Photograph: Maja Smiejkowska/Reuters
Fifteen years ago this week the French bank BNP Paribas announced it was closing three of its hedge funds heavily exposed to the US sub-prime mortgage market.
On the day little heed was paid to the news, but it quickly became apparent that not just BNP Paribas but just about every big financial institution was up to its neck in securities linked to underperforming American home loans. In early August 2007, BNP was simply the pebble that marked the coming avalanche.
Another August, another crisis. Memories of 2007 were rekindled by Andrew Bailey last week when the governor of the Bank of England announced that interest rates were being raised just as the UK economy is expected to hit the wall.
Leaving the pandemic-induced collapse in activity apart, the last “proper” global recession was the global financial crisis of 2007-09, a period when only massive government bailouts prevented the banking system from collapsing.
The Bank of England thinks the recession it is expecting will last as long – five quarters – as the downturn of 2008-09 but be less severe. Output as measured by gross domestic product is forecast to drop by just over 2% compared to almost 6% in the slump of the late 2000s.
The other piece of good news is that – as far as it is possible to tell – the global banking system is better placed to withstand losses than it was 15 years ago. Regulations are tighter, capital buffers larger. That said, banks were also thought to be in fine fettle in mid-2007.
Yet, there are other ways in which the two crises differ which should be a cause for concern.
For a start, the previous crisis followed a prolonged 15-year upswing in the global economy. Growth was strong and living standards rose steadily. Cheap imported goods from China and other emerging market economies kept inflation low.
Since then, growth has been anaemic, living standards have flatlined and inflation is now running at its highest level in four decades. Warning signs of trouble ahead have long been flashing.
In terms of having policy room to deal with a crisis, finance ministries and central banks were much better placed in 2007. Public debt levels were low, official interest rates were around 4-5%, quantitative easing was a thing of the future. Governments felt they had scope to spend more and tax less, while central banks had the leeway to cut borrowing costs aggressively and embark on massive bond-buying QE programmes.
Today the US Federal Reserve, the European Central Bank and the Bank of England are all raising interest rates even though the American economy has shrunk for the past two quarters and both the eurozone and UK economies are heading for recession. Were it not for high inflation rates, all three central banks would be cutting rates not raising them. The aim of central banking is to act in a counter-cyclical fashion: to raise rates during a boom and cut them in a slump. Far from mitigating recessionary pressures, the Fed, the ECB and the Bank of England are adding to them.
Faced with central banks determined to reassert their anti-inflation credentials, finance ministries face a choice: stick to their deficit-reduction plans or seek to ease the pain of recession by spending more or taxing less. If they have any sense, they will prefer the latter option.
A second notable difference between 2009 and today is the breakdown of international cooperation. When Gordon Brown hosted a summit meeting of G20 leaders in London in April that year it seemed a new era was dawning in which developed economies – such as the US, Germany and Japan – and leading emerging market countries, such as China, Brazil, India and Russia – would act together to reflate the global economy.
G20 unity frayed as the world economy stabilised but has now disappeared altogether. Russia’s invasion of Ukraine has prompted economic sanctions from the west and the Kremlin has responded in kind by cutting off gas supplies and pushing up energy costs. Vladimir Putin will have seen the Bank of England’s decision to raise interest rates despite the UK’s looming recession as a small triumph in the economic war.
If Ukraine is one example of a de-globalising world, then Taiwan is another. The already poor relations between Washington and Beijing have deteriorated further after the visit to Taiwan by the US House speaker, Nancy Pelosi, and the economic, military and diplomatic measures China has announced in response.
In 2009, China was seen more as an economic partner than a geopolitical threat. It had been admitted to the World Trade Organization in 2001 and G7 central bankers – like the then governor of the Bank of England Mervyn King – said there could be no real solution to the big global problems without Beijing at the table.
The mood now is different. The supply chain chaos caused by Covid-19 created demands for greater self-sufficiency; China’s threat to Taiwan – the world’s biggest producer of semiconductors – will accelerate that trend. No country is going to want to risk being cut off from supplies of components that are vital to so many products.
De-globalisation might be no bad thing for the planet if it means shorter, less-carbon heavy supply chains. Not though, if it means tearing up global agreements on cutting carbon emissions. Worryingly, one area where China says it will cease to cooperate with the US as a result of Pelosi’s visit is on climate change.
The crisis of 2007-09 briefly brought countries together. The crisis of 2020-22 has sown division and exposed some painful truths. Real recovery from 2009 never happened and the world is rudderless at a time when it is getting hotter, poorer and angrier.
