Twelve years ago, I stood in front of a TV screen at the private equity firm I was working at and watched the financial world go into meltdown. Lehman Brothers had just collapsed, and the news ran rolling footage of the bank’s employees walking out of its offices in London looking dazed while carrying boxes full of their belongings. As the world crashed around us, it was unfathomable that things would not completely change forever. The system that had allowed such a breakdown would not be able to survive.
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But survive it did, despite the calamity that proved there was something fundamentally precarious about the US and European economies. Lehman Brothers filed for chapter 11 bankruptcy in the US on 15 September 2008. It is still the largest bankruptcy filing in US history and precipitated the largest one day drop in the Dow Jones Industrial Average since the September 11 attacks. Lehman’s collapse was the culmination of a crisis that had been rippling through the financial sector for many months, triggered by an increase in default rates in the American subprime home mortgage sector.
The bubble burst for many reasons, but the primary culprits were lax regulation, reckless lending to increase market share, and out-of-date regulation that did not keep up with the securitisation of mortgages. The regulatory environment was crafted by free market ideologues who believed in minimal state interference.
The near collapse of the global financial system was brought about by these laissez-faire economics in combination with other policies designed to encourage home ownership among the less well-off and a decline in house prices in the US, which began in 2006. A report by the US Senate concluded that the crisis was due to "high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street".
Minimise then catastrophise
Like all disasters, in hindsight it is clear what went wrong. The faith in the ability of all these loosely regulated financial institutions to behave reasonably was underpinned by the belief that excessive financial liberalisation would work because the markets are efficient. To this day, this view still has not changed. A host of sweeping regulatory measures were passed in the US and Europe, ones which left banks better capitalised, less able to be exposed to high levels or risk, and subject to healthy internal controls. But these reforms stopped short of breaking up the gargantuan institutions, which render financial markets vulnerable to shocks if they are compromised.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis (and a Republican who oversaw the Troubled Asset Relief Program [TARP] that was a main component of the US government’s response to the financial crisis), stressed the urgency of breaking up banks because post-financial crisis reforms did not go far enough. He also stressed that the time to do it was now, when things were stable, unless we are “willing to tolerate a crisis every 100 years”. Until the banks are broken up, the government is in the position of constantly ensuring that they are well capitalised because the economy would not be able to sustain the shock if they fail. In the years since he made that assertion, the Trump administration has been on the opposite path, allowing banks to claw back some of the freedoms they had before the crisis.
That makes the 2008 financial crisis a prime example of the persistence of human behaviour to initially minimise and fail to grasp the full scale of an approaching problem, and then apply solutions that are merely short-term stabilisers, not prophylactics.
During the containment phase, the disease is already spreading, which forces regulators’ hands finally into the suppression phase
We are seeing the exact same thing unfold with the coronavirus pandemic.
First comes complacency – the belief that certain systemic weaknesses had been left in the past. The Great Depression of 1929 and the financial crisis in 2008 were both fundamentally caused by the same thing – too much debt in asset markets. The Spanish flu and coronavirus pandemics were both allowed to spread because of the same blunder – failure to act early and decisively. Efforts in the US to learn from outbreaks as recent as the bird flu 15 years ago were still not part of the official toolkit when the coronavirus pandemic hit.
While financial and health crises are developing, it’s easy to succumb to an initial impulse to “contain”. During the containment phase, the disease is already spreading, which forces regulators’ hands finally into the suppression phase. By then it is too late. In the period leading up to the financial crash, there were several efforts by failing financial institutions to extend their lives.
In its final months, Lehman Brothers attempted to stave off collapse by engaging in increasingly desperate and ultimately unsuccessful talks to sell all or part of the company to several bidders, such as Barclays Bank. The Federal Reserve Bank of New York itself called a meeting with other Wall Street heads to try and find a path to liquidate Lehman’s assets and prevent the consequent domino effect. These efforts took place over a period of eight months, ultimately failing with Lehman’s collapse in September of 2008.
