Lessons yet to sink in from 2008 financial crisis!

S. Narendra

Called the Great Financial Crisis,The Great recession, the meltdown of global financial system in 2008 is becoming a faint memory,as the global economic growth, international trade and stock markets across the globe are looking up. In the US, where the crisis originated, the hubris is back. There are moves to loosen whatever weak financial regulations were put in place post-the crisis. President Donald Trump’s administration, in a cultivated amnesia, most likely could pressurise other countries, including India, to follow suit.
On September 15th ten years ago , to refresh our memory, Lehman Brothers, a big US financial conglomerate, went into bankruptcy, shaking the global financial system. For years before that , businesses, such as banking, share brokerages, insurance, real estate and credit rating agencies, had colluded in a frenzy of speculative deals. Banks had induced people to take loans without repaying capacity. Some were NINJA (no income, no jobs, no asset) loans. In one famous case, that of Carlyle Group, $ 1 deposit had been leveraged into $ 32 loans.

A report prepared by Paul Romer has assessed that between 2007 and 2016, the average wealth of the top one per cent of US population increased by $ 4.9 million. At the same time the wealth of the median family declined by $ 42000. Economist Thomas Piketty, in his 2014 acclaimed book-‘Capital in the 21st Century, ‘ showed that when the return on capital exceeds economic growth rate , there will be concentration of wealth. This happened during the boom years before 2000 dot.com bust ; and happened since 2008 bail-outs and governments pumping money for preventing economic recession.

The loans were repackaged several times into complicated financial instruments known as credit default obligations (CDOs) and sold them to multiple investors without the normal backing of funds.In some cases, there were fictitious CDOs.The credit rating agencies -S&P,Fitch, Moody and others accepted heavy payment in return for AAA rating that fooled investors; in subsequent investigation, they were berated and fined in some cases for their lack of due diligence.
Moody’s, for example, earned in 2006, $881 million from structured deals, compared to other business: the bonds which S& P had rated as AAA in 2006, could not get any ratings a year later.The governments were willing partners in this man-made, avoidable catastrophe that struck large swathes of the population.
As the markets for bonds, equities and currencies across the world are interlinked in innumerable ways, almost all big financial institutions in many countries in Europe, Asia, America, had participated in creating and sharing toxic assets. Iceland, a country of 300,000, with big banks having dealings with Europe and the US, went down. When Lehman, Citi group, AIG and many others

i n U S fell, high profile ‘wealth managers ‘ like BlackRock, Franklin (with world-wide tantacles) caught the infection. There was something like a domino effect. It scraped India’s ICICI as well. Time magazine listed 25 persons as mostly responsible for the crisis, that included Alan Greenspan. And, none of them got punished.AIG was bailed out by the US government with $185 billion; critics of bail out pointed out that big firms like Goldman Sachs that had bought insurance for their CDOs got paid from AIG bail-out, instead of such firms paying a price for engaging in dubious business.
“Why did no one see this coming?’’ was the famous question from Queen Elizabeth to audience at the London School of Economics. Another famous quote relating to the crisis was: ‘my assumptions were flawed’, by Alan Greenspan, former head of the US Federal Reserve, whose QE or easy money policy with low interest rates was held responsible for heating up the financial markets everywhere. Greenspan’s flawed assumption that people and markets would behave rationally and the economy would selfcorrect, according to rough estimates cost the US economy $ 12 trillion (including GDP loss of $ 7.6 trillion between 2007-2017).

Triggering the Great Economic Recession, the entire generations of people lost their jobs, homes and hopes of returning to work. A report prepared by Paul Romer has assessed that between 2007 and 2016, the average wealth of the top one percent of US population increased by $ 4.9 million. At the same time the wealth of the median family declined by $ 42000. Economist Thomas Piketty in his 2014 acclaimed book- ‘Capital in the 21st Century ‘ analysed the causes of inequality and showed that when the return on capital (r)exceeds economic growth rate (g), there will be concentration of wealth.
This happened during the boom years before 2000 dot.com bust ; and happened since 2008 bail-outs and governments pumping money for preventing economic recession. Beginning with US government, many others bailed out the failed banks, insurance companies. Elsewhere, including India, the governments printed money to float the economy back into some shape. Have governments and markets learnt any lessons from the crisis that was comparable to the Great Depression of 1929 ?

