Fifteen years ago this week, French bank BNP Paribas announced the closure of three of its hedge funds with significant exposure to the US subprime mortgage market.
The day when little attention was paid to the news, but it quickly became clear that not only BNP Paribas, but just about every major financial institution was neck deep in headlines related to underperforming US home loans. . At the beginning of August 2007, BNP was only the pebble that marked the avalanche to come.
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 was expected to hit the wall.
Leaving aside the pandemic-induced slump in activity, the last “real” global recession was the global financial crisis of 2007-09, a period when only massive government bailouts kept the banking system from crashing. collapse.
The Bank of England thinks the recession it expects will last as long – five quarters – as the recession of 2008-09, but will be less severe. Output, as measured by gross domestic product, is expected to fall just over 2% from nearly 6% during the crisis of the late 2000s.
The other good news is that, as far as we can tell, the global banking system is better positioned to withstand losses than it was 15 years ago. Regulations are stricter, capital reserves larger. That said, banks were also considered healthy in mid-2007.
Yet there are other differences between the two crises that should be of concern.
For starters, the previous crisis followed a prolonged 15-year recovery in the global economy. Growth has been strong and the standard of living has risen steadily. Cheap goods imported from China and other emerging market economies kept inflation low.
Since then, growth has been sluggish, living standards have stagnated, and inflation is now at its highest level in four decades. The warning signs of trouble ahead have been flashing for a long time.
In terms of policy space 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 to 5%, quantitative easing was a thing of the future. Governments felt they had room to spend more and tax less, while central banks had room to aggressively cut borrowing costs and embark on massive QE programs of buying obligations.
Today, the US Federal Reserve, European Central Bank and Bank of England are all raising interest rates, even though the US economy has contracted over the past two quarters and economies in the zone euro and UK are heading into recession. Without high inflation rates, the three central banks would cut rates instead of raising them. The objective of the central bank is to act in a counter-cyclical manner: raise rates in times of boom and lower them in times of crisis. Far from alleviating the recessionary pressures, the Fed, the ECB and the Bank of England are adding to it.
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 the recession by spending more or taxing less. If they have any common sense, they will prefer the latter option.
A second notable difference between 2008 and today is the breakdown of international cooperation. When Gordon Brown hosted a summit meeting of G20 leaders in London in April of that year, it looked like a new era was beginning in which developed economies – such as the United States, Germany and Japan – and the main emerging countries, such as China, Brazil, India and Russia – would act together to revive the world economy.
G20 unity frayed as the global economy stabilised, but has now completely disappeared. Russia’s invasion of Ukraine provoked economic sanctions from the west, and the Kremlin responded by cutting gas supplies and increasing energy costs. Vladimir Putin will have seen the Bank of England’s decision to raise interest rates despite the looming recession in the UK as a small triumph in the economic war.
If Ukraine is an example of a de-globalized world, Taiwan is another. Already poor relations between Washington and Beijing deteriorated further after US President Nancy Pelosi’s visit to Taiwan and the economic, military and diplomatic measures announced by China in response.
In 2009, China was seen more as an economic partner than a geopolitical threat. He was admitted to the World Trade Organization in 2001 and G7 central bankers – like then Bank of England Governor Mervyn King – said there could be no real solution to the problems. major global issues without Beijing at the table.
The atmosphere is now different. The supply chain chaos caused by Covid-19 has created demands for greater self-sufficiency; China’s threat to Taiwan – the world’s largest producer of semiconductors – will accelerate this trend. No country would want to risk being cut off from the supply of vital components for so many products.
De-globalisation may not be a bad thing for the planet if it means shorter, lower-carbon supply chains. Not if, if that means tearing up global agreements on cutting carbon emissions. Worryingly, one area where China says it will stop cooperating with the United States following Pelosi’s visit is climate change.
The 2007-09 crisis brought countries together briefly. The 2020-22 crisis has been divisive and exposed some painful truths. The real recovery of 2009 never happened and the world is rudderless at a time when it is getting hotter, poorer and angrier.