This year marks the first anniversary of the collapse of Lehman Brothers, the investment bank whose bankruptcy triggered the great crash of 2008. While there has been no shortage of reflection on the dramatic events of last year, there has been little in the way of soul-searching.
A year ago, the world economy almost collapsed. Having already intervened to rescue several ailing financial giants, the US government judged it could not keep stepping in. So when Lehman said it was insolvent, the Bush administration let it die.
Hardly anyone anticipated what happened next. Investors around the world, afraid that financial firms in which they'd invested might also go to the wall, began pulling out fast. Stock markets plunged. Bank after bank looked like it might run out of cash.
Desperate to preserve cash, banks stopped lending to one another. Then they stopped lending altogether. Global trade, which depends heavily on credit, stopped. It looked like the next Great Depression was imminent.
Injecting trillions
So governments stepped in, injecting trillions of dollars of liquidity and stimulus money into the world economy. And they said that Wall Street would have to change its ways. In return for government support, banks would have to accept new regulations that put a stop to their excessive risk-taking.
But with the worst past, complacency quickly returned to board rooms. Within weeks of being lambasted for paying huge bonuses to the very individuals who induced this crisis, the banks were paying yet more big bonuses. So this week, US President Barack Obama travelled to Wall Street to give a speech aimed at putting his financial-reform agenda back on track.
Regulatory movement has come slowly partly because the US president has been preoccupied with other matters - not least of which is his effort to push health-care reform through Congress. But in Washington and London, the strength of Wall Street and the City, respectively, is creating powerful counter-currents. 'Regulatory capture' of these capitals - whereby lobbying money and close connections between regulators and regulated create resistance to change - is most pronounced, owing to the importance of the financial sectors to the British and US economies.
In capitals like Paris and Berlin, governments are more keen to press ahead with regulation. But without London and Washington coming on board, the change wouldn't amount to much. So great is the strength of the financial sectors of these countries that in the absence of a fresh crisis, major change seems unlikely. It is especially galling to many observers that the player which saved Wall Street from itself, the US government, now is struggling to impose its will.
For the time being, calm has returned to the world's financial markets. Credit-lines are open, interest rates are low, stock markets are rallying, and investors are happy to lend governments they need to support economic recovery.
Is the worst past? Are the waters calm, in which case a new regulatory regime might not even be necessary? Or is this - as many still argue - just a breather before crisis conditions return.
No reason to repeat
Many analysts point to the fact that after the 1929 crash, markets rallied for a couple of years before resuming their downward slide. Of course, there is no reason why history needs to repeat itself. Still, this fact is a useful reminder that calm today doesn't have to mean calm tomorrow. At the moment, markets are pricing in a best-case scenario, in terms of rising growth and low inflation.
Even if the worst is past, markets may still be too optimistic. And if they resume sliding, the complacency of the banks will bring yet more anger.
John Rapley is president of the Caribbean Policy Research Institute (CaPRI), an independent research think tank affiliated with the University of the West Indies, Mona. Feedback may be sent to columns@gleanerjm.com.