Lehman plus five

Has enough been done to prevent another crisis?

Sunday marked the fifth anniversary of the collapse of Lehman Brothers, which precipitated the financial crisis of 2008. Much has been attempted in response to the factors that were perceived to have led to the crisis. Five years on, it is worth thinking about how all these analyses and actions add up. Are the measures taken collectively and individually by the world's largest economies sufficient to both repair the damage done by the crisis of 2008 and prevent a recurrence?

Certainly, the strong collective response orchestrated by the G20 in 2008 -09 helped pull the global economy back from the brink. Massive infusions of liquidity by central banks and increased fiscal commitments by governments provided a Keynesian stimulus to a system on the verge of collapse. This was a significant recognition of the degree of global integration - only a credible co-ordinated response could have an impact. Further, the level of co-operation achieved in mitigating the crisis provided an opportunity to collectively address many structural issues also originating in greater global interconnectedness - such as a focus on reliable financial safety nets; efforts to standardise and strengthen accounting, reporting and prudential systems across countries; and harmonising regulatory frameworks to shut down opportunities for arbitrage by global financial companies. While progress has not been uniform, implementation of the Basel III norms, for example, represents a commitment to structurally de-risk the global financial system even though conditions remain somewhat uncertain.

However, even as co-ordination continues on these issues, it is evident that the very asymmetric patterns of recovery since 2009 have severely challenged the global solidarity that had emerged then. The emerging market economies, which seemed to recover very quickly, were quite critical of the risks to their stability as the developed economies struggled to deal with growth and indebtedness problems with massive infusions of liquidity. Now, it is this group that is struggling to maintain growth momentum and stability, problems that are being exacerbated by the rollback of liquidity in a recovering United States, in particular. As policy makers around the world struggle with the recent bout of turbulence, several illusions about the sustainability of growth and macroeconomic stability are clearly being shattered. India is a prominent, but by no means the only, member of the group of countries in which this is happening.

The bottom line is that, five years after the financial crisis precipitated, its trajectory is still unfolding. Global policy responses to it are apparently addressing the vulnerability that it exposed; but, equally, the differential performance of large economies over the past five years has raised questions about the long-term impacts of several measures taken in the immediate aftermath of the Lehman collapse. How this will affect global solidarity and whether what has been accomplished until now is enough to stave off another crisis are questions that persist even five years on.