Lehmans – one year on: have we learned the lessons?

Gavyn Davies: Quit stalling on capital reform

Although banks often get carried away by a reckless search for short-term profits, they are not stupid enough to ignore the near-death experience of September 2008. The best hope for reform is that the large institutions see it as being in their own interest to rein in risk. However, in case memories are indeed short, governments need to agree on a system in which the capital requirements imposed on the banks are increased as lending and asset prices rise during the next boom. This is a much better way of preventing excessive risk-taking than political grandstanding on pay, (which is annoying but not the core of the problem) or the FSA idea of a Tobin tax on all financial market trading (which hits the wrong targets). Britain should stop dragging its feet and promote global reform on capital requirements for banks.

Gavyn Davies is chairman of Fulcrum Asset Management.

Andrew Graham: No real attempt at reappraisal

The credit crunch was not just a financial collapse, but the collapse of an ideology – that the wider and deeper markets became the greater the public good. What response have we had to the crisis at this level of ideas? Virtually nothing. Alan Greenspan's comments are the most extraordinary. One day he is surprised at banks' behaviour, the next it is all down to human nature. Not lessons learned, but shell-shocked inconsistency. Mervyn King hardly offers greater insight. In his House of Lords evidence he focused almost exclusively on the control of inflation, ducking the key question: "As governor of the Bank of England, what were you doing about the overall health of the financial system?" If he was as worried as he now claims to be, why didn't he act? With the notable exception of Adair Turner there is, as yet, zero sense that those in authority have made any real attempt at the fundamental reappraisal we clearly need.

Andrew Graham is an economist and master of Balliol College, Oxford

Jayati Ghosh: We've paved the way for worse

Hardly anything seems to have been learned in terms of required regulation. Moral hazard (because economic agents do not suffer the adverse consequences of their own actions) is more pronounced than ever. Financial institutions have been bailed out at enormous public expense, but without changes in regulation that would discourage irresponsible behaviour. Banks that were "too big to fail" have got bigger. Flawed incentive structures continue to promote short-term profit-seeking rather than social good. So we have protected private profiteering and socialised its risks. Meanwhile, speculative behaviour in global commodity markets can still cause a repeat of the recent crazy volatility in world fuel and food prices, which created so much havoc in the developing world. This opportunity wasted by governments – reflecting the lack of basic change in the power equations governing capitalism – will prove to be expensive. We should brace ourselves for an even worse replay of the financial crisis in the foreseeable future. And the lopsided government response – benefiting those responsible for the crisis without adequate concern for the collateral damage on innocent citizens – may give public intervention a bad name, at a time when we desperately need such intervention for more democratic and sustainable economies.

Jayati Ghosh is economics professor at Jawaharlal Nehru University, New Delhi

Robert Skidelsky: Still living with crazy maths

The future is irreducibly uncertain, economies do crash and the economics profession needs fundamental reform. Sophisticated maths led economists to believe that risks could be quantified, that markets were automatically self-correcting, and that shares are correctly priced on average. The crisis should have blown these strange ideas sky high. When Lehmans collapsed, markets panicked because no one knew what would happen next. "Risk" became meaningless and, in the face of such uncertainty, people stopped spending. This sent the world economy into a tailspin. The economic system should be restructured with these lessons in mind. Government policy and regulation should aim to minimise the possibility of systemic collapses. Students of economics should be taught more history and less maths. Policymakers must temper the assumptions of conventional economics with a strong dose of realism. Only then we can hope to avoid such crises in the future.

Robert Skidelsky is professor of political economy at Warwick Universtiy

Barry Eichengreen: Derivatives slip the net

The lessons of the Lehman fiasco have been learned in the sense that we know what they are at the analytical level, but they have not been acted on. The first is that the authorities need the authority to resolve the affairs of bank holding firms. In the US, the FDIC has that authority for banks but not bank holding companies, and there is no agreement in Congress about how to fix this problem. The UK has a resolution regime for deposit banks as of 2009, but not for merchant banks and other non-bank institutions. As long as this is the case, moral hazard will be a serious problem. The second lesson is that complex derivatives create serious counterparty risk when traded over the counter and need to be netted through a single clearing house or clearing-house or exchange. Everyone is now moving to establish a clearing house – so many that effective netting is likely towill be impossible. Better would be an organised exchange. But this would require instrument standardisation. The markets, alas, seem to be moving in the opposite direction.

