Ten years ago, the western capitalism world almost fell apart in a savage financial crisis never seen before. It wasn’t the only financial crisis the modern capitalism system had to had gone through, but it was the uncertainty it drove us all to what made it highly hazardous for a whole cultural life-style in Europe and Northern America.
One day like the 15th of September in 2008, Lehman Brothers high executives filed for bankruptcy.
What started there wasn’t sure at that time but economists all around the world feared the most: a quick spread of a overwhelmed mortgage and uncontrolled loans provided systematically for banks and investments companies during years. That meant, roughly, that they didn’t know where the money was and more importantly if they were going to be able to claim it back at some point.
US government acted surprisingly letting it down as they probably knew how corrupt was the US financial system. They were right because in the next weeks after Lehman Brothers, Merrill Lynch, AIG insurance company, HBOS, Royal Bank of Scotland, among others giants followed its bankruptcy steps.
This provoked a huge financial crisis in the US, as loans became less accessible to customers and sub-prime mortgages (the spotted cause of the crisis) were radically cut off. These practices, quite dishonest in economic matters, soon were spread to Europe.
The Keynesian Solution
In the United Kingdom, Lloyds Bank, Royal Bank of Scotland and Barclays, the three major banks of the nation, went down in October 2008. But, in this case, the UK Government followed a different strategy, the government saved them from doom.
This followed a commonly known strategy already done in past crisis. A Keynesian tactic on tackle crisis in its very beginning: the National Banks and public administrations should invest public money to lead the country out of crisis.
Also, in other countries all over Europe, like Germany or Spain, banks were going down by their own fails in the past. Bailout after bailout, government saw themselves in the thin line of what to do. They all ended up (by European commission) saving their bank system to prevent becoming less attractive for other eyes.
Nonetheless, this common Keynesian strategy lead to another crisis in Europe, the debt crisis. States in Europe needed to borrow money to international lenders in order to save their bank systems, so they sooner borrowed more money their national income could allow to pay without entering in a recession or rising their inflation.
So austerity became part of the game as the final solution. And it is still with us in many countries in Europe, even, of course, in the United Kingdom.
The aftermath, the effects of the financial crisis
But, after everything that happened and all the measures taken by the National Governments, what are the wounds, the scars, that the financial crisis has inflicted on us? Expert economist Tony Greenham lead an article of 3 lesser kown effects of the financial crisis of 2008.
- In first place, those related to massive and hidden redistributions of wealth:
According to the economist, “the Bank of England has created £435 billion of new money to pump into the economy since the crash, and there is broad consensus that this has supported growth, lowered long-term interest rates and eased pressure on government finances.
Less well known is that it created unexpected windfall gains for those with significant existing financial wealth, such as shares and government bonds, as the flood of new money pushed up the value of these assets. The Bank estimated that the boost to the holdings of financial assets and pensions of the richest 10 per cent of households would have been between £128,000 and £323,000 per household.
He added, “just try to imagine the reaction to a budget that gave the richest 10% of the population well over £100,000 per household in tax rebates”.
On the other hand, mortgage interest rates dramatically changed before and after the crisis. One same person, getting the same amount of income with same characteristics, could get three different mortgage package in just three years length. Becoming fairness for those who acquired a mortgage prior to the banking crisis.
- The second effect is that about the recession and austerity myths:
The financial crisis blew a hole in government finances around the world, and especially in Britain. Not only from the £133 billion direct cash costs of bailing out the banks, but from the collapse in tax revenue from business, consumption and work as the recession took hold.
For Tony Greenham, this Keynesian model will bring high debt rates to the State Treasury, but he asked himself what should be the size of the state. Instead of thinking of macro-economy terms, with its prudence course of action, he sees it as a growing centralized mentality that “there has been an even more invidious dishonesty that has cropped up from time to time. This is the argument that it was excessive government spending and debt that caused the recession.”
- And, finally, there is the renaissance of economics:
There is a positive lecture out of any crisis, for Tony Greenham is this: “In my view the honest answer is that economic teaching and practice had become too rigid, too monotheistic and prone to group-think. It lacked the theoretical and intellectual equipment to understand that such a credit bubble was even possible, let alone spot one on the horizon”.
For example, today the Rethinking Economics movement is still campaigning for greater pluralism in the teaching of economics, along with increasing demand from employers and civil society organisations such as Promoting Economic Pluralism for an ability to deploy a broader range of economic methodologies to solve real world problems.
Hernaldo Turrillo is a writer and author specialised in innovation, AI, DLT, SMEs, trading, investing and new trends in technology and business. He has been working for ztudium group since 2017. He is the editor of openbusinesscouncil.org, tradersdna.com, hedgethink.com, and writes regularly for intelligenthq.com, socialmediacouncil.eu. Hernaldo was born in Spain and finally settled in London, United Kingdom, after a few years of personal growth. Hernaldo finished his Journalism bachelor degree in the University of Seville, Spain, and began working as reporter in the newspaper, Europa Sur, writing about Politics and Society. He also worked as community manager and marketing advisor in Los Barrios, Spain. Innovation, technology, politics and economy are his main interests, with special focus on new trends and ethical projects. He enjoys finding himself getting lost in words, explaining what he understands from the world and helping others. Besides a journalist, he is also a thinker and proactive in digital transformation strategies. Knowledge and ideas have no limits.