It is nearly a year since the dramatic collapse of Lehman Brothers. At one time last year, the financial and economic system looked to be entering into meltdown with quite a few cataclysmic predictions
The worst fears haven't materialised. That doesn't mean things are good. We are still looking at the worst recession since the 1930s and one of the highest levels of unemployment in the post war period. Combined with record levels of public debt it makes for a difficult few years. But, I guess its something that it could have been a lot worse.
After Lehman's unexpected demise, and banks not lending to each other. It looked like a frozen credit market could cause many banks to fall like Domino's. It raised the spectre of the 1930s when 100s of US banks went bankrupt contributing to the Great Depression.
The global banking bailouts may have been badly managed - with the tax payer getting a raw deal; it was also rather sickening to see incompetent rich Wall Street Bankers bailed out by the taxpayer, but, despite all this the worst was avoided and a sense of fragile confidence did return. Banks are still nursing large losses which continue to worsen during the recession. But, it could have been a lot worse.
Despite the worst downturn since the 1930s, there were fears in certain quarters of a return to hyperinflation due to the Central Banks decision to create money through quantitative easing. This fear was largely misplaced in a period of spare capacity and a falling velocity of circulation. The link between inflation and money supply is more complicated. Most countries are avoiding a deflationary spiral, but, inflationary pressures are still very muted.
The UK and US public sector debt have been increasing at a record pace. The UK is running its largest peacetime public sector deficit. This increase in national debt raised fears of much higher interest rates, and an inability of the government to sell the debt. However, so far the the markets have maintained a strong appetite for buying government securities.
A repeat of Great Depression.
Since the last quarter of 2008, GDP fell at a very sharp rate. Annualised quarter falls reached nearly 10% in countries such as UK, Japan and Germany. When GDP falls at this rate there is danger of a the worsening economy getting out of control. However, unprecedented monetary and fiscal policy stimulus helped to revert the situation and now most economies are forecast to return to economic growth soon. The falls in output were combined with some of the gloomiest confidence.
The fact we the worst fears didn't materialise is hardly great news, since they were pretty dire to begin with.
There is also a danger that the first shoots of growth may cause a premature relief that the problem is over. The economy still faces high and rising levels of unemployment. The growth is still based on rocky foundations which will need careful nurturing.