This summer will mark five years since 2008, the year of both the first flush of the global financial crisis, and of the peak of the combined food and fuel spike.
As David Steven and I have observed in various papers, the last decade was bookended by shocks – 9/11 at one end, and these two at the other. And while the resource spike and the credit crunch lacked the visual vividness of September 11, they were arguably just as significant in the way that they shook assumptions about the stability or direction of globalisation.
But it’s also intesting to look back now at that strange year, and reflect on how many of the initial fears, hopes and assumptions about the twin crises have been proved wrong with the benefit of five years’ hindsight – as well as various shifts that have taken place since 2008 that no-one foresaw at the time. Here are ten things that lots of us (well, I, anyway) got wrong or missed altogether back in 2008 – adapted from a futures presentation I gave to Oxfam last week.
Great post from Nils Gilman on Small Precautions:
In 2006 RAND staged a wargame to think through the implications of a nuclear terorr incident. They created a specific scenario – a tactical nuclear device being detonated by a terrorist organization in the Long Beach harbor – and then staged a role-play to determine how key stakeholders would react and work together. The experience must have been incredible, because even the write-up is riveting. When I revisited this text today, however, what struck me with particular force was RAND’s assessment (this is in 2006, remember) of what the longer-term economic implications of such an event would be:
“The attack is likely to have dramatic economic consequences well beyond the Los Angeles area:
- Many loans and mortgages in Southern California might default.
- Some of the nation’s largest insurance companies might go bankrupt.
- Investors in some of the largest ﬁnancial markets might be unable to meet contract obligations for futures and derivatives.
“While exact outcomes are diﬃcult to predict, these hypothetical consequences suggest alarming vulnerabilities. Restoring normalcy to economic relations would be daunting, as would meeting the sweeping demands to compensate all of the losses.”
As some of you will no doubt observe, all of these consequences in fact did come to pass just two years after this report was issued – as a result of the Lehman Brothers default, the consequent collapse of AIG, and the cascade effects which are still creating malign reverberations throughout the global economy, above all in the Eurozone.
Usually when people say that something would be “like a nuclear bomb going off” they are exaggerating; but in the case of the Lehman default, it is accurate.
– With the UK election campaign under way in all but name, the FT’s Martin Wolf explains why he doesn’t fear a hung parliament – arguing that it might be just what’s needed to achieve fiscal restraint. “So poorly has single-party despotism governed the UK”, he suggests, “that I would welcome a coalition or, at worst, a minority government.” The Institute for Government, meanwhile answers all your hung parliament-related questions here, placing things in international and historical perspective.
– The Cable highlights the Obama administration’s key people on Iran. Richard Haass, meanwhile, suggests that the West’s strategy must do more to help the Iranian people – with the US and EU acting to “energise and lend rhetorical support to the opposition, helping it to communicate with the outside world”.
– Elsewhere, Der Spiegel profiles the five main risks to the Euro – namely Greece, Portugal, Spain, Ireland, and Italy – assessing their economic woes. Charlemagne, meanwhile, interviews Cathy Ashton. And The Economist also has news that Dominique Strauss-Khan, current IMF head, is considering running against Nicolas Sarkozy in France’s 2012 presidential elections.
– Finally, this week saw a group of British Academy experts writing to the Queen about the failure to foresee the credit crunch – a follow-up to a question from the monarch at the LSE last summer. Their suggestion: the need for a better-coordinated government horizon scanning capacity – something that could take the form of a monthly economics briefing to the Queen, which would serve – as Professor Peter Hennessy has commented – to “sharpen minds” of officials. Read the full letter here (pdf).
– With the anniversary of Lehman Brother’s demise, the FT recalls the events of that fateful weekend last September. The NYT has reflections of three former Lehman employees, while a Guardian roundtable asks what lessons, if any, we’ve learned from the bank’s fall. Niall Ferguson, meanwhile, rails against those who argue “if only Lehman had been saved”. He suggests:
Like the executed British admiral in Voltaire’s famous phrase, Lehman had to die pour encourager les autres – to convince the other banks that they needed injections of public capital, and to convince the legislature to approve them.