Barry Eichengreen is professor of economics and political science at Berkeley

Bill Emmott: We heeded Japan's example

We won't know whether the lessons have been learned until we are again in a boom, when the prices of some asset or other are rising to surprising levels or if someone claims that there has been a paradigm shift and that the old rules are obselete … and then the regulators decide whether to end the fun and to clamp on controls … or not. That is what they should have done when house prices were soaring and credit derivatives were turning incomprehensible, and didn't. The lessons of Japan's crisis of the 1990s were indeed learned: first, admit your problems; second, intervene with public money and nationalisation where necessary; third, pump hard on monetary and fiscal policy to rescue the economy. This has worked. The economic damage has so far not been as bad as in the 1980s slump. But there remain further lessons to learn. These are that fiscal and monetary policy had better not be tightened too soon, but that new rules for financial firms should be brought in as soon as possible, in order to make it clear what the new basis of their business is. There has been lots of talk about them, but that is all.

Bill Emmott is former editor of the Economist

Ann Pettifor: Policymakers played for fools

Tragically, The global crisis is still managed by policymakers holding fast to the disastrous Bush-Paulson legacy. Fooled into believing the crisis is over, by a stock market bubble, they share the pathological belief that the market knows best; that banks cannot be fully nationalised or obliged to lend at low rates; and that while wages and incomes fall, top directors can ignore inflation when awarding themselves bonuses and pay. Restoring the finance sector's dominance is still the priority. Policymakers appear blind to the forces causing banks' balance sheets to bleed red. They are blind to the real economy, where the very solvency of banks is threatened by debt deflation fuelled in turn by bankruptcies, unemployment and falling incomes and prices. Sadly, because lessons have not been learned, there will be no policy tools left to deal with the next banking crisis – due in 2010, if not sooner.

Ann Pettifor is executive director of Advocacy International

Aditya Chakrabortty: What about the public good?

The collapse of Lehmans Brothers and the chaos that ensued taught governments an old lesson they had forgotten: finance is too important to be treated like just another industry. No, a system to make payments and extend credit is an essential utility, just like water and public transport. That's why the British taxpayer has shelled out hundreds of billions to keep the entire banking system afloat. Ever since learning that lesson, however, Gordon Brown and Alistair Darling have done their damnedest to forget it, again – and to talk instead about arms' length management and (tired old theme, this) Britain's comparative advantage in financial services. Well, what about using our publicly owned financial utilities to foster new industrial strengths, like green technology? Banks should be mandated to lend at rock-bottom rates to sectors of strategic importance, even while their wasteful lending (125% mortgages, anyone?) must be capped. Utilities are meant to provide a public good: it's well past time bankers were held to that.

Aditya Chakrabortty is the Guardian's economics leader writer

Bethany McLean: Short-termism has triumphed

If you believe the conventional wisdom, allowing Lehmans to fail was the US government's biggest mistake in its handling of the crisis. That replaced an older piece of conventional wisdom, which is that to function, capitalism needs moral hazard. From the vantage point of a year later, maybe the problem is not that financiers lost too much but that they lost too little – systemwide, that is: obviously Lehman staff paid a high price. Failure for financial firms and the people who run them should be an option. But here we are, and momentum for regulatory reform is pretty much stalled. Even if the current blueprint is enacted, the biggest financial firms are likely to emerge even bigger, and hence even more insulated from the consequences of failure. Worse, a short-term mindset is still the rule of the day. If a banker, trader or executive can make a bet that yields them riches in the short term and makes the rest of us pay over the long term, who thinks that bet won't get placed?

Bethany McLean is author of Enron: The Smartest Guys in the Room