On Sept. 15, 2008, Lehman Brothers, the fourth-largest investment bank in the United States, filed for bankruptcy protection. It was the climax of a year-long U.S. financial crisis caused by sketchy trading practices on Wall Street. The bank’s collapse triggered the Great Recession, which in turn spawned a lingering debt crisis in Europe.
A decade later, there is general agreement that the government response to the recession, in the United States, Canada and around the world, was adequate to the task. Central banks poured billions into their economies in the form of stimulus or to insure investments, and lowered interest rates to the vanishing point. By mid-2009, the recession was technically over; by 2012, most North American stock markets had recovered their losses.
Today, major banks around the world are better capitalized and more frequently subjected to stress tests. The economies of the United States and Canada are robust. Based on a few key metrics – most notably stock market gains, GDP growth and low unemployment – the economy is healthier than it was before the crisis.
So why, then, does the world seem so precarious? Canada, in particular, can feel at times like it is approaching a precipice, at the bottom of which is another painful downturn.
It all goes back to the 2008 crisis. The long run of extremely low interest rates that followed has resulted in an alarming rise in household debt. Canadians owe trillions of dollars, and now interest rates are starting to creep back up. There is a real risk of a personal-debt crisis, one exacerbated by the extreme rise in house prices in major cities.
Governments, too, have been gorging on cheap debt, when they should have been using the stronger economy to reduce or eliminate their deficits. Ottawa and Queen’s Park are among the worst offenders.
According to the Institute of International Finance, total global debt (government, corporate and consumer) rose to US$247-trillion in the first quarter of this year – nearly 40 per cent higher than in the first quarter of 2008.
There is also concern that the benefits of the recovery are not being shared by all. The rise in stock prices is mostly helping the richest 1 per cent of the population, while everyone else counts their pennies and worries about stagnant wages and their ability to retire. The income inequality that existed before 2008 has been exacerbated, but it is being masked by the strong economy and the relief it has brought.
The political consequences of the crisis have been just as grave. There is a link between the justified anger caused by the crisis and the rise of overheated populism that led to the election of President Donald Trump in 2016. He has since exploited that anger by exchanging the complex pillars of the pre-2008 economy – globalization and free trade – for the easy posturing of protectionism and tariff wars.
Canada now faces the dual prospect of the collapse of the North American free-trade agreement and being hit with 25-per-cent tariffs on car exports – a threat Mr. Trump seems to make daily as he demands more concessions from Ottawa.
Ottawa also faces a threat from Mr. Trump’s deep cuts to U.S. corporate-tax rates, which could badly hurt investment in Canada. As well, our domestic politics are making it frustratingly difficult for investors to exploit our oil resources.
In fact, Canada faces so many economic challenges at once – some of its own making, some a fallout from the crisis, and some due to the fickle nature of our biggest trading partner – that to come out of it in one piece will require a lot of things to fall into place. If we survive Mr. Trump, we must still find a way to expand our oil exports. And if we figure that out, there is a looming debt crisis to manage.
These are difficult challenges, but they can be met. The most important lesson to take from 2008 is that complacency is unacceptable. Many economists believe another crash is overdue; given the warning signs, it’s hard to disagree.
In short, Ottawa and the provinces need to plan for the worst by fixing the things they can control. They need to stop borrowing recklessly and to start working co-operatively to expand our resource sector. They need to address household debt and income inequality head-on. They need to examine their tax regimes and position them competitively. They also need to improve medicare and other social safety nets.
To do otherwise is to be willfully blind to the danger signs. The world paid a heavy price for that sort of myopia in 2008. Let’s not do it again.