10 years after Lehman Brothers, major risks remain – Matt Carthy MEP
Sinn Féin MEP Matt Carthy has commented on continuing risks to financial stability on the tenth anniversary of the collapse of US investment bank Lehman Brothers.
Carthy, a member of the European Parliament’s Economic and Monetary Affairs Committee, said: “This weekend marks the 10th anniversary of the collapse of Lehman Brothers in the US. The subprime mortgage crisis led to a collapse in the US housing market – but it was the decade of gambling on these mortgages by ‘securitising’ them into complex investment vehicles that caused the most damage.
“As financial institutions began to realise they couldn’t put a value on hedge funds that were ‘contaminated’ with securitised mortgages, the entire value of several banks and associated private equity funds was wiped out. The interconnected nature of the global financial system prompted a chain reaction. Millions of people around the world lost their homes, their jobs, their savings and their retirement funds. But governments soon stepped in to bail out the banks that were deemed ‘too big to fail’.
“So what’s changed in the past 10 years? Unfortunately the biggest changes we can observe is the rapid rise of the far right in the US and the EU, and a massive increase in inequality around the world. In Ireland we are facing unprecedented crises in housing and health, while the banks we bailed out are not even paying a cent in corporation tax.
“We are seeing the results of two failures – the reckless financial deregulation that caused the crash, and the even more reckless political esponse to it, which imposed harsh austerity on ordinary people who had played no role in the crisis.
“The main tool that has been used to lift the economy out of recession has been monetary policies of the ECB and other central banks – record-low interest rates and quantitative easing. But instead of providing new money to households or the fight against climate change, the ECB has been pumping in around €60 billion each month into corporate sector assets and government bonds since 2015.
“This has fuelled volatile new asset bubbles, including in property. It’s hard to make a profit when interest rates are so low, so investors and hedge funds have turned to property. As a result, the property market in one in three EU countries is now overheating – meaning it is overvalued and heading for a price crash. And despite a decade of easy money, inflation remains stubbornly low. This means when the next crisis or downturn hits, there will be few remaining tools central banks can use to turn it around.
“We are facing several significant risks to financial stability today, including new asset bubbles, the emerging market debt crisis, and historic levels of private debt. But in the EU we are already seeing the rolling back of post-crisis regulations, and the ECB and the Commission are actively promoting the revival of securititsation.
“The Banking Union aimed at ending the too-big-to-fail problem stumbled at its very first hurdle in Italy last year, where a massive loophole in the new law allowed taxpayer-funded bailouts to take place again. The Bank Structural Reform proposal – aimed at separating the commercial and investment activities of the banks – was withdrawn last year after fierce lobbying by the banks.
“If we’re serious about avoiding a new financial crisis, we need major reform of the sector. This means, for a start, turning away from securitisation, regulating the shadow banking sector, closing the loopholes in the Banking Union legislation and implementing the Bank Structural Reform proposal. Unfortunately it seems clear that those political parties, such as Fianna Fáil and Fine Gael, who endorsed the policies that caused the crash, and burdened the costs of that crash on ordinary families, are intent on pursuing similar policies once again. That is why real economic change can only be brought about by real, and progressive, political change.” ENDS