Sat | Sep 22, 2018

Editorial | Lehman Brothers and lessons therefrom

Published:Friday | September 14, 2018 | 12:00 AM

We don't know if anyone in Jamaica remembers Gordon Brown, or, more important, has been listening to him this week. We should.

A decade ago, Mr Brown was Britain's Labour prime minister. Before that, he was Chancellor of the Exchequer, or finance minister. Both jobs would have given him insights into the subject on which he has been commenting.

Tomorrow will mark 10 years since Lehman Brothers, the big US investment bank, with US$600 billion in assets, formally filed for Chapter 11 protection under America's bankruptcy laws. That was the symbolic start to the global financial crisis, and the Great Recession, from which Jamaica has still not yet fully recovered.

We, in this regard, share Mr Brown's fear, expressed this week, that the world may be "sleepwalking into a future crisis", with neither political will nor strategy to address the problem should one occur.

"We are at the latter end of the economic cycle where people take greater risk,s and there is a problem in emerging markets," he told the British newspaper, The Telegraph. The problems of Turkey, Argentina, Brazil, and South Africa, among others, are well known and worrisome.

No one, however, knows where, or what, might trigger the next meltdown. But it makes sense to understand what ignited the last one; how the world went about fixing it; and what lessons are to be learnt therefrom. Last time, it was about inadequate and opaque regulatory arrangements, extreme risk-taking by banks and their peddling of instruments that few people, including themselves, really understood or could keep track of.

American banks provide mortgages, with abandon almost, to the most marginal borrowers, helping to create a bubble in the housing market. At the same time, they cut and carved, then packaged and repackaged the underlying debt into ever more esoteric instruments, some of which were ostensibly insured, using equally complicated credit default swaps (CDS).

The problem was that the bubble burst. When borrowers couldn't repay, the value of the underlying asset shrunk. Then insurers couldn't meet their obligations of their CDs. In this catastrophe, Lehman and others went bust, causing the wider American economy to falter. Then came the global contagion.

No one saw the crisis coming, despite the collapse, a year earlier, of the big UK mortgage lender Northern Rock, which required a PS37-billion bailout by the British government. More critically, bankers, regulators, and investors had learnt little from events a decade earlier in Japan, where similar over-investment in real estate and excessive risk-taking induced a collapse of the financial sector.

 

Nationalist solos

 

From a global perspective, given America's central role in global finance, Donald Trump's efforts at weakening post-2008 banking and consumer regulations increases the potential for being blindsided by future trouble. The greater problem, though, as Gordon Brown observes, is the retreat into 'nationalist solos', evidenced by President Trump, as well as the hard-rightists of Europe, who have kindled ideologies of populism and protectionism to the detriment of global consensus and cooperation. The latter was critical in confronting the crisis a decade ago.

Jamaica, in the circumstance, has to be aware of our susceptibility, as a small, open economy, to global economic contagion. Hopefully, we are past Audley Shaw's naivety of a decade ago when he thought America's oncoming recession would be good for Jamaica because it would lead to lower oil and commodity prices. We understood differently.

Since its experience with the financial sector crisis two decades ago and bolstered by post-Great Recession economic reforms, Jamaica has strengthened its regulatory environment. Those must be regularly reviewed, and, where necessary, enhanced. And as Gordon Brown urged, we must stay committed to multilateralism.