Raghuram Rajan and Paul Rome The question cannot be answered without reference to the causes of the crisis. The principle causes were dismantling of regulations over financial entities led by the US. The walls separating commercial banks, investment banks, insurance, brokerage houses, S&L (savings & loans) were demolished. A substantial part of the financial system was unregulated that allowed shadow banking.
The regulating and oversight agencies such as the US Federal Reserve ,SEC were weakened and filled with persons who had conflict of interest (Bernard Madoff, the scamster was on the board of New York Federal Reserve).There were multiple regulating agencies with no coordination or inclination to regulate.The Financial Crisis Inquiry Commission ,set up by US Congress, concluded in its report that the financial crisis was not like a freak weather event, as claimed by some. Rather it was man-made ,predictable and avoidable.In summary, it said if only law makers had not knocked out legal guardrails in 1990s ,if only bank CEOs had thought more critically about the complex securities, they had created and traded with abandon, if only the Federal Reserve had acted to stop the flow of toxic mortgages that would rot through the nations largest financial institutions, they could have saved the global economy from disaster.
Economists Raghuram Rajan, Paul Romer, a nonprofit Coalition and a few others had warned about the consequences of easy money policy and loose regulation. Analysing a previous boom and bust, Romer and George Akerlof, had shown that small weaknesses in the regulatory system could open up enormous risks and enormous opportunities for private profit. Most commentators summarised the causes in one word-GREED-political, economic, financial.
In India, in the wake of the crisis, there was some comfort that the economy and the financial system was insufficiently integrated with the global economy. But the repercussions were felt when the global economy slowed down. The central banks policies in the developed world such as US Fed pumping $85 billion a month,or its withdrawal, Fed changing interest rates causes worry in all emerging economies.
There is pressure on India to open up its financial sector and India cannot but yield.Post-2008 crisis, there was talk of coordination of fiscal and monetary policies among G-20-members but no one walked the talk.
In the immediate aftermath of 2008, experts exulted that bank nationalisation in 1969 had saved India. But when humongous NPAs showed up in PSU banks, it proved that ownership of financial institutions is no guarantor of probity or commercial prudence or managerial vigilance. Privately owned GTB or Global Trust Bank was a star before the dot.com bust ; so also Goldman, Lehman, Citi and others in the US, Northern rock in the UK. The private ownership did not insure against their bad, greedy management.

Next crisis?

Henry Paulson, Timothy Geithner and Ben Bernanke Writing almost on the 10th anniversary of Lehman collapse, Ben Bernanke (former Fed chairman), Timothy Geithner, Henry Paulson (ex-Treasury Secretaries) have this to say : “ the powers of the regulators alone proved inadequate (for dealing with the crisis).Congressional action made it possible xxx working with regulators,to prevent the collapse of the financial system, and avoid another great depression.Congress (now) has taken away some of the tools that were crucial to us during 2008 panic.It is time to bring them back. Our main concern is that these defences of the financial system will erode over time and risk taking will emerge in corners of the financial system that are less constrained by regulation’.