The same can be seen as country after country stalled and then scrambled in response to the virus, first minimising and then catastrophising. The British government initially said there was no need to apply any measure more serious than social distancing, thinking it could somehow avoid Italy’s fate. A week later, it was dragged to reality and shut down the country. The US followed a similar pattern. Trump first trivialised the issue and told the public that it was only a small number of cases with a high recovery rate. His administration then tried to catch up for lost time by declaring a state of national emergency.
The risk of history repeating itself
This reluctance to take action until absolutely forced also applies to solutions. After the financial crisis, governments bailed out the banking sector despite reforms. “Too big to fail” was the mantra that justified the impunity. It implied that, logically, banks should have failed, but could not be allowed to.
In some cases, money injected into the banking sector in the US (either from taxpayer money or quantitative easing, which aimed to make funds available for consumer loans and mortgages) was directed abroad for investment into high-growth emerging markets. Regulatory reform established some wide-reaching technical changes but left the original infrastructure intact, and the threat of another crisis ever present. As social scientist and anthropologist Joris Luyendijk put it: “Institutions that are too big to fail are too big to exist.”
The risk is that the same patterns are repeated in the wake of the coronavirus pandemic in the US and western Europe. One of the reasons the virus has been difficult to contain is because there is no public war chest of funds available that can finance sufficient, widespread testing. The New York Times correctly points out that testing on a large scale then identifying and isolating the network of infected people “is the only way to fully break the chains of transmission”.
One of the reasons the virus has been difficult to contain is because there is no public war chest of funds available
It was the main reason South Korea’s response was more successful than other countries. As early as January, South Korean officials met with medical companies and instructed them to produce test kits for mass testing, which were then rolled out across hundreds of pop-up testing sites.
The slow rollout of testing in the US – a country where there are 30 million uninsured and 44 million underinsured, and no readily unfolded public healthcare crisis infrastructure – has meant that potentially large numbers of people did not present themselves with symptoms because it costs between $500-$1,000 just to get tested for the virus. A hospital stay amounts to tens of thousands of dollars. Slow plans to roll out free testing expose a major flaw in a national private healthcare system – you cannot barricade the insured from the diseases of the uninsured.
The same goes for not enshrining sick pay for everyone employed, even on a casual basis. Sick people who will lose income by not showing up for work are then more likely to show up for work, infecting others as a result. The concept of a universal basic income, a standard amount of money that everyone receives regardless of whether they work or not, was one that was already gaining popularity before the virus hit. It would have helped containment in the early days of the spread by providing reassurance to workers that they would not lose all income if they lost their jobs and have removed the incentive to go back to work earlier than is wise. There are already calls for universal income to become law after the crisis is over.
Fundamental change, not short-term solutions
It is likely that some measures will be taken to reform labour and healthcare systems. But financial meltdowns and pandemics are such rare events that they do not pose permanent threats, despite the devastation they cause. That makes it very likely that, whatever those measures entail, they will not bring truly fundamental and systemic change. It is not inevitable that we are doomed to repeat these mistakes.
The way forward is to push for infrastructural reforms, such as universal basic income, funding and establishing an international first response pandemic organisation while the urgency is high. That involves both implementing short-term measures and using the momentum of the crisis to rethink how our world is not prepared to deal with such shocks. The effect of a pandemic does not end when it’s over – it casts a long shadow both economically and politically. It is a crisis, but one that has forced the world to realise how interconnected we are.
No single event has joined up and replicated our experiences all over the world in such a way that we are able to share, and see, how we are all coping. This is a powerful powder keg of solidarity, which gives us the highest chance of working together and ensuring that when this happens again, we will not be caught off-guard. It is imperative that we do two things in parallel: firefight the immediate impact of the pandemic and leverage the pain to prepare for the next disaster before our current predicament becomes a distant memory. Time is of the essence.