財經觀察 1642 --- The year in review

The year in review
By Lionel Barber
Published: 00:28 | Last updated: 00:28
There was an ominous fragility about the world in 2008. In mid-September, the financial system came close to collapse. The failure of Lehman Brothers, the 158-year-old Wall Street investment bank, triggered panic in markets. The authorities in New York, Washington, London, Frankfurt and Tokyo looked on helplessly. For a few nerve-wracking days and nights, the world appeared to be hurtling toward financial Armageddon.

The crisis was far from over when another assault on the senses took place, this time in Mumbai. Terrorists, laden with plastic explosives, grenades and assault rifles, killed at least 192 civilians across India’s financial capital and laid waste to the luxury Taj Mahal Palace hotel. By singling out symbols of Indian opulence and power, the perpetrators consciously aped the September 11 terrorists who targeted the Twin Towers in New York.

The Mumbai massacre and the global financial crisis offer a sobering reminder that the path of history is far from linear. No doubt some will be tempted to view the events as a form of divine retribution, a punishment for a generation of excess characterised by a growing gap between the very rich and the rest of us. The twin shocks certainly challenge assumptions which had appeared unassailable since the fall of the Berlin Wall: the innate superiority of the western model of market capitalism and the inevitable progress of globalisation, powered by the free movement of goods, labour, capital and services.

In 2008, as investors rode a switchback in the financial and commodity markets – oil ended the year at about $44 a barrel after reaching an all-time high of $147.27 in July – we witnessed the rise of an alternative model: illiberal capitalism. Authoritarian China has long pursued this path, where the state enjoys a commanding role in the economy. This year, Vladimir Putin’s Russia marched further in that direction, consolidating control over sectors deemed vital to national security, such as energy and commodities. French president Nicolas Sarkozy, irrepressible as ever, put his own Gallic gloss on events when he proclaimed: “Laissez-faire is finished, the all-powerful market that is always right, that’s finished … ”

In the new age of fragility, governments around the world reasserted their role. Sarkozy called for a French sovereign wealth fund to defend leading companies in strategic sectors of the economy. Peter Mandelson, ennobled and restored to the British cabinet after four years of exile in Brussels, called for a new industrial strategy to protect British companies threatened by recession. Asian and Middle East governments or state-sponsored agencies, worried about a sudden surge in food prices, bought up farmland in Africa.

Most striking of all, the US government – like the British government – found itself drawn into advocating a rescue package for the financial sector which had hitherto projected an air of invincibility. By year’s end, the US rescue was headed well above $1 trillion. “This sucker could go down,” warned George W. Bush. His was one of the more memorable utterances of the year – though some wondered whether Bush was referring to the US economy or his ill-starred presidency.

How could the world have arrived at such a humiliating impasse? And why, in the words of Queen Elizabeth II, did none of the experts see it coming? The answer lies in a toxic combination of failures in risk management and regulatory oversight, as well as skewed incentives, particularly in the area of credit derivatives – the sophisticated financial products which dispersed rather than concentrated risk in the system. These systemic failures were compounded by a more basic and familiar weakness: the infinite capacity of human beings living in periods of excess credit to delude themselves into believing that prices will invariably head upward. As one Wall Street chief executive confided to me: “This crisis was nothing more than a gigantic collective bet on the American consumer, sustained by a rising property market.”

In October, the world’s major central banks united in the first ever co-ordinated cut in benchmark interest rates. The cuts kept coming. By December, the US had reduced rates to 1 per cent and the Bank of England had dropped its key rate to 2 percent – the lowest since 1951.

The post-Bubble reckoning is – and will be – severe. Economists warned of a Depression as confidence evaporated in the banking system. The Great Credit Drought, caused by banks hoarding capital, threatened to trigger multiple corporate bankruptcies. The Big Three carmakers in Detroit were given months, if not weeks, to survive. Britain’s high street banks had a near-death experience.

Alistair Darling, chancellor of the exchequer, was excoriated in the summer for warning that the UK faced the most severe economic crisis since 1945. Weeks later, he looked (for once) like a prophet in his own lifetime.

By year’s end, the Brown boom was truly over, with government borrowing set to rise to more than 8 per cent of gross domestic product in 2009. But the Conservative opposition proved curiously ineffectual. The Tories’ considerable lead, at times extending to more than 20 points in the polls, evaporated as a free-spending Brown cast himself improbably as the saviour of Britain – and the world. Europeans, long used to being lectured about the virtues of liberal economics and the supremacy of the City of London, maintained a respectful silence. The notable exception was Angela Merkel, the feisty German chancellor, who preached fiscal probity with the fervour of a Lutheran pastor.

Continental leaders were unable to form a unified front when it came to the credit crunch – a second blow for Europhiles in 2008. The first came when the Irish rejected the Treaty of Lisbon, dashing the hopes of those who had thought the Celtic Tiger’s support for a constitution would bolster the European project.

