The “F word” is back. Back in the financial markets, back in the conclaves of central bank governors, back among the manufacturers and the high-street retailers. The four-letter word is fear.
Earlier this year, few imagined that we would be approaching the third anniversary of Lehman Brothers’ collapse on Sept. 15 with such a sense of unease. The belief was that economic recovery was well enough embedded for central banks to start raising interest rates and for finance ministries to crack on with the job of reducing budget deficits.
The mood today is different. US Federal Reserve Chairman Ben Bernanke has said the US central bank would discuss possible ways to stimulate growth when it meets next month. The Bank of England appears to be heading in a similar direction. There is anxiety at the IMF that blanket austerity will tip fragile Western economies back into recession. Concerns are once again being expressed about the health of the banks, about the US’ national debt and, above all, about whether the eurozone can survive its current crisis intact.
Standard Chartered and HSBC were the two UK-based banks to bounce back from the first financial crisis, partly because their global reach allowed them to benefit from Asia’s rapid recovery.
This, though, is how the chief economists at the two banks see things: “America is drowning in debt, Europe is imploding as problems in the euro area intensify, while, in contrast, Asia’s economy is cooling, as growth rates moderate from a strong to a solid pace,” Gerard Lyons at Standard Chartered says.
Putting the possibility of a US recession as high as 2-1 and of an eventual euro crisis as high as 50-50, Lyons adds: “It should be little surprise that there is increased uncertainty and heightened risk aversion across financial markets.”
Stephen King at HSBC describes the world as a “frozen economic tundra,” with the power of central bankers to influence events on the wane.
“After the Great Recession, there has sadly been no ‘Great Recovery,’” he says.
He too is unsurprised that investors are rushing for the exit, given the bickering between Democrats and Republicans on how to tackle the US budget problems and the inability of Europe’s politicians to sort out the euro.
This is not how it was supposed to be. It took time for policymakers to comprehend the enormity of the shock administered to the global economy by the collapse of the US housing market, but once the penny dropped in the autumn of 2008, they were at pains to show that lessons had been learned from the 1930s. Banks were recapitalized to prevent them from going bust, interest rates were slashed, money was created, public spending was increased.
To widespread relief, there was no second Great Depression. Unemployment in the US rose to almost 10 percent, but not the 25 percent seen in the 1930s. Industrial production and international trade started to pick up in the spring of 2009. By and large, countries resisted the temptations of protectionism.
Over time, however, it has become clear that the recovery has been both slow and costly. If it is aborted, the risk is that the global economy will return to where this all started in 2007, with another crisis in the banking system.
The recovery has been slow because the crisis was caused by over-indebtedness among private individuals and banks. Both, in the jargon of the markets, were over-leveraged: They had borrowed an awful lot of money, in other words, in anticipation of asset prices going up and up. When the bubbles burst, households and banks realized how exposed they were. As a result, they started to pay off their debts and even when the cost of borrowing came down to virtually zero, the demand for credit remained weak.