Scars of Global Financial Crisis Still Visible

It is almost 10 years since the financial world began a wobble that would swing into what it is now known as the global financial crisis. On June 22, 2007, the public downfall of New York-based global investment bank Bear Stearns began in earnest.

America's then fifth-largest investment bank was among a number of Wall Street giants exposed to bad bets on the US subprime mortgage market. Bear Stearns agreed to a plan for a $4.2 billion secured loan to its hedge funds under pressure from those bad debts. Wall Street is the place where the financial crisis began almost 10 years ago.

But in the weeks after financial contagion followed, and, almost a year after the plan, JPMorgan Chase and the US government bailed out Bear Stearns. The final nail in the coffin came with the collapse of Lehman Brothers on September 15, 2008, AAP reported.

Before these events, most people believed the banks were "too big to fail" and that the financial system would hold.

Today, the scars of the global financial crisis remain. There have been trillions of dollars in losses. And in a world of subpar economic growth, even optimists are downbeat about whether the economic medicine has been taken.

Key Problems

The crisis highlighted a number of key problems which remain unresolved.

Firstly, excessive debt. In the aftermath of the world market crash, rather than pushing for debt destruction, world leaders used fiscal and monetary policy to fan demand. Global debt now stands at a staggering $215 trillion.

Then there is ineffective regulation. Despite genuine attempts to stop risky lending and products–from tougher financial regulations under Dodd-Frank (now under attack by the Trump administration) to higher capital requirements under Basel III–problems persist.

The controversial pay packets of banking executives are back up in the millions (they did dip after the GFC) and as Michael Lewis, who famously wrote the 'The Big Short', which was adapted into an Oscar-winning screenplay, says "incentives in the financial system are still rotten".

Finally, the question of accountability. Banks and their regulators should have behaved better. But what about the consumers–could they have known better? And governments, who in times of crisis feel left with little option but to bail-out banks, have found it difficult to make measures stick.

Irrational Exuberance

Let's start with the question of debt. Lord Adair Turner, who chaired the UK Financial Services Authority between 2008 and 2013 and helped redesign global banking, says the world since has not addressed this root cause of the crisis and that means it's at risk of another one.

Lord Turner, now chairman of New York-based Institute for New Economic Thinking, says the world is suffering from "irrational exuberance" and "debt overhang".

The latter term refers to countries trapped in a vicious cycle of debt, and when nations ultimately default on that debt–he predicts that the next crisis will come courtesy of China and that's just a number of years away–it ends in their economic destruction.

The Institute of International Finance says global levels of debt held by households, governments, and non-financial corporates jumped by over $70 trillion in the past decade to a record high of $215 trillion, equating to 325% of global GDP.

Powerful But Dangerous

Even if you ignore the bears on Australia's housing market, globally there are risks. James Galbraith, an American economist and academic, says banks are more concentrated than before the crisis, "therefore more powerful and more dangerous".

"The economy of Europe has not recovered; that of the US has recovered growth but has not restored employment, in relation to population. The derivative exposure of a single German bank–Deutsche Bank–is said to be equal to the entire GDP of Europe. Non-performing loans in Italy, not to mention Greece, are at crisis levels."

William White, chairman of Economic and Development Review Committee at the OECD, says $215 trillion in debt at the end of 2016, is "an unprecedented level".

"Whereas emerging market economies were 'part of the solution' post 2009, they are now 'part of the problem'. Overall exposures look worse today than in 2007."