Fragile signs of life don't mean the good times are back

This weekend a year ago the powers behind Washington and Wall St gathered to confront the full enormity of the credit crisis.

Their decision - to let Lehman fall - unleashed financial hell. Right or wrong that decision has touched all of us in ways as far reaching as the events of that other September day in 2001.

Never mind the equity market recovery, the retail revival or any of the other green shoots, anyone who thinks the global economy will ever be the same as it was before Lehman collapsed is kidding themselves.

Like a heavy drinker emerging from a hangover, those first fleeting bursts of normalcy have never felt so good. The world has kept turning, cash has slowly begun to flow again and the technical recession is ending.

But to mistake these signs of life for a return to prosperous economic times would be disastrous - akin to that drinker cracking open a bottle to celebrate the end of his hangover.

The fall of Lehman took the global economy to the brink of an apocalyptic meltdown.

What followed was the biggest financial rescue effort in history. In a rare example of the world working together, decisions were made that averted the worst of the catastrophe.

But governments across the world were forced to mortgage the prosperity of future generations. Trillions of dollars of taxpayer wealth has been destroyed just to ensure the stability of the system.

State intervention has mitigated the pain at street level. While the recession of the last year hasn't been fun it has been limited to something recognisable. Unemployment may top out at below 10 per cent in most of the developed world.

But the piper is still to be paid.

In the US the national debt is approaching US$12 trillion and the greenback is no longer undisputed king of currencies. The mighty Americans look less secure in their status as the one true superpower. It remains to be seen whether they will regain their grip or continue to stagnate as China chases at their heels.

In Britain the public faces massive cuts in public spending over the next few years. Even Australia - propped up by rapacious Chinese demand for minerals - has blown its biggest budget surplus ever in one hit.

In New Zealand, Finance Minister Bill English has said it may be 2017 before the Government can run a budget surplus again. That's assuming voters come to terms with cautious Government spending. If not there may be more pain to come as our debt levels breach limits that ratings agencies and foreign investors are prepared to live with.

English recalls the Lehman collapse came within a day or so of National unveiling its generous programme of tax cuts. Those cuts fell victim to the crash. They represent just one of may ways that all of us can put a price on the fall of Lehman.

There will be other costs. Many may go unnoticed as we revise and lower our expectations of the returns our investments can deliver. At a social level governments will have less to spend on welfare, health and education unless they are prepared to tax more, or more efficiently.

We have paid a high price for stability. But we have bought ourselves the chance to rebuild from a solid foundation. The system remains in place for investment in new technology, improved productivity and the creation of real wealth.

We have a way forward, as long as we can learn from our mistakes.

 

Liam Dann