Google the words “lessons from Lehman” and you get 1,030,000 results. Everyone has a favourite list of lessons learnt and not learnt. Books have been written and money made, conferences have been organised and frequent-flyer miles logged in, and the circus goes on. In one line, the most important lesson is “be wise, not smart”. Too many smart people on Wall Street, too few wise men. That is how the signals went unheeded, the mistakes got repeated, the risks and the stakes got bigger and the rest is history. Problem is, it is not yet quite history. Two years after the collapse of Lehman Brothers and the consequent crisis in the United States and then western Europe and some other parts of the world, question marks still remain on whether the crisis is behind us or not, whether the right lessons have been learnt, and whether the correct remedies have been put in place. Many, like Raghuram Rajan, still believe that the appropriate lessons have not yet been learnt. The “fault lines” that caused the financial crisis in the United States have not gone away. What is clear is that Lehman’s collapse was not only waiting to happen but that it triggered a much greater collapse… that of western economic power. What began as a trans-Atlantic financial crisis has ended up as a crisis of trans-Atlantic power. It is important to remind ourselves that the financial crisis was indeed a trans-Atlantic crisis, just as the 1997 banking and financial crisis was an East Asian crisis. Because of the global linkages of the trans-Atlantic economies, what was essentially a “regional” financial crisis became a “global economic crisis”. The impact of a collapse of confidence in western markets, followed by a collapse of spending and lending, impacted global demand and thereon global growth.
This much, which is quantifiable and has been quantified, is now universally accepted. Differences exist, however, on the qualitative, or subjective, consequences of the crisis. Of these, two stand out. First, the geo-political shifts in national power and strategic capability. Has the “West” become less “powerful” and the “East” more? Have the trans-Atlantic financial crisis and the global economic slowdown contributed to a decline in western, chiefly American, power and influence and the rise in Asian, chiefly Chinese, power and influence? Even informed opinion is divided on this. It is too early to write off the US, as an engine of growth and enterprise and a global power, and as early to celebrate the rise of China. There is, however, greater clarity on the other subjective issue of the impact of the crisis on thinking on economic policy. The crisis has rubbished the so-called “Washington Consensus” on economic policy, a set of ideas based on free market principles. It has not, however, been replaced by its opposite — a “Beijing Consensus” that sanctifies state intervention and regulation. Rather, the world is gravitating towards a moderate middle, eschewing both extremes and combining market principles with state interventionism — an India-style “mixed economy” that can be dubbed the “New Delhi Consensus”? Expect to see more government intervention in most economies around the world.
