Did the 2008 Financial Crisis Change the World?
The financial crisis that culminated a decade ago with the bankruptcy of Lehman Brothers was a major shock to the world, by several measures the greatest since the end of World War II. Its ramifications have been complex, and it is still too early for a definitive assessment. Still, the ten-year anniversary provides an opportunity to take stock. The surprise is how limited the lasting impact appears to be, in the United States and arguably also in Asia. The only large economic region where the crisis has been unquestionably transformational is in Europe.
First, a bit of semantics. The expression “global financial crisis” has been widely used, but there really was no such thing. A North Atlantic financial crisis, encompassing the United States and Europe, started in 2007 and climaxed into outright panic from mid-September to mid-October 2008. In the rest of the world, there was no financial instability, but a severe if brief negative economic shock in late 2008 and early 2009. There and in the United States, the crisis was over by 2010. In the euro area, by contrast, it was amplified by fault lines in the regional monetary union’s incomplete policy architecture, and lasted considerably longer as a consequence, arguably until mid-2017. Only then was the last remaining significant pocket of euro-area financial system fragility eventually resolved, namely the Italian financial sector restructuring epitomized by the closure of two large banks and the public rescue of a third one.
Now for the durable consequences. In the United States, some analysts argue that the crisis paved the way for the illiberal, protectionist turn of the Republican Party and the Trump presidency, but this is highly debatable. An increasing body of social science research suggests that the drivers of the 2016 Trump victory had more to do with identity than economics, and responded to developments that predated the crisis. In this analysis, many white males in the Unites States feel their traditional collective social dominance increasingly under attack, from outside by the rise of China and the corresponding erosion of America’s global preeminence, and from inside by the increasing racial and gender diversity of U.S. society. Both these trends started long before 2008. The post-2008 “Great Recession” changed the lives of millions of Americans, but did not fundamentally alter the structures of America’s economy and society, in striking contrast to the Great Depression of the 1930s which ushered in a spectacular expansion of the economic role of the Federal Government and a radical transformation of the U.S. financial system. In comparison with the New Deal legislation, the Dodd-Frank Act of 2010 was an adjustment at the margin, and may still be at least partly reversed.
The structural consequences of the 2008 shock may last somewhat longer in China. The Chinese authorities’ response to the shock was a massive stimulus, mainly channeled through the banking system, which greatly expanded debt in the Chinese economy. Meanwhile, the debt challenge remains for China to reduce this leverage without compromising stability.
In Europe, however, crisis-induced changes have been profound and permanent. This was the first large-scale economic crisis since the introduction of the euro in the late 1990s, and it almost led to the monetary area’s breaking up, in 2011-12 when Italy and Spain came close to losing sovereign debt market access, and again during the Greek aftershock episode of 2015. While euro area leaders dithered for far too long, they eventually thrashed out a firm policy response in 2012 with the creation of a large common financial assistance fund, the European Stability Mechanism, and the pooling of banking-sector oversight from the national to the euro-area level, a complex project known as banking union which has now been operational for several years. This greater integration, in turn, was a key driver of the British government’s ill-fated decision to submit the United Kingdom’s EU membership to referendum in June 2016, resulting in the ongoing drama of Brexit. As a result, the European Union will never be the same again, no matter how these developments may further unfold.
From a global perspective, the crisis appears to have slowed the pace of cross-border trade and economic integration, but the more recent data suggest that this impact may have been temporary rather than permanent. If so, and on the whole, the world will have weathered the 2008 crisis rather well. But once again, it is still a bit too early to be certain.