Amid the pervading gloom, the election of Barack Obama to the White House stood out as a beacon of hope. The first-term senator from Illinois fought a brilliant campaign. He out-organised and outspent Hillary Clinton, the favourite for the Democratic nomination; then he swept aside Senator John McCain, the Vietnam war hero-cum-Washington maverick who fought a lacklustre campaign. McCain’s selection of Sarah Palin as running-mate was typically off-key. Optometrists and much of the US media swooned over the moose-hunting governor of Alaska, but once her barnstorming speech at the Republican convention faded, she turned out to be a seven-day wonder.

Obama’s victory was a moment of great emotion in the US and around the world. Who can forget the shot of the Rev Jesse Jackson, tears rolling down his cheeks, as he waited in the early hours of the morning for the president-elect’s victory address in Grant Park, Chicago? Yet we should not forget McCain’s gracious concession speech, either. November 4 2008 saw American democracy at its best.

Obama’s win drew parallels with Franklin Roosevelt’s election in 1932, but – barring a Depression – a more useful comparison may be with Ronald Reagan’s election in 1980. Then, too, amid deeply troubled economic times, Americans were desperate for a change in leadership. The key will be whether Obama can manage a resurgent Democratic majority in Congress which will be tempted by protectionism and retribution against the once-dominant Republicans.

Inevitably, the Obama victory will be seen as a chance for the US to repair relations with the outside world. America’s image has suffered under the Bush presidency, but most of the damage was done in the first term, especially after the war of choice against Iraq. In the second term, the Bush administration curbed its unilateralist instincts.

In 2008, the stark message was that the threats to US (and western) interests have, if anything, become more pressing: Iran continues to pursue its ambition to acquire nuclear weapons; the Taliban insurgency continues to grow in strength in Afghanistan, drawing in an increasingly fragile Pakistan; and the Israeli-Palestinian conflict remains as intractable as ever. Only Iraq offered a semblance of hope after the US and the Maliki government agreed a timetable for the withdrawal of combat troops by the end of 2011, a recognition that General David Petraeus’s “surge” against militants has been far more successful than the sceptics assumed.

Elsewhere, the US lost ground in the Caucasus when the Russian army invaded Georgia, a pro-western former Soviet republic pressing for membership of Nato. Critics predicted the foray was the opening gambit in a strategy by Vladimir Putin to regain control of former Soviet satellite states. Certainly, it tempered optimism that the “election” of Dmitry Medvedev, a nominally liberal bureaucrat, would signal a shift in Russian policy. The FT interviewed Medvedev in the Kremlin for two hours in late March, and found him a thoughtful advocate of the rule of law. But months later, he looked more and more like Putin’s puppet.

This was not a good year for freedom-lovers, with a few exceptions. July saw the spectacular release of Ingrid Betancourt, the Colombian-French anti-corruption activist held by Farc guerrillas for six-and-a-half years in the Colombian jungle; and two months later, former Bosnian Serb leader Radovan Karadzic was arrested and brought to the Hague to stand trial before the UN war crimes tribunal. The International Criminal Court was also active, with one prosecutor – for better or worse – recommending indicting Omar al-Bashir, president of Sudan, with genocide in Darfur.

But elsewhere, the picture was depressing. Robert Mugabe and his cronies clung to power in Zimbabwe, despite the ravages of hyperinflation. The Democratic Republic of Congo erupted into renewed violence, with casualties in the civil war evoking comparison with the levels reached in Rwanda in 1994. The Chinese cracked down on civil disobedience in Tibet. And pirates became ever bolder on the high seas off Somalia, even hijacking a Saudi supertanker.

If there was light, it came in the spectacular shape of the Beijing Olympics. The opening and closing ceremonies set new standards in pyrotechnics. But there were also memorable sporting performances, notably by the bionic swimmer Michael Phelps and the world’s most graceful athlete, the Jamaican sprinter Usain Bolt, who set world records in the 100m and 200m races and 4 x 100m relay. His trademark golden track shoes and his arched victory pose will linger in the popular imagination, a welcome counterweight to the cynicism which, thanks to the wonders of modern drug laboratories, has long poisoned athletics.

The other winner was Damien Hirst, the post-pop descendant of Andy Warhol, to quote FT critic Jackie Wullschlager. Hirst’s “Beautiful Inside My Head Forever” exhibition contained more than 200 pieces and later fetched £111m in a Sotheby’s auction. The top lot was “The Golden Calf”, a 600kg bullock whose hooves and horns are cast in solid 18-carat gold. It sold for £10.3m, a record for the artist at auction.

The sums are breathtaking, but in retrospect they may be seen as the last gasp of an era of excess. Last month, it was reported that Hirst, who is worth more than £200m, had laid off 17 of the artists who help produce his work. One of the directors of his art production company said: “We have to be mindful of the current economic climate and how this might affect us in the future.”

The year 2009 will be altogether more testing for those at the top as well as the bottom of society.
Lionel Barber is editor of the FT