IN everyone’s lives there are unforgettable historical moments. For me those include the Berlin Wall coming down, the death of a princess, 9/11, the banking crash and, although I try to forget, the announcement of the 2014 referendum result.

By the banking crash I mean seeing those first news images of the staff at Lehman Brothers leaving their offices with personal belongings in cardboard boxes and thinking “good god, how bad can this get?” The strange thing is that 10 years on I don’t yet know the answer.

READ MORE: 10 years on from the global financial crash, we need to bust its myths

The crash wasn’t like any other before. It provided an existential shock to the whole financial system and dealt a death blow to the semi-religious belief system known as neo-classical economics. A death blow though that our leaders are still unable to come to terms with.

Neo-classical or laissez-faire economics had become such a dominant mantra that economists, politicians and the media behaved as though there was no alternative to light-touch banking regulation and the financialisation of the economy. Such tunnel vision means that even to this day they have failed to learn the lessons of the crash, failed to restructure the banking sector effectively and failed to allow heterodox economists the platform to promote alternative economic solutions.

READ MORE: Gordon Brown fears new financial crisis in ‘leaderless’ world

For 30 years the UK had been a cheerleader for the neo-classical economic model (free markets, low regulation, consumerism, consumption, and widely available personal credit).

In the early 2000s, the banks effectively asked “why do we need to hold so much in assets when we have mastered economics and can’t fail unless we are held back by over regulation?” Back then “the king was in the altogether” and everyone was admiring his new clothes.

Well, not everyone, but everyone in politics and banking, even Labour chancellors Gordon Brown and Alistair Darling, whose deregulation drives helped set up the conditions for the UK element of the global crash.

To be clear, allowing banks to lend more than their capital assets only became feasible when the law was changed to allow banks to create new money without balancing that against reserves; money that they could lend, they didn’t have, and that didn’t even exist, until they made the loans which were secured against the value of the properties leant against.

That’s great until you realise that the value of the security (houses) rises faster when you lend more money to homebuyers and create bidding wars. So the banks were incentivised to lend to anyone, even those who couldn’t afford the repayments – as a result of prices outstripping wage growth – as a direct result of the banks artificially increasing of house prices.

The banks thought that high house values meant they couldn’t lose. Even when owners defaulted they could just repossess the property. Unless, of course, the value of house prices is shown to be inflated, people stop buying, or interest rates increases create large numbers of people defaulting, and make the debts uncollectible.

The banks wanted more and more mortgage debt and started bidding against one another to buy bundles of mixed American subprime and prime mortgage debts (mortgage securities).

Credit rating agencies granted these securities Triple A status, so bankers lapped them up and looked forward to their bonuses, not knowing that those bundles were soon going to be worthless when house prices crashed – and then the entire banking system ran out of money.

The reaction
AT first, governments didn’t know what to do, so America let Lehman Brothers fold and created a panic. They were ignorant of the size of the problem until almost all the banks in the UK, and America in particular, started to admit their insolvency to the central banks and that American mortgage securities were in fact junk.

With the imminent collapse of the entire financial, and effectively economic system, global leaders agreed to take on the debt and privatise the banking system. There wasn’t really any alternative unless you consider the collapse of society an option.

The biggest mistake – the impact of which has not yet fully manifested – is what happened after the bailout. After the initial bailout, the UK Government decided to cut spending and this led to the policy of austerity cutting the supply of money and public services to the poorest in society, exacerbating the wealth gap and slowing economic investment.

The trouble is austerity was a mistake on a spreadsheet – an agenda driven by a report by two American economists, Reinhart and Rogoff, which claimed that public debt of more than 90% of GDP slows growth.

Their work was used to justify austerity policies aimed at stabilising growth and avoiding another economic collapse, but Reinhart and Rogoff have admitted they were wrong after Thomas Herndon, an economics student writing an essay on their report, found basic errors in the spreadsheet calculations the two economists used to justify a global austerity agenda.

The National:

Now some 70% of the UK’s leading economists believe austerity is harming the economy and slowing growth. The OECD and the IMF have been calling for new capital investment to grow the economy but the UK Government has nailed its colours to the austerity mast and so the UK now has the slowest increasing economic growth in the developed world.

