It is five years since Lehman Brothers collapsed, and how the world has changed. Then, it was top of the boom. We had just had the glitz of the Beijing Olympics and while it was clear the banking system was under pressure, the authorities had so far managed to hold things together. We had rescued Northern Rock, the Americans Bear Stearns, AIG and so on. Then it all fell apart; Lehmans was allowed to go down, the banking catastrophe occurred and most of the developed world experienced its deepest recession since the Second World War. We live with the consequences: living standards have fallen in most countries and, in some, unemployment has risen to desperate levels.
There are two obvious questions. Could we have done better? And, are we through it now? Some thoughts about each.
It is now pretty widely accepted that it was a grave mistake not to rescue Lehman Brothers, because the result was a complete collapse of confidence in international banking. The costs of propping up the rest of the banking system were then far greater than the cost of propping up Lehmans would have been. But the following spring the G20, formed in 2008 by President Bush, had a meeting in London at which support for the global monetary system was pulled together and the foundations for the slow recovery were laid. Gordon Brown, who chaired that meeting, deserves more credit than he has so far received.
You could certainly say that the actual crisis was not well handled. Monetary, fiscal and regulatory policies in the run-up were also deeply misguided – and the performance of banking leadership was disastrous. But, having got to where they were in spring 2009, the world leaders at that G20 meeting did patch things up well enough.
Through it now? Well, maybe we just about are. You can have a debate about the effectiveness or otherwise of the Coalition’s economic policies and about the solidity or otherwise of the present upswing. But there is some sort of recovery across the developed world, with only those eurozone countries most clobbered by earlier excesses and current debts still failing to take part in it. If the global economic cycle reasserts itself, we should have several more years of decent growth before a slowdown towards the end of the decade.
One narrow measure of success will be when the first chunk of the Government’s shareholding in Lloyds Bank is sold back to the public. This should be very soon. A share price at 78p, a three-year high, is well above the price at which the stock was bought. Though there are arguments for waiting for an even higher value (Morgan Stanley has a target price of 100p), there is political pressure to get things moving. It looks plausible that the taxpayer will end up with a decent profit on Lloyds and may break even on Royal Bank of Scotland.
The broad measure of success, here and elsewhere, will be when the world has a banking system that is secure and can start supporting economic growth. We are still too close to the recession to be able to know why it has taken so long to recover, but part of the answer must be that banks have had to devote resources to repairing their balance sheets, raising more capital, writing off duff loans – and have therefore been unable and unwilling to support growth.
Historically, a recession following a financial crash takes longer to recover from than a recession caused by other factors. But five years is a long time and you can now see signs of a return to normality, even if the new normal is less adventurous than the old. Actually, the way banks are behaving now – more cautious and, let’s hope, more responsible – is more like banking of a past age than that of the noughties. And the obvious early sign that credit is flowing again, here and in the US, is in the recovery of house prices.
Final point: one other sign of a return to normality has been the rose in long-term bond yields. Yesterday, the 10-year gilt yield was back above 3 per cent, double the level of summer last year. The panic that drove cash into supposedly safe-haven gilts is clearly receding.
The British car industry motors ahead
One of the brightest spots of the UK economy over the past year has been the motor trade, with both sales and production countering the Europe-wide downturn. And one of the brightest spots within the motor trade has been Jaguar Land Rover. The news that the company is taking on another 1,700 people is part of a continuing success story, a particularly stunning one considering the troubled history of the two marques. How has the new Indian owner – Tata – succeeded where its predecessors failed?
It may be partly lucky timing; Ford had done a lot of development work that was only just showing up in new products. But it was also good management. Dr Ralf Speth, Jaguar Land Rover’s chief executive was ex-BMW and he said once that, as a child growing up in Germany, he had admired the technical excellence of Jaguar, winning at le Mans against Mercedes at a time when BMW was on its knees. With Jaguar now tiny compared with its German rivals, he wanted to help bring it back to its former pre-eminence.
Actually, it is the Land Rover brand that has so far been making most of the running, because its market segments are larger. But Jaguar is now broadening its range and you can see the two brands benefiting from this growth phase for the luxury car market – a boom that seems likely to continue a while yet.