The fall of 2008 is a period that financial managers will always remember. The loss of value, the loss of trust and the loss of key institutions combined to bring the world’s financial system to a dangerous precipice. Thanks to the intelligence and courage of some key policymakers, we did not fall into the abyss.
As we reflect back on that interval, it is impressive how far we’ve come. But there remains a long distance to travel before we establish a new normal. Even from a distance of five years, the economic consequences of the crisis are still being felt.
The American recovery has been steady, but its pace has been far below past standards. European nations have endured a revolving-door recession that finally appears to have ended. Emerging markets that rely on exports to the developing world have seen growth rates fall significantly.
Debt was an accelerant to the economic boom that preceded the crisis, and it has been an anchor to the recovery. Consumers, governments and financial institutions all found themselves overleveraged when the dust settled. The austerity that followed has limited economic progress.
The return of world equity indices to record levels has helped household balance sheets, but the benefit has been distributed unevenly. Public budgets were pushed into deep deficit, forcing spending control, which has been a drag on growth. Financial institutions rehabilitating their balance sheets have been cautious lenders.
Central banks moved with speed and size to avoid a worst-case outcome in 2008, and they have maintained a very supportive stance since. But the potency of their efforts may be diminishing, and the long-term risks of continuing may be rising. Economies may soon have to perform without such substantial monetary stimulus.
There were many “lessons learned” papers drafted back then, filled with prescriptions for reforming the financial system. The process of implementing them is very much incomplete. The equilibrium between private sector discipline and regulatory oversight for banks is still being defined.
While this all may sound like a frustrating summary, current conditions are worlds better than the dark alternative many feared. We should all be thankful for that, but at the same time, we should realize that rehabilitation remains a work in process.