The Global Economic Crisis is Far From Over

Recently, The United States marked the fourth anniversary to the collapse of Lehman Brothers-Investment Bank, which filed for bankruptcy back in September 2008. In order to properly understand the sequence of events leading to the collapse of Lehman Brothers, as well as the massive impact this scenario had on the global economic system, we should take a short trip back in time towards the middle of the 19th century – the days in which the most prominent investment banks were first established.

Barry Ben-Zeev

Many of them, including Lehman Brothers and Goldman-Sachs were formed in an era when Jews were not allowed to work in the banking system in the United States, so they turned to an alternative path – forming investment banks that deal primarily with securities.

The Glass-Steagall Act

In 1933, the Glass – Steagall act provided for a complete separation between the activities of the investment banks dealing mainly with securities, and the usual commercial banking oriented activities. For example, the amendment forced the JP Morgan Bank to split its activities into two institutions Morgan Stanley Investment Bank and J P Morgan Bank.

The Glass-Steagall act was eliminated by Gramm Leach-Bililey act back in 1999 during the Clinton administration.

The immediate results were clear: commercial banks in fact received a permission to engage in securities services and trading, and investment banks were allowed to engage in commercial banking activities.

The previously maintained separation had been canceled and the new connections that were subsequently formed, led to an increased risk that both, large commercial banks and investment banks in the United States have taken upon themselves. Moreover, the policy put forward by the Chairman of the Federal Reserve at the time, Alan Greenspan, was very liberal and permissive with regard to the supervision of the banking system. It is therefore not surprising that Greenspan’s decisions had been frequently mentioned when discussing the reasons behind the current crisis.

The Neo-Liberal Theory has collapsed

Apart from the repeal of the Glass-Steagall act, we have also witnessed a real-estate bubble beginning to form at the beginning of the new millennium, while at the same time   leverage of the balance sheets of the investment banks swelled to unprecedented proportions. One of the reasons behind this scenario was that the BASEL 2 rules which were applied to commercial banks – did not apply to investment houses.

And here is where we return to 2008. Goldman-Sachs and Lehman Brothers were bitter rivals right from the moment they opened their doors to the public. When the U.S. administration, led by George W. Bush (as well as former U.S. Treasury Secretary Henry Paulson who also served as chairman and CEO of Goldman – Sachs) decided not to help Lehman Brothers and allow them to file for bankruptcy, the administration failed to take into account the huge domino effect we all witnessed later on.

The aforementioned domino effect was possible due to a mutual exposure of a massive scale between Lehman Brothers and a vast variety of business entities such as insurance companies, banks and investment houses, using credit derivatives and mortgage backed bonds derivatives in the institutional market.

Lehman’s chapter 11 bankruptcy obviously shocked the global financial community, and shortly after, the administration had to face yet another crucial decision – whether to save  AIG insurance company from a similar faith? This time, it was clear however that the potential damage that might be caused by a possible bankruptcy of such a large business entity (which also enjoyed the maximum AAA rating), would cause the global economy to go decades back.

The government intervention and rescue of AIG, demonstrated that the Republican theory according to which the administration should refrain from interfering with the market, because it can take care of himself – has proven itself wrong. The biggest paradox in this entire story is that precisely the same neo-liberal capitalists who refused to believe in regulation and government intervention in the market, were eventually the ones that had to confirm and go forward with a government intervention of an unprecedented scale.

Nowadays, the leaders of the world’s leading economies fear a similar crisis in their own countries. Hence, they exercise caution. It is important to remember that the crisis is not completely behind us, because at this time we are only experiencing the “after shock” stage. For example, the constantly worsening EURO and banking crisis taking place in Europe is actually a direct continuation of the 2008 crisis. Many European leaders are currently promoting monetary policies they themselves do not necessarily believe in, in order to save the EURO from a fatal collapse at any price.

In conclusion we can say that it seems as if the world has not yet found its place between capitalism and communism. At this point, the world is in a search for an interim formula that can bridge the gap between these two paradigms. Communism collapsed! The non-interventional Ideology has also collapsed! This is yet another effect of the 2008 economic crisis, which will continue to be felt around the world for a long period of time.

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