Five years after the collapse of Lehman Brothers triggered the largest global financial crisis since the Great Depression, the world’s financial system remains dangerous and dysfunctional. Worse, despite years of debate, no consensus about the nature of the system’s problems – much less how to fix them – has emerged.
China has begun to build a parallel international order, centered on itself. If the European Union aids in its construction – even just by positioning itself on the fault line between China and the United States – it risks toppling key pillars of its own edifice and, eventually, collapsing altogether.
Now that the old rules governing macroeconomic cycles no longer seem to apply, it remains to be seen what might cause the next recession in the United States. But if recent history is our guide, the biggest threat stems not from the US Federal Reserve or any one sector of the economy, but rather from the White House.
Amid much discussion of the challenges facing the Chinese economy, the line-up of usual suspects typically excludes the most worrying scenario of all: popular unrest. While skeptics would contend that widespread protest against the regime and its policies is unlikely, events elsewhere suggest that China is not immune.
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STANFORD – Five years after the collapse of Lehman Brothers triggered the largest global financial crisis since the Great Depression, outsize banking sectors have left economies shattered in Ireland, Iceland, and Cyprus. Banks in Italy, Spain, and elsewhere are not lending enough. China’s credit binge is turning into a bust. In short, the world’s financial system remains dangerous and dysfunctional.
Worse, despite years of debate, no consensus about the nature of the financial system’s problems – much less how to fix them – has emerged. And that appears to reflect the banks’ political power.
For example, Vince Cable, the United Kingdom’s business secretary, recently accused Bank of England regulators – whom he called “capital Taliban” – of holding back the country’s economic recovery by imposing excessive burdens on banks. Cable appears to believe the banks’ lobbyists when they claim that lending and growth would suffer if banks were forced to “hold more capital.”
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