– Sticking with matters financial and economic, Der Spiegel has an interview with the head of the IMF, Dominique Strauss-Kahn, on the Fund’s actions during the crisis and the potential for a new role for the institution going forward. Former MPC member, David Blanchflower, meanwhile, offers a telling insight into the inner workings of the Bank of England’s decision-making as financial meltdown ensued.
– Elsewhere, the WSJ reports on President Sarkozy’s call to broaden indicators of economic performance and social progress beyond traditional GDP, following the findings of the Stiglitz Commission. Richard Layard, expert on the economics of happiness, offers his take here, arguing that “[w]e desparately need a social norm in which the good of others figures more prominently in our personal goals”.
– Wolfgang Münchau, meanwhile, assesses the implications of an Irish “No” vote in the upcoming referendum on the Lisbon Treaty. “There is an intrinsic problem for the Yes campaign in Ireland”, he suggests, “which is that the core of the treaty was negotiated seven years ago. This is a pre-crisis treaty for a post-crisis world… If we had to reinvent the treaty from scratch, we would probably produce a very different text”.
– Finally, last week saw the German Marshall Fund of the US publish its Transatlantic Trends survey for 2009. Unsurprisingly, a majority of Europeans (77%) support Barack Obama’s foreign policy compared to the 2008 finding for George W. Bush (19%); though the “Obama bounce” was less keenly felt in Central and Eastern Europe than Western Europe. A multitude of other interesting stats – on attitudes to Russia, Afghanistan, Iran, the economic crisis, and climate change – can be found here (pdf).
The Kremlin has been shaken by the credit crunch, which hit the Russian stock exchange worse than any other exchange in 2008, pushing it down around 65%. The fall in the oil price threatens to push the economy into recession this year, and Russian oligarchs have seen their fortunes halve.
However, the country is still in a relatively strong position compared to its neighbours, and there are signs it is looking to capitalise on this to expand its economic influence in the region.
For the last few weeks, the country’s largest bank, state-owned Sberbank, has been in talks to buy the troubled Bank Turam Alem in Kazakhstan, which had to be nationalised by the Kazakh government earlier this year. It’s the biggest bank in Kazakhstan, and would give the Russian state enormous economic leverage within the country, at a time when Kazakhstan is wondering whether to join the ruble or to set up a new central Asian regional currency.
In Kyrgyzstan, which has also been badly shaken by the economic crisis, Russia agreed a $2bn loan package and $150m ‘grant’ in February. A few weeks later, the government agreed to close down the US air base at Manas.
In Belarus, talks with the IMF have stalled, while Aleksander Lukashenko is seeking a further $2.7bn loan from the Kremlin on his visit to Moscow this week, to prop up the central bank’s reserves. There are also talks to sell one of the country’s biggest banks, BPS Bank, to Sberbank.
In Ukraine, PM Yulia Timoshenko is trying to get a $5bn 15-year loan from the Kremlin to cover the country’s budget deficit, much to the ire of the country’s president, Viktor Yushchenko, who compared the potential deal to the Molotov-Ribbentrop pact.
This was after Timoshenko’s government failed to meet the IMF’s targets for government spending cuts in February, leading to the suspension of the second tranche of the IMF’s $16bn loan package to the country.
No doubt the Kremlin will be telling both Ukraine and Belarus that if they want the emergency cash, they need to give Gazprom more control over the pipelines that take the EU’s gas through these countries.
In Hungary this month, where the economy is also in dissarry and the government desperately needs cash, Gazprom signed two important deals with MOL, whereby the Hungarian government agreed to finance the South Stream pipeline from Russia (which will be a competitor to the EU-approved Nabucco pipeline). Details of the deal are shady, but it may have been that the government got some short-term loan in return for supporting the project.