WHEN historians gaze back at the early 21st century, they will identify two seismic shocks. The firstwasthe terrorist attacks of September 11th 2001, the second the global financial crisis, which boiled over ten years ago this month with the collapse ofLehman Brothers. September11th led to wars, Lehman’sbankruptcyto an economicand political reckoning. Just asthe fightingcontinues, so the reckoningisfarfrom over.

Lehman failed afterlosingmoneyon toxicloansand securities linked to America’s property market. Its bankruptcy unleashed chaos. Trade fell in everycountryon which the World Trade Organisation reports. Credit supplied to the real economy fell, by perhaps $2trn in America alone. To limit their indebtedness, governments resorted to austerity. Having exhausted the scope to cut interest rates, central bankers turned to quantitative easing(creatingmoneyto buybonds). Justasthe causesofthe financial crisiswere many and varied, so were its consequences. It turbocharged today’s populistsurge, raisingquestionsaboutincome inequality, job insecurity and globalisation. But it also changed the financial system (see Briefing). The question is: did itchange it enough?

To splurge is human One way—the wrong way—to judge progress would be to expect an end to financial crises. Systemic banking meltdowns are a feature of human history. The IMF has counted 124 of them between 1970 and 2007. There is no question that they will occuragain, ifonlybecause good timesbreed complacency. Consider that the Trump administration is deregulating finance duringan economicboom and thatthe Federal Reserve has not yet raised counter-cyclical capital requirements. Even when prudence prevails, no regulator is a perfect judge ofrisk. A better test is whether the likelihood and size of crisescan be reduced. On that, the newsisboth good and bad. First, the good. Banks must now fund themselves with more equity and less debt. They depend less on trading to make money and on short-term wholesale borrowing to finance theiractivities. Even in Europe, where fewbanks make large profits, the system as a whole isstrongerthan itwas. Regulatorshave beefed up theiroversight, especiallyof the largest institutionsthatare too bigto fail. On both sidesof the Atlantic banksare subject to regular stress tests and mustsubmit plans fortheirown orderlydemise.

Derivativesmarketsofthe type that felled AIG, an insurer, are smaller and safer. Revamped paypoliciesshould preventa repeatofthe injustice ofbankers taking public money while pocketing huge pay-packets—in 2009 staffatthe five biggestbankstrousered $114bn. Yet many lessons have gone unlearned. Take, for example, policymakers’ mistakesin the aftermath of the crisis. The state had no choice butto stand behind failingbanks, but it tookthe ill-judged decision to all but abandon insolvent households. Perhaps 9m Americans lost their homes in the recession; unemployment rose by over 8m. While households paid down debt,consumer spending was ravaged. It has taken fully ten years fo rthe countervailing economic stimulus to restore America’s economy to health. ManyofEurope’seconomies still suffer from weakaggregate demand. Fiscal and monetary policy could have done more, sooner, to bring about recovery. They were held back by mostly misplaced concerns about government debt and inflation. The fact that this failing is not more widely acknowledged augurs badlyforthe policyresponse nexttime (see Free exchange). Stagnation has, inevitably, fed populism. And, by looking forscapegoatsand simplisticsolutionsthatpunish them, populism has made it harder to confront the real long-term problems that the crisis exposed. Three stand out: housing, offshore dollarfinance and the euro.

To share divine The precise shape ofthe nextfinancial crisis is unclear—otherwise itwould surelybe avoided. But, in one wayoranother, it is likely to involve property. Rich-world governments have never properly reconciled a desire to boost home ownership with the need to avoid dangerousboomsin household credit, asin the mid-2000s. In America the reluctance to confront this meansthatthe taxpayer underwrites 70% of all new mortgage lending.

Everywhere, regulations encourage banks to lend against property rather than make loans to businesses. The risk will be mitigated only when politicians embrace fundamental reforms, such asreducinghousehold borrowing, with risk-sharing mortgages or permanent constraints on loan-tovalue ratios. In America taxpayersshould getoutofthe rotten business of guaranteeing mortgage debt. Sadly, populists are hardlylikelyto take on homeowners. Next, the greenback. The crisis spread across borders because European banks ran out of the dollars they needed to pay backtheir dollar-denominated borrowing. The Fed acted as lender of last resort to the world, offering foreigners $1trn of liquidity. Since then, offshore dollar debts have roughly doubled. In the nextcrisis, America’spolitical system isunlikely to letthe Fed actasthe backstop to thisvastsystem, even afterDonald Trump leavesthe White House. Finding ways to make offshore dollar finance safe, such as pooling dollar reserves among emerging-market countries, relies on international cooperation ofthe type that is fast falling out of fashion.

The rise of nationalism also hinders Europe from solving the euro’s structural problems. The crisis showed how a country’sbanksand itsgovernmentare intertwined: the state struggles to borrow enough to support the banks, which are dragged down by the falling value of government debt. This “doom loop” remainsmostlyintact. Until Europe shares more risksacrossnational borders—whetherthrough financial markets, deposit guarantees or fiscal policy—the future of the single currency will remain in doubt. A chaotic collapse of the euro would make the crisisof2008 looklike a picnic. Policymakers have made the economy safer, but they still have plenty of lessons to learn. And fracturing geopolitics make globalised finance even harder to deal with. A decade afterLehman failed, finance hasa worrying amount to fix

Source： The Economist