Interview with Jean-Laurent Bonnafé, Director and Chief Executive Officer of BNP Paribas - by...
7 days of Economics: Ten years after, The uncomfortable new normal
- Ten years after the collapse of Lehman Brothers, assessing to what extent major economies have fully recovered from the
ensuing global financial crisis and the Great Recession very much depends on the perspective which is chosen
- A mixed picture emerges: in most countries per capita real GDP is higher than before the crisis
- But public sector debt hasn’t declined and growth has been slow, despite the expansionary policy stance
- Policy rates are still (very) low and central bank balance
sheets are vastly bigger
- Policy leeway hasn’t been restored which implies that thinking about how to address the next
downturn should be high on the agenda
Former Fed chairman Ben Bernanke, in his The courage to act – a memoir of a crisis and its aftermath, uses ‘The dam breaks’ as the title of the chapter describing the fruitless efforts to find a solution for Lehman Brothers which led to the company filing for bankruptcy at 1.45 a.m. EST on Monday 15 September 2008. The metaphor in the title reminds us to what extent Lehman’s collapse was an accelerator of a crisis which had been developing for a long time already. An accelerator which made it increasingly difficult to stop the spiral. To quote Bernanke: “It was a terrible, almost surreal moment. We were staring into the abyss.” Tellingly, Tim Geithner, who was running the Federal Reserve of New York at the time before becoming Treasury Secretary under Obama, starts his memoirs, aptly called Stress Test, with the struggle to stop the decline of the economy early on in 2009, rather than focussing on Lehman.
Assessing ten years later, to what extent major economies have
recovered from the global financial crisis and the Great Recession is
important. After all, the US expansion, which started in July 2009 is by
historical standards of a respectable age so evaluating where we are ten
years later helps in gauging the resilience to a new downturn. However,
this exercise is also difficult because it very much depends on the
perspective chosen. Focussing on GDP, the labour market, balance
sheets, asset prices, developing economies and policy leeway, what
emerges is a mixed picture. Per capita real GDP is higher than before the
crisis but growth has been slow despite the expansionary policy stance. In
some countries, the unemployment rate, in particular long-term
unemployment, remains above pre-crisis levels. Several developing
economies have seen a significant increase in corporate debt in foreign
currency. Public sector debt in advanced economies hasn’t declined,
despite sustained growth and sharply declining interest rates. In
conjunction with still (very) low policy rates and vastly bigger central bank
balance sheets, this implies that policy leeway hasn’t been restored. It
means that in the ‘new normal’ of, for structural reasons, slower potential
GDP growth and lower interest rates than before, discussing how to
address the next downturn should be high on the agenda.
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