deregulation of the banking industry as a key part of his Presidential campaign. Excuse me while I go outside: I think the wind might be getting up…