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A crisis wasted? 10 years on from the GFC



Industry Finance

By Aron D’Souza

A decade since the global financial crisis shook the world economy in a manner unprecedented in living memory, the after effects still reverberate strongly across political systems, economies, and societies. While much reform has taken place in the wake of the crisis, some of the most important lessons remain unlearned.

So, as we mark the ten-year anniversary of the crisis, we ask: how have things changed? What problems remain unaddressed and what new challenges face us in the aftermath of the GFC?

Are things really so different?

One of the key differences between 2008 and 2018 is the regulations that enshroud banks are far tougher than they used to be. Banks are no longer as debt-burdened as they were back then, and they must now also present clearer contingency plans, risk analysis, and hold larger portions of solid equity in their business.

But even in the banking sector there is still much work to be done. The wave of consolidations that followed the 2008 crisis resulted in risks that are now concentrated in fewer entities. Persistent risk exposure from derivative instruments continues even today. For example, Deutsche Bank, a single German outfit, has a derivative exposure with a nominal value equivalent to the entire GDP of Europe.

Wider problems must also be addressed. Much of the regulation put in place since 2008 risks being watered-down, notably the Dodd-Frank act which is meant to enhance stability and accountability in the American financial system. Meanwhile, the ‘revolving door’ between American politics and business is spinning faster than ever, and the conflicts of interest this creates for stronger financial regulation and oversight simply cannot be ignored.

Future Risks

Global debt remains very high at $215 trillion, more than three times the size of the global economy.

Perhaps of greatest concern is household debt –an important factor in 2008. Whilst the crumbling financial institutions of 2008 were deemed ‘too big to fail,’ struggling households were left to face the prospect of losing their homes, jobs and savings alone. This has led to social disenfranchisement, economic stagnation, and populism. Since 2008, household debt has grown substantially in several countries, including Australia.

In the United States, crippling student loan debt, which now exceeds $1.5 trillion(up from $0.6 trillion in 2008) compounds the issue. As American students borrow more and more for their education but fail to find avenues of employment to pay back their student borrowings, the risk of widespread defaults continues to grow.

After seeing their parents laid-off or their family homes repossessed, a debt laden generation is now entering the workforce with a psyche shaped by mistrust in the institutions that govern society.

Unsurprisingly, these worrying trends have fed the current wave of anti-establishment, political populism we have witnessed around the world and pose a unique threat to the pillars of Western society. To make matters worse, a direct result of this political backlash is the election of leaders ill-equipped to grasp the complexities of fiscal policy and unwilling to act with the global minded cooperation that will be required to mitigate the next crash.

But the next crisis may not erupt in the West. In China, debt has grown five-fold since 2008. On one hand, the non-traditional lending market has exploded through loosely regulated peer-to-peer platforms. On the other, sheets of State-Owned Enterprises show ever ballooning amounts of leverage.

Emerging market growth may indeed have helped counter the decline in developed markets in 2008, but today they are themselves hefty borrowers and account for two-thirds of corporate growth over the past decade.

Perhaps the next crisis could be right here in Australia, triggered by a housing bubble similar to the US in 2008. When US markets collapsed in 2008, US household debt was 98% of GDP. Today, Australia’s household debt to GDP ratio is even higher at 123%, second only to Switzerland’s 128%.

The worry about this Australian problem is reflected in domestic political rhetoric, but has yet to be translated into tougher policy, in part because politicians are too beholden to constituents who yearn for housing markets to rise indefinitely. This was precisely the thinking in the United States circa 2007.

Reflecting on the Decade

There are two philosophical lessons that have not received appropriate attention in the decade since the crisis. The first is that bad results can come from the best of intentions. The 2008 crisis resulted in part from the relentless pursuit of home ownership at all costs–part of a fervent belief in the American Dream. Over many decades, policymakers at the head of American government created extremely distortionary legal and policy conditions that improperly incentivised the financial sector – all in the hope of realising an illusory ideal. 2008 is perhaps one of the best examples of how governments have continued to fail the people when they translate social ideals into practical policy.

The second deeper lesson is about capitalism’s essential process of ‘creative destruction.’ The political economist Schumpeter argued that it was creative destruction that channeled capitalism’s energy. When poor business models collapse, better ones rise in their wake. What we have seen since 2008 is a ‘too big to fail’ attitude that bails out poor business models. By forcibly letting zombie businesses linger, we fail to allow capitalism’s greatest energy to materialise. By that measure, we are failing to foster healthier capitalism.

Have we let a good crisis go to waste?

A crisis should produce reflection and, as Churchill knew, an opportunity for change. What could have been a watershed moment that sparked true reform and promoted trust in capitalism and the institutions who regulate it, has instead fostered disillusionment and reactionary politics.

For all the structural changes that policymakers claim to have made in the past ten years, it seems this crisis may have been wasted.


Aron D’Souza, Founder and MD of Sargon.

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