Is The Global Economy Resilient Enough To Withstand Another 2008 Like Lehman Shock To The System?
Is the Global Economy “resilient” enough to withstand another 2008-like Lehmann Shock? For those of you who are too young to remember, I am talking about the bankruptcy of the American Investment Bank, Lehman Brothers, on September 15, 2008, which “triggered” the Great Recession and almost “took down” the Global Financial System. For those old enough to remember, the ensuing 2–3 months were nightmarish as stock markets crashed and jobs slashed. I am contextualizing the collapse of Lehmann Brothers as the global economy reaches another “watershed” moment, with recessionary fears and nearly “every economist and their dog” warning of another 2008-like crisis. Indeed, reading financial and economic news these days reminds me of the “dark days” following the Lehmann Shock. With a near consensus on another downturn, I thought it would be helpful to analyze the implications of another “crash” to our lives and whether the global economy can withstand the coming “bottomless” slowdown.
While there are similarities between 2008 and 2022, the key difference here is that the former was entirely a “Made in the USA” crisis, thanks to the “recklessness” of American bankers, who took “too many risks” to the point where the entire system collapsed. However, the coming crisis has several “actors” with Vladimir Putin and Xi Jinping in “starring roles”. For instance, the 2Ps of the Pandemic and Putin are the catalysts for the present situation in the global economy, and so both China and Russia have leading roles here. Of course, one should not discount the part played by the West since the “easy money” era is over, and the global economy that was on “steroids due to Central Bank Printing presses” finds itself at the receiving end as they “taper and tighten”.
In the aftermath of the Great Recession, much was written and said about how the global economy proved its “resilience”, what with even Nicholas Taleb (the bestselling author and expert) pointing out how the Black Swan events (a term he coined to describe Low Probability, yet, High Impact outcomes) could not “bring down” the “system” and he even wrote a book, titled Antifragile, to describe how we gained from disorder. However, I am not too sanguine this time, as the pandemic has left us all feeling the “blues” and a pervading sense of “weirdness” where not being typical is the New Normal. Add the senseless Ukrainian war to the mix, and you get the drift on how even a tiny spark can lead to a devastating fire, much like the wildfires raging all over Europe and, to some extent, the US.
In short, my hunch is that any economic crisis would cause more damage to our sense of well-being than in 2008, as I am reminded of the 1990s often. Then, weak governance worldwide and the pointless wars in the Middle East led some to proclaim that decade as the “decade from hell”. Moreover, we are caught in a “tech-driven doom loop” where we are aware that technology has “enslaved” us and yet, have to depend on it for almost everything in our daily lives. In addition, Climate Change is not making us “breathe easier” (literally and figuratively), and it seems as though we have reached a “point of no return” in our ability to withstand crises. Essentially, we are too “frazzled” and “overwhelmed” to “ride the recession”, and this perhaps is the most significant risk of all.
Last, I hope that the “social contract” that binds us all in societies holds us together, despite the lawlessness and the anarchy we see around us. This is the time for the bold and visionary leadership of the kind that was on display during the Second World War, and sadly, none of our current “leaders” is inspiring us to action. Apart from this, the Perfect Storm of converging shocks, where Putin threatens Europe with a “winter from hell” and the United States “busy” with its internal schisms tearing it apart, and worse, China in a slow-motion train wreck, even a tiny “disturbance” somewhere can ignite a cascading crisis much like how Srilanka and other developing nations went from “boom to bust” within the space of a few years. To conclude, buckle up for turbulence and more zaniness with a “crisis by Christmas” the most likely outcome.
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Originally published at https://rammohansusarla.in on July 27, 2022.