The Lehman Lesson
Most people remember where they were when JFK was shot, or the Berlin Wall fell, or the Twin Towers were struck. Wars, assassinations, or natural catastrophes remain unforgettable among those impacted. But sometimes one event—like 9/11—can shake the entire world, when the unthinkable happened and was seen live on television.
Who remembers where they were on September 15, 2008? Certainly those who lost their jobs at Lehman Brothers when it went bankrupt do. Those watching on the floor of the stock market remember. Those watching their savings begin to disappear as the domino impact act of the great crash began to ricochet around the globe—they remember it. Those at the Federal Reserve and in European central banks recall the fear of entering the worst global economic crisis in eight decades.
The fallout of that economic meltdown trickled into the millions of saving accounts and retirement funds of average citizens over the coming months and years, leaving panic, unemployment, and despair in its wake. A crisis that was spawned in the U.S. housing market spread around the globe and reminded us of the fragility of our globalized economy. It also nourished the roots of a political transformation in the U.S. and in Europe that challenges us today, a decade later.
Initially, the European response to this Lehman bankruptcy and subsequent crisis was that it was an American subprime mortgage crisis caused by an unregulated market and Anglo-Saxon laissez faire ideology—ideology which Europe should resist. But it did not take long to realize that the American disease was metastasizing into the economies of many EU members, endangering the Eurozone and its entire banking system. And that had a lot to do with the fact that the European banks had been part of the run-up to the crash.
It did not take long to realize that the American disease was metastasizing into the economies of many EU members, endangering the Eurozone and its entire banking system.
By 2010 the crisis in Greece was threatening the survival of the Eurozone—and indeed the European Union itself—as economic instability spread to other countries. And there were more shocks coming.
The tools to deal with the crises—and the readiness to do so—differed in the U.S. from in Europe. The Federal Reserve and the European Central Bank had different options. But the crisis forced them to confront a common threat.
The common threat extended beyond financial challenges. It also involved the geopolitical earthquakes occurring domestically and globally. As the Lehman folded, Russia was invading Georgia, signaling a post-Cold War tectonic shift on the European continent. That was to be followed by an increasingly assertive Russian invasion of Crimea in 2014. The impact of the 2008 meltdown in Eastern Europe laid the groundwork for an aggressive nationalism taking root in Hungary and Poland and spreading throughout the European Union. By 2015, the refugee crisis boiled over and fanned the flames of nationalism. And by 2016, uncertainty and anxiety on both sides of the Atlantic erupted in the twin political earthquakes of Brexit in the UK and the election of Donald Trump as president of an increasingly disunited States of America.
A decade after Lehman, what have we learned from that experience? Are we better prepared for another tsunami like it? Did we get a good look at our vulnerabilities, our interdependencies, and the tools we need to respond to them—those we have and those we need to create?
The answer to those questions—and many more—remain unclear. We know that the financial crisis of the past decade strained the capacities of governments and financial institutions to act decisively in the face of strong political headwinds. We know that the strain of making decisions and sustaining political support in an anxiety-driven electorate has opened up cracks in democracies. One need only look at the election results most recently in Sweden, Germany, and Italy or at the conflicts between member states and the EU.
One need only look at the trench warfare going on between Democrats and Republicans in the U.S. as well as the divisiveness surrounding and caused by the president.
We also need only heed the warnings of those who point to the economic and social divide between those who survived what some have called an “Economic 9/11” in the past ten years—and those who fell further behind as a result.
Those who think that the western liberal democracies are in danger of being undermined and overtaken by so-called “illiberal” forces emerging to challenge them argue that there has to be a better way of making liberal democracy once again responsive to all of those people who are losing confidence in the future of their country, let alone their own futures.
Following the fall of the Berlin Wall there was a period in which the hubris of those in Washington and in Europe fed the belief that the “force” was with them. There was an expectation that a wave of liberal democracy, underscored by an open capitalist economic system, would see a rising tide lift all boats. And globally speaking, such developments did occur as emerging markets lifted millions out of poverty. Some called it the “great moderation”—a final version of a modern liberal democracy defining the end of competition with the Soviet Union. Yet neither the end of the Cold War nor the following years would moderate the politics of liberal democracies or guarantee their success if the challenges of securing confidence and trust in the system of government and ensuring the governed feel recognized and valued are not met—especially when technological change and globalization have increased inequalities that many otherwise rich countries haven’t yet found an answer to. When that happens, it can be called a “Lehman lesson.”
Neither the end of the Cold War nor the following years would moderate the politics of liberal democracies or guarantee their success if the challenges of securing confidence and trust in the system of government and ensuring the governed feel recognized and valued are not met—especially when technological change and globalization have increased inequalities that many otherwise rich countries haven’t yet found an answer to.
During the past ten years we have seen the shortfalls of governments on both sides of the Atlantic. We have seen a financial system go into free fall and then find a foothold again—but without putting in place the systems and guarantees that another crisis cannot occur. We have seen how liberal democracies can sustain a consensus where a center can hold just as we see where they can face threats from those who give up on a center.
The Lehman lesson is one of many reminders that democracies depend on the ability of citizens to see themselves as equal stakeholders in a system they wish to participate in and protect. It is a lesson long known, but perhaps not always remembered. Today’s leaders would be wise to recall the words of Benjamin Franklin when asked what kind of government was created at the Constitutional Convention in 1787: “A Republic, if you can keep it.”