(S.Narendra is former Principal Information Officer to the Government of India and Information adviser to PM)



		EDITOR'S MAIL EDITOR'S COMMENT ECONOMIC SCENARIO ECONOMIC SCENARIO FRANKLY SPEAKING REALPOLITIK CARING FOR THE NEEDY SIGNS OF THE TIMES UNSMART CITIES M.P POLITICS SOUTHERN TRENDS PUNJAB POLITICS WEST BENGAL POLITICS TIBET’S FUTURE 2+2 DEAL Imran’s naya PakIstan ? PAGE FROM HISTORY PAK POWER GAMES GLOBAL AFFAIRS REVIEW HITS & MISSES SPORTS DIARY BOOK BAZAAR BOOK BAZAAR HONOURING THE BRAVE YOGA IN DAILY LIFE ART OF LIVING Issue:October' 2018 Subscribe Now	GLOBAL AFFAIRS REVIEW Lessons yet to sink in from 2008 financial crisis! S. Narendra Called the Great Financial Crisis,The Great recession, the meltdown of global financial system in 2008 is becoming a faint memory,as the global economic growth, international trade and stock markets across the globe are looking up. In the US, where the crisis originated, the hubris is back. There are moves to loosen whatever weak financial regulations were put in place post-the crisis. President Donald Trump’s administration, in a cultivated amnesia, most likely could pressurise other countries, including India, to follow suit. On September 15th ten years ago , to refresh our memory, Lehman Brothers, a big US financial conglomerate, went into bankruptcy, shaking the global financial system. For years before that , businesses, such as banking, share brokerages, insurance, real estate and credit rating agencies, had colluded in a frenzy of speculative deals. Banks had induced people to take loans without repaying capacity. Some were NINJA (no income, no jobs, no asset) loans. In one famous case, that of Carlyle Group, $ 1 deposit had been leveraged into $ 32 loans. A report prepared by Paul Romer has assessed that between 2007 and 2016, the average wealth of the top one per cent of US population increased by $ 4.9 million. At the same time the wealth of the median family declined by $ 42000. Economist Thomas Piketty, in his 2014 acclaimed book-‘Capital in the 21st Century, ‘ showed that when the return on capital exceeds economic growth rate , there will be concentration of wealth. This happened during the boom years before 2000 dot.com bust ; and happened since 2008 bail-outs and governments pumping money for preventing economic recession. The loans were repackaged several times into complicated financial instruments known as credit default obligations (CDOs) and sold them to multiple investors without the normal backing of funds.In some cases, there were fictitious CDOs.The credit rating agencies -S&P,Fitch, Moody and others accepted heavy payment in return for AAA rating that fooled investors; in subsequent investigation, they were berated and fined in some cases for their lack of due diligence. Moody’s, for example, earned in 2006, $881 million from structured deals, compared to other business: the bonds which S& P had rated as AAA in 2006, could not get any ratings a year later.The governments were willing partners in this man-made, avoidable catastrophe that struck large swathes of the population. As the markets for bonds, equities and currencies across the world are interlinked in innumerable ways, almost all big financial institutions in many countries in Europe, Asia, America, had participated in creating and sharing toxic assets. Iceland, a country of 300,000, with big banks having dealings with Europe and the US, went down. When Lehman, Citi group, AIG and many others i n U S fell, high profile ‘wealth managers ‘ like BlackRock, Franklin (with world-wide tantacles) caught the infection. There was something like a domino effect. It scraped India’s ICICI as well. Time magazine listed 25 persons as mostly responsible for the crisis, that included Alan Greenspan. And, none of them got punished.AIG was bailed out by the US government with $185 billion; critics of bail out pointed out that big firms like Goldman Sachs that had bought insurance for their CDOs got paid from AIG bail-out, instead of such firms paying a price for engaging in dubious business. “Why did no one see this coming?’’ was the famous question from Queen Elizabeth to audience at the London School of Economics. Another famous quote relating to the crisis was: ‘my assumptions were flawed’, by Alan Greenspan, former head of the US Federal Reserve, whose QE or easy money policy with low interest rates was held responsible for heating up the financial markets everywhere. Greenspan’s flawed assumption that people and markets would behave rationally and the economy would selfcorrect, according to rough estimates cost the US economy $ 12 trillion (including GDP loss of $ 7.6 trillion between 2007-2017). Triggering the Great Economic Recession, the entire generations of people lost their jobs, homes and hopes of returning to work. A report prepared by Paul Romer has assessed that between 2007 and 2016, the average wealth of the top one percent of US population increased by $ 4.9 million. At the same time the wealth of the median family declined by $ 42000. Economist Thomas Piketty in his 2014 acclaimed book- ‘Capital in the 21st Century ‘ analysed the causes of inequality and showed that when the return on capital (r)exceeds economic growth rate (g), there will be concentration of wealth. This happened during the boom years before 2000 dot.com bust ; and happened since 2008 bail-outs and governments pumping money for preventing economic recession. Beginning with US government, many others bailed out the failed banks, insurance companies. Elsewhere, including India, the governments printed money to float the economy back into some shape. Have governments and markets learnt any lessons from the crisis that was comparable to the Great Depression of 1929 ? Raghuram Rajan and Paul Rome The question cannot be answered without reference to the causes of the crisis. The principle causes were dismantling of regulations over financial entities led by the US. The walls separating commercial banks, investment banks, insurance, brokerage houses, S&L (savings & loans) were demolished. A substantial part of the financial system was unregulated that allowed shadow banking. The regulating and oversight agencies such as the US Federal Reserve ,SEC were weakened and filled with persons who had conflict of interest (Bernard Madoff, the scamster was on the board of New York Federal Reserve).There were multiple regulating agencies with no coordination or inclination to regulate.The Financial Crisis Inquiry Commission ,set up by US Congress, concluded in its report that the financial crisis was not like a freak weather event, as claimed by some. Rather it was man-made ,predictable and avoidable.In summary, it said if only law makers had not knocked out legal guardrails in 1990s ,if only bank CEOs had thought more critically about the complex securities, they had created and traded with abandon, if only the Federal Reserve had acted to stop the flow of toxic mortgages that would rot through the nations largest financial institutions, they could have saved the global economy from disaster. Economists Raghuram Rajan, Paul Romer, a nonprofit Coalition and a few others had warned about the consequences of easy money policy and loose regulation. Analysing a previous boom and bust, Romer and George Akerlof, had shown that small weaknesses in the regulatory system could open up enormous risks and enormous opportunities for private profit. Most commentators summarised the causes in one word-GREED-political, economic, financial. In India, in the wake of the crisis, there was some comfort that the economy and the financial system was insufficiently integrated with the global economy. But the repercussions were felt when the global economy slowed down. The central banks policies in the developed world such as US Fed pumping $85 billion a month,or its withdrawal, Fed changing interest rates causes worry in all emerging economies. There is pressure on India to open up its financial sector and India cannot but yield.Post-2008 crisis, there was talk of coordination of fiscal and monetary policies among G-20-members but no one walked the talk. In the immediate aftermath of 2008, experts exulted that bank nationalisation in 1969 had saved India. But when humongous NPAs showed up in PSU banks, it proved that ownership of financial institutions is no guarantor of probity or commercial prudence or managerial vigilance. Privately owned GTB or Global Trust Bank was a star before the dot.com bust ; so also Goldman, Lehman, Citi and others in the US, Northern rock in the UK. The private ownership did not insure against their bad, greedy management. Next crisis? Henry Paulson, Timothy Geithner and Ben Bernanke Writing almost on the 10th anniversary of Lehman collapse, Ben Bernanke (former Fed chairman), Timothy Geithner, Henry Paulson (ex-Treasury Secretaries) have this to say : “ the powers of the regulators alone proved inadequate (for dealing with the crisis).Congressional action made it possible xxx working with regulators,to prevent the collapse of the financial system, and avoid another great depression.Congress (now) has taken away some of the tools that were crucial to us during 2008 panic.It is time to bring them back. Our main concern is that these defences of the financial system will erode over time and risk taking will emerge in corners of the financial system that are less constrained by regulation’. (S.Narendra is former Principal Information Officer to the Government of India and Information adviser to PM)