The second big mistake was George Osborne’s policy of injecting money into the economy through quantitative easing (QE) which hit the retired, failed in its goal to stimulate business investment, and disadvantaged Scotland and the the UK regions by pouring money into the pockets of the wealthy in the southeast of England.

QE involved the Bank of England “creating” money to buy Government securities (gilts) and similar financial assets from private banks/financial institutions. This buying surge increased the price of those assets, thus reducing their yield and forced interest rates low for a sustained period.

The theory was that the sellers – the banks – were then supposed to lend the money on to help grow the economy, but they didn’t. The banks were risk adverse and didn’t want to lend to business during a recession – that they had created – so they held on to the money until they could invest once more in property.

The Bank of England’s purchases artificially raised the prices of gilts and distorted the market, meaning banks and financial services companies profited more from selling assets to the Bank of England than they would have in a free market. This lowered the yield of the gilts and the returns to pension funds, making pensioners another group disadvantaged by the crash and how it was handled.

The National:

Don’t take my word for it, George Osborne himself admitted that “essentially, it [QE] makes the rich richer and makes life difficult for ordinary savers”.

Ok, so the poor, the pensioners and the middle classes, Government services, public spending and economic growth have all suffered and continue to suffer due to the banking crash. But the rich elites who predominantly live in London and the southeast have become significantly richer. The banks and the rich were bailed out to start partying again and the rest of us were left with the bill and the hangover.

There are four key signs that another crash could be on the way.

Firstly, the global money supply is expanding significantly faster than the global economy. “Broad money” (the amount of money supply in the economy) was 59% of global GDP in 1970, 104% in 2000, and 125% in 2015; but inflation in the leading capitalist economies has been extremely low despite low interest rates. Debt, however, has also been growing up from 250% of GDP at the turn of the century to 321% in the latest figures.

Secondly, the banks, not having paid for their previous mistakes, are gambling again. Banks are investing in mortgages but are also back in the subprime business. Bailed-out institutions such as Citigroup and Wells Fargo are said to be circumnavigating regulators by lending to non-banking organisations, creating shadow banks which can deal with higher-risk (potentially higher-profit) loans.

Although starting from a low base, the non-prime market (see what they did) looks like it’s doubling in size this year. America’s economic growth is impressive until you examine the foundations and the sand they rest upon.

The National:

Thirdly, most banks are passing the new asset stress tests, but with a slowdown in economic growth, a surge in defaults is developing in the UK and a sharp rise in interest rates is slowing consumer spending (70% of the economy) and threatens to push RBS and Barclay’s capital ratios into the danger areas. Deutsche Bank’s US division failed the US Federal Reserve stress test and announced 7,000 job cuts and its credit rating has been cut.

Fourthly, this week the governor of the Bank of England suggested that a hard Brexit could significantly cut house values in the UK and I think a fall is due in London and the southeast – the longer house price inflation is maintained, the bigger the fall will be. Inflation is not yet rising quickly enough to cause a major problem, but any fall in the pound after Brexit (between 5% and 20% dependent on the deal) would add to inflation and drive interest rates up. Thus, households may reel in their spending and if the banks can’t take the stress, governments have no reserves left to bail them out again.

Conclusions
TEN years on and it doesn’t look like lessons have been learned, and with austerity we are making new mistakes. The global economy is showing signs of weakness and I haven’t even discussed the impact a potential Chinese slowdown would have. The cost of living is set to rise, as are interest rates and the pressures on household budgets.

The political elites are clueless in the face of the need to redesign and reboot the entire economic system, and populists like Trump and Boris Johnson – even the far right – are gaining power and influence.

We could just about muddle through if it weren’t for the fact that Brexit may yet supply a killer blow to the UK’s fragile and long-winded recovery.

The truth is that all of today’s problems are connected to the day Lehman Brothers went down. These aren’t new problems, they are the result of our Government’s failure to treat the cause of the crash and not just the symptoms. I have come to the conclusion that it isn’t really 10 years on from the crash, but rather we are still crashing, just in slow motion.

Gordon MacIntyre-Kemp is the founder and chief executive of Business for Scotland.