The September 2008 crash one year later.

September 14, 2009

One year ago this week all hell broke loose on global financial markets when Lehman brothers went bankrupt, AIG insurance was bailed out and de facto taken over by the American government . Shortly after   all the major Wall Street investment banks had disappeared from Wall street, either bankrupt like Lehman, taken over like Merill-Lynch, bought for a song like Bear Stearns, the previous March or saved from bankruptcy by being bought up by former rivals   or by fleeing Wall Street for the safety of a regular banking as opposed to investment bank licence. The stock market in New York fell by over 800 points in one day as panic selling spread through the markets.

The bloodshed was amazing as was the gigantic size of the 700 billion bailout financed by the U.S.Fed and the American Treasury. People around the world were astounded by the speed and violence of the collapse.A state of shock gripped the popular imagination.

Fortunately global leaders in many countries reacted swiftly, particularly in the U.S. and boldly   pumped hundreds of billions of dollars into the global financial system and very gradually calm was restored. President Obama followed this up with a major program of almost 800 billion dollar stimulus in 2009.  

When we examine the situation today twelve months later we have reason for cautious optimism about how much in some respects   the situation has improved from the close to total collapse that had prevailed. Unemployment is much higher so we have to redouble efforts to reduce it.

Recessions always lead to a dramatic and typically long lasting rise in the rate of unemployment even as the economy recovers. Those who for years had denounced regulation, deficit finance, government enterprise and Keynesian economics had to eat their words as governments introduced as swiftly as possible the very policies they had turned their backs on and scorned for so many decades. Exactly as people like myself had predicted and counseled for so long these approaches worked to save the global economy from catastrophe.

We are not totally out of the woods yet but a recovery is under way and will grow stronger in the coming months. Many people resent the fact that the very firms which had brought about the crisis in the first place were bailed out with taxpayer funds. President Obama has vowed that it never be allowed to happen again.But without major regulatory reform that will not be so easy to bring about. Even with regulation   the risk of systemic failure will remain, albeit diminished.

Consideration ought to be given to a small tax on all speculative activities and derivative products whose revenues could be set aside for a rainy day fund to help governments in the future pay for the unemployment consequences of failed speculation.

Some have argued that they should have been allowed to fail or be nationalized.Others complained about socialism. But the facts are that had the government allowed them all to fail as they most definitely would have the damage would have been even more enormous than it was.

The crash of 2008 has now entered the history books.

The successful revival of Keynesian policy will do so as well. The voices of reaction and obsessive laissez-faire are not yet silent but their power to persuade has been greatly diminished for many years to come.