Last Thursday was the second anniversary of the start of the banking crisis in the United States, much of Europe and elsewhere. Like others, I have been reflecting recently on these past two years. As we emerge from the economic crisis, we now face the challenge of remaining objective and refraining from being too emotional about recent experiences, or the challenges that may lie ahead.
There is generally still a view that this has been a truly all-country, inclusive global financial crisis. So far, it is clear from the current data that the speed and severity of the fall into recession was quite unparalleled for many decades, either here in the UK or in many of the other so-called advanced countries.
It is also clear that many of these countries have witnessed dramatic crises in their financial systems that in most cases appear to have been the proximate cause of the collapse of their economic activity and perhaps, indirectly, to some countries beyond.
What is not clear is the rest: the underlying causes of the crisis, how truly global it has been or how the world is likely to look in the future. Many commentators continue to express highly emotional judgments. Indeed, I find myself describing this crisis, in its unique distinction to past crises I have experienced, as a “Facebook” crisis. In other words, this is the first true crisis that has created such noise throughout the media and much of our society, with regard to the causes, its severity, how impaired it has left many of us and who is to blame.
Even the Queen has been moved to have asked “why no one saw it coming”. I was part of the group asked to provide a response to that question. It is probably the access to so much information that has really been the unique feature of this crisis, the consequences of which are still quite unpredictable.
As I said, there is generally a view that this has been a truly all-inclusive global financial crisis. This, like many other aspects of the crisis, is so far wrong. In a number of regions of the world, both developed and developing, financial systems have not been put under the severe stress we have witnessed here in the UK, the US or much of Europe. China is one of the most important examples from the developing world.
Within the more (so-called) advanced countries, neither Canada nor Australia has faced a banking crisis as such. Most countries around the world of course suffered economically after the collapse of Lehman Brothers, as those events led to the (hopefully, temporary) freezing of trade credit and the collapse of world trade. This fact needs to be remembered in the search for “what to put right” about the world.
Although the financial services industry in many countries appears to have been guilty of major excesses, the correction of which is almost definitely a key contributor to the crisis in those countries, it is hard to see whether these excesses alone would have caused the degree of problems we have witnessed. What is self-evident is that housing prices rose sharply over a number of years, in several countries simultaneously, including most importantly the US, but also in Britain, Australia, France, Ireland, Spain and others.
It is quite probable that without these house price increases reversing into outright house price declines, the excesses of the banks themselves might not have been so damaging.
In this respect, searching for policies that might curtail excessive house price increases relative to personal incomes might be just as good as many of the other populist notions that are doing the rounds, as indeed trying to decide whether there was a “common” cause of the house price increases.
Theories about lax monetary policies, inflation-targeting being a necessary but not a sufficient goal of monetary policy and the persistence of large and growing economic imbalances would all seem to be inter-related causes of this crisis.
The extraordinary invective directed by the media and others at the banking industry appears to be a by-product of the crisis that is, perhaps, set to stay for some time. We have seen further evidence of this in recent weeks, as many financial firms from around the developed world have reported their second-quarter results. Not all, but many, have reported strong performances, often surprising with the size of their profits. Hostile treatment has been given to both those that did and those that did not perform so strongly, with a heavy focus on bonus accruals and remuneration.
Here in the UK, politicians have been queueing up to offer their criticism. Very few have thought sufficiently long to realise that, unless these strong underlying performances in the financial sector continue, the economic downturn is likely to be prolonged. Although payment for performance may cause outrage while the economic pain is still being felt, it is the performance that matters more than the levels of compensation. It is understandable and justified that there should be public anger about high levels of remuneration, but to rail against banks returning to strong profitability seems odd and is yet another example of the “Facebook” nature of this crisis.
At the end of the month, I will write about the latest objective evidence of the extent of the crisis and what this means for the future of the world and UK economy. It has become increasingly evident since April that the decline in activity is going down. There is increasing evidence over the past fortnight that many countries might have already returned to positive GDP growth and, in some cases, growth around their trend rates, sufficient to bring unemployment back down over time.
The move in the industrial purchasing managers’ survey here in the UK back above 50 in July, on top of the already above 50 services PMI, strongly suggests that we are well through the worst. There is also evidence that in some cases the crisis might be leaving them healthier and more sustainable than before the crisis hit, both China and the US among them, with China especially turning its challenges into opportunities.
As I shall discuss when I return at the end of August, turning a crisis into an opportunity is what we should all be striving for.
• Jim O’Neill is chief economist at Goldman Sachs
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