Fading global cooperation will make this crisis worse than the recession of 2008
Fifteen years ago this week the French bank BNP Paribas announced it was closing three of its hedge funds heavily exposed to the US sub-prime mortgage market.
On the day little heed was paid to the news, but it quickly became apparent that not just BNP Paribas but just about every big financial institution was up to its neck in securities linked to underperforming American home loans. In early August 2007, BNP was simply the pebble that marked the coming avalanche.
Another August, another crisis. Memories of 2007 were rekindled by Andrew Bailey last week when the governor of the Bank of England announced that interest rates were being raised just as the UK economy is expected to hit the wall.
Leaving the pandemic-induced collapse in activity apart, the last “proper” global recession was the global financial crisis of 2007-09, a period when only massive government bailouts prevented the banking system from collapsing.
The Bank of England thinks the recession it is expecting will last as long – five quarters – as the downturn of 2008-09 but be less severe. Output as measured by gross domestic product is forecast to drop by just over 2% compared to almost 6% in the slump of the late 2000s.
The other piece of good news is that – as far as it is possible to tell – the global banking system is better placed to withstand losses than it was 15 years ago. Regulations are tighter, capital buffers larger. That said, banks were also thought to be in fine fettle in mid-2007.
Yet, there are other ways in which the two crises differ which should be a cause for concern.
For a start, the previous crisis followed a prolonged 15-year upswing in the global economy. Growth was strong and living standards rose steadily. Cheap imported goods from
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