Outside In | It’s time to brace for a second ‘lost decade’ as the post-Lehman recession drags on

From last week’s G20 in Shanghai, to our APEC Business Advisory Council meetings in San Francisco, the messages from economists and the world’s economic policymakers alike seem unanimous: that the world’s economy has taken a dangerous turn for the worse.

I would not dare to disagree – but I am still perplexed at the disingenuity and denial at the heart of efforts to explain why we are in our current pickle – in particular in the US where the terrible post-2008 recessionary journey began.

As if we need to be reminded, we are now close to eight years into the Great Recession that has followed the Lehman crash in 2008, and are soon formally likely to acknowledge a “lost decade”. And unless policymakers in places like the US begin properly to admit true causes, I fear we may be into a second decade before we can see confident evidence of recovery.

For me, the analytical problem starts right back in 2008, when Lehman’s collapse threw the global economy into cardiac arrest. After recognising that the immediate crisis had been caused by the crazy collateralization of huge volumes of sub-prime mortgage loans, Ben Bernanke laid the foundations for unprecedented Quantitive Easing in order to bail out the banking institutions that had created the crisis.

The assumption seemed to be that the crisis that engulfed us was a product of panic, and that if enough money was flushed into the economy, and interest rates lowered far enough, then what was essentially a psychological crisis could be resolved, allowing the pre-2008 party to resume.

From my contrarian perspective, this was profoundly wrong: the message from 2008 was that a significant proportion of the “growth” recorded in our GDP numbers since the mid-1990s had not been growth at all. Rather, it had been an orgy of interbank collateralization activity which had given the appearance of growth, had massively enriched those in the financial sector that were driving the orgy, and which had little to do with any traditional banking role of funding real growth in real companies in the real economy. It had been a bankers’ Ponzi scheme of gigantic proportions. In short, much of the giddy growth and apparent wealth we had recorded since the early 1990s had never occurred in the first place, and at some point would need to be written down. Many in the US even today seem reluctant to acknowledge this.

With the global economy in cardiac arrest, quantitative easing was used as life support. The assumption then appeared to be that if they dealt with the panic, and recovery would occur naturally. They seemed not to recognise that life support systems can only buy you time, but they do nothing to deal with the root cause of the cardiac arrest.