5 years on

On the 9th October 2007 the totem pole of capitalism, the S&P 500, peaked at 1,565. Last night it closed at 1,441. So, five years into the crisis, where are we in terms of clearing up the banking crisis?

There’s good news in the US. We have commented on the initial driver of the crisis in the world’s largest economy – the boom and bust of the housing market – on many occasions. Recently, we’ve noted that we’re beginning to see improvement here. This is an important sign that the US is moving on from the financial crisis. Although unemployment remains stubbornly high, it is moving in the right direction and the financial system is looking sound once again. The government’s combination of supportive measures – such as taking equity stakes in banks – and allowing some pain to occur – in the case of Lehman Brothers and housing repossessions – seems to have been largely successful.

The UK economy and financial system have not yet returned to the same state of health and the government still holds legacy stakes in some of the bigger banks. It appears that the problems the country faced five years ago remain, even though they are not as severe as they were. These difficulties are highlighted by today’s Financial Times where the two headline stories relate to the FSA easing bank rules further to encourage lending and help the financial system, and the governor of the Bank of England’s speech at my old university last night where he talked about giving central banks greater flexibility with their inflation targets to help avoid financial crises.

Europe, the third major western financial system, faces its own particular problems. Five years on from the peak we had the strange situation of the German chancellor being taken in a convoy of cars through Athens past illegal demonstrators to try to sort out the continued funding of the Greek state. We have written many times about the questionable sustainability of a politically motivated single currency and the funding of states, individuals and corporates remains difficult in many parts of this system.

We believe financial systems need to be mended by a combination of government intervention and private sector responsibility. The US has led the way in this regard and the UK is trailing, hopefully successfully, behind it. However in Europe the problems have been exacerbated by the single currency regime, where the need for political intervention to solve the problem is relatively large versus the need for private sector adjustments. We are still concerned about whether the necessary political intervention will occur. So, five years on, it appears that the western world is still coming out of the credit crisis, albeit at different speeds and with different levels of success.