We cannot move on. It is now eight years since Lehman Brothers went bankrupt, as I reminded readers last week. The flood of feedback proved, if there were any doubt, that the wounds from the 2008 financial crisis are still bleeding. It still arouses anger and confusion.
And the response to the crisis drags on. Interest rates were slashed in the immediate aftermath of the crisis, as central banks tried to rescue the situation, and investors fled for safety.
In many ways, they succeeded. Asset prices rebounded. In the US, share prices trebled from their low, and are still close to an all-time high. Banks are safer than they were eight years ago, they routinely face stiff fines for misbehaviour, and have a much wider capital buffer for use if crisis resurfaces.
The economy itself is far healthier. In the US, the jobs market is at or close to full employment. Inequality is higher, fanning anger, and almost everyone wishes that growth were faster. But the Great Financial Crisis of 2008 was not followed, as feared, by a second Great Depression. The Great Recession was bad but could have been far worse.
So why does anger and confusion persist? First, and reasonably, there is frustration largely on the part of those outside the markets and financial system that those guilty have not been brought to legal account. This in large part explains the continuing anger over the largely successful bailouts received by banks at the worst of the crisis.
There is a difference between bailing out banks and bailing out bankers. Rescuing banks in 2008 averted the real risk of a collapse of the payment system that would have made everyone suffer. Anyone who doubts this should look at what happened to the Greek economy when ATMs were briefly shut down during last year’s stand-off over a possible “Grexit” from the eurozone. It was not a risk worth taking.
This is no way implies that those bankers responsible should avoid criminal punishment once such a crisis has been safely averted. The sight of bankers going to prison would have served two useful purposes. First, it would have altered bankers’ behaviour in future. Second, justice would have been done and seen to be done.
This does not justify kangaroo courts or finding scapegoats. But the failure, particularly the US, to achieve legal closure can now be seen as a critical error.
The second big reason for anger afflicts those in the markets. Bond yields are unimaginably low. The shares of European banks, notably Deutsche Bank, are priced for a crisis. Central banks are still at panic stations, maintaining low rates once thought to be a passing policy to get past the crisis. They are doing this despite deep discomfort with rates so low.
Meanwhile, investors grow ever more alarmed by the distortions that low rates are causing to the allocation of capital. It has driven money to anything that pays a yield. Yet even if many investors are worried, the behaviour of the market collectively shows unmistakable fear of any return to “normal” higher rates.
Consider this week’s announcements from the Bank of Japan and the Federal Reserve. Japan provides the model for what low bond yields appear to signal. Activity dips, inflation drops and easy money cannot jolt things back to life.
The BoJ’s announcement of negative interest rates this year sparked a market sell-off. Negative rates make it hard for banks to make a profit, and thus take away their best chance at rebuilding their capital to make them safer. So the BoJ did not cut rates further into negative territory, and instead targeted a rate for 10-year yield - of zero.
Then the Fed announced that it was not raising its target rate from a lower bound of 0.25 per cent “for now”. But it made clear that it wanted to do so, while three governors dissented by voting to raise rates straight away. Anxiety about the market response seems narrowly to have trumped anxiety about the distorting effects of lower rates. For now.
Markets did not hear the nuances. In the US, many investments bought in the “hunt for yield” - boring stocks and bonds that pay a high yield - had lagged behind for weeks, out of fears of a rate rise. That was reversed. Stocks rose, bond yields fell, and the bet is that rates will rise at most twice by the end of next year.
In Japan, attempting to keep the cost of money at zero over 10 years was perceived as a relatively hawkish policy, and the yen strengthened on it.
Instant injections of liquidity to avert a crisis need not imply a decade of historically low rates. But that is what we have. It is unsettling, and it stirs anger.
Further, the greatest danger for markets is that the policy succeeds. Should cheap money finally spark growth and inflation, it would be a consummation devoutly to be wished. But the market is positioned for the opposite. The higher rates that would follow, pumped through a conservative banking system in which far fewer banks make a market, could spark a new crisis.
