The one thing banks learned in the 10 years after Lehman is that fraud will be bailed out and that you can even make it larger than 2008

Saturday, September 15, 2018
By Paul Martin

As we come up on the 10 year anniversary of the now infamous ‘Lehman Event’ which sent shockwaves around the world and nearly brought the global financial system to collapse, there is one thing the banks learned from that crisis which set in motion the course and direction for finance today.

All fraud will be bailed out, and thanks to the Fed, it can be made even larger.

Over the past decade, the banking and financial systems have solidified their paradigm of financialization, where investing in paper assets over physical ones has been much more profitable to those at the top. And all one has to do is look at the past few years where borrowing by banks and corporations has resulted in most of that credit being funneled into stock buybacks rather than into capital investment or expenditures.

And despite the so-called framework of reforms instituted by Congress (Dodd-Frank) in the aftermath of Lehman and the 2008 Financial Crisis, nearly all of these safeguards have long since been rescinded, with over leveraging of debt, lowering of borrowing standards, and multiplication of derivative buying now being far greater than what it was a decade ago.

The collapse of Lehman Brothers on 15 September (the bankruptcy was announced late Sunday on the 14th) is the culmination point of the GFC. It is also the culmination point on our journey to a new global crisis. The failure of Lehman shocked the central bankers and political leaders so that they retained to a full conservation mode. Examples of banking crises in the Nordics, where the failed banks were wound down and the financial sector was restructured, were forgotten. Even though better capitalized, the banks, dubbed “too big to fail” in 2008, are even larger now in the US. The European banking sector is undercapitalized and full of zombies and it’s kept going only by the liquidity support of the European Central Bank. The economy of China is facing a reckoning which can only be described as the biggest debt bubble ever. The banking regulation has been likely to push more banking into the “shadows”.

It is almost certain that the creators of the Federal Reserve, or other major central banks for that matter, could not have envisaged that at some point they would provide funding with near zero or even negative interest rates for a decade and that they would end up owning a large chunk of the capital market. Still, it’s where we stand. The central bankers, in an exception of the Fed, are still in a full stimulus mode.

Alas, the imbalances that plagued the world economy before 2008, are even larger now. Debt in the world economy is considerable higher and the extended use unorthodox policies of the central banks have created a platform for speculation of an unprecedented scale. The ‘lost decade’ of Japan shows very clearly that policies, which save everybody and provide the banks with almost endless liquidity, lead to a ‘zombified’ banking and business sectors unable to grow and are in a constant risk of failure. Now, this is a global issue.

GFC was not born out of void. The imbalances and risks were visible before the crisis hit. It was born out of a combination of speculation, regulatory failures, moral hazard and incentives to get into debt. Very little has been done to fix these issues and, in some cases, even the opposite has materialized. This policy of “more of the same” has the potential to bring down the global economy in the future. – GNS Economics

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