September 2018 marked the 10th anniversary of the collapse of Lehman Brothers that triggered the most destructive financial and economic crisis of the last 80 years. One of the most powerful US investment banks at the time collapsed in a handful of days. Meanwhile, not long before its filing for insolvency on September 14, leading credit rating agencies confirmed AAA rating for it. In fact, they attributed top rating to a walking corpse, whose assets were well overrated.
Digging a Grave for the Banking Corpse
Two people knew about the real state of affairs : Ben Bernanke -then head of Federal Reserve System – and Jimmie Dymon – CEO of JP Morgan – who was offered to take over the bank with so many problems. They preferred not to provoke panic but also had no option other than to bury this banking corpse. As Bernanke himself recognized, being already a fellow at Brookings Institute, saving Lehman Brothers on behalf of Fed either wouldn’t be legal or feasible economically.
However, a majority of the population didn’t bother to analyze what was happening to the investment bank. Living in an economic upturn that lasted without break since the end of recession in 2001, they were busy investing in main sources of wealth available to them – their houses. Two giants in the mortgage sphere – Fannie Mae and Freddie Mac – were creating new financial products that made houses available for those who in normal conditions would never allow a mortgage themselves. To cover the risks, they started issuing new bonds – credit default swaps (where seller assures the buyer that the latter will be paid in event of a default) and collateralized debt obligations (where in a event of the default holder of the obligation was given the collateral – house – as compensation). House prices were soaring. Not a single bank in the US collapsed in 2006-2007. Meanwhile, the most important “consumer” of new financial instruments was the bloating balance sheet of Lehman Brothers.
Professional market participants didn’t know where all this conjuncture would lead. Watching growth in all the most important indicators, they were unable to detect any ‘canaries in the wharf’, which led to a phenomenon called procyclical bias. Basically, banks and regulators were fooling themselves into thinking that the upturn in economic cycle would be here for long, and investment opportunities would be available for many. The choice of many was investing mainly in real estate. And no one bothered to ask themselves how they would repay the loans or how their bank would avoid collapse because of high exposure to new opaque bonds once house prices would start to fall.
The Great Recession
Everything changed on September 14, 2008 (in fact, though, first alarms were triggered in autumn of 2007). Six years of reckless credit expansion followed, which was an unstoppable destruction of wealth, called the Great Recession. Anger and anxiety of the people who realized they had been fooled about their future started spilling over the world, because the lies didn’t stop there.
On both parts of the Atlantic, states predictably were under significant pressure to save the ‘command heights’ of their economies i.e. main financial institutions and industrial giants. Special strain was put on Eurozone economies significantly dependant on foreign capital inflows and growth of construction industry – Ireland, Portugal, Spain, Italy and Greece. Their debt-to-GDP ratio skyrocketed, and the trust of markets eroded which was reflected onto higher yields . Soon the moment of reckoning came, and they had no one to appeal for an effective bailout rather than IMF, ECB and European Commission.
What followed remains the most egregious episode in the history of economic misinformation in the EU. In 2009, the then head of Greek Statistical Agency Andreas Georgiou refused to breach European best practices in the field by refusing to present inaccurate data of the Greek economy to the public and the European Commission. The politically appointed board of the institution insisted on submitting lies in order not to provoke fear of markets and the people. Georgiou was dismissed. The data was presented. However, the authorities were caught lying anyway.
Ironically enough, soon after trying to use manipulative data to show their (in fact, inexistent) strength, the Greek government used Georgiou’s accurate accounts to ask for a bailout from the Troika (ECB, IMF, EC) in 2012. Yet, in return, the statistician himself received a conviction for breach of trust, upheld by Greece’s highest court. This episode shocked the markets and European authorities, showing how shaky the foundation of trust in the Eurozone was in times of turmoil as in 2009-2012.
To the Grassroots of the Issue
More and more people are reconsidering their political allegiances in favor of populist parties because of their unresolved economic anxieties. What can we, then, make of the fact that governments are reporting with fanfare about exiting the recession and accelerating growth? Why is it not felt at the grassroots level? The most probable response to that, is that current metrics to present the state of national wellbeing are becoming more irrelevant and thus misinforming.
GDP was a great invention that in the time of the catastrophe of 1930s simplified economic discourse for the general public. But with growing economic and social inequality, and growing importance of factors other than material wellbeing it is time to reconsider. Stubbornly sticking to traditional toolkit of communication of economic data to the people will be met at least with indifference, if not with anger. Policymakers need to realize that just stating that the economy is growing is not enough if people don’t feel it in their pockets. Thus, publishing data on how the fruits of this growth are distributed among income quintiles would be prudent. As soon as scientists have more access to government data, they would be able to make the necessary conclusions and present them faster to the public.
In a post-GDP world, the indicators that would matter the most would be fairness of distribution, availability of jobs, progress in healthcare etc. People want to be sure that their children will live better lives than them, but this is not the case momentarily. Being fooled with false promises during both economic upturn, and Great Recession, they are perfectly right to demand new evidence, new measures and new accountability. The price of kicking the can down the road is the bell that tolls for democracy itself – plunging the world in a second iteration of ‘brown plague’ of neo-fascists born with disdain towards any evidence-based policy- and decision making.
By Vladislav Kaim
Graph With Stacks of Coins, Ken Teegardin (CC BY-SA 2.0)
Historic Moment: the Fall of an Empire – 25 SEP. 2008, Alane Golden (CC BY-NC-ND 2.0)
Huge Euro Symbol – Frankfurt, Germany, Chris Goldberg, (CC BY-NC 2.0)