Market Waits For Fed On Seventh Anniversary Of Lehman’s Bankruptcy

Seven years ago today, following frenzied weekend meetings, Lehman filed for bankruptcy. It confirmed the end of an era in a way that Bear Stearns demise had only hinted. The world has not been the same since.

The end of the secular credit cycle was a shock felt around the world, but it is the policy responses that shape the investment climate today. The aggressive fiscal and monetary stimulus by the US paved the path for a economic recovery earlier than most. Large US banks were forced to accept recapitalization funds. A new regulatory regime was launched to strengthen risk management, consumer protection and investor confidence.

Since the middle of 2009, when the financial crisis-induced economic contraction ended, the US has created 11.3 mln jobs. That includes the loss of about 500,000 government positions. The US economy is larger than ever before.

The budget deficit that peaked at over 10% of GDP is now less than 3%, with only mild austerity–many fiscal support measures were temporary, and rolled off, while others were counter-cyclical stabilizer, like unemployment compensation,  that are less needed as growth returned. Tax revenues were also lifted by the return to growth.  

The different policy responses to the crisis generated different economic outcomes, and it is this divergence that is the chief characteristic of the investment climate.  The US may be ahead, but it has not returned to status quo ante.  Partly, time has marched on. The demographic situation has continued to evolve. Baby Boomers are retiring. Partly, productivity, the deus ex machina, has slowed considerably. While these factors may account for the bulk of the slower growth, there still seems to be a cyclical, and possibly a cynical component (e.g. sharp rise in disability claims).  

The eurozone and Japan were considerably slower to respond. They did offer an aggressive policy response until much after the US (and UK).  While the US has largely cleaned up the banking system, for example, eurozone banks are still hobbled to some extent by the overhang of bad debt.