Five years ago, Lehman Brothers filed for bankruptcy and it looked for a while like everything was going to collapse.  No one knew exactly what was next as the financial system was imploding all around us.

Today, we’re still struggling to regain what we lost in the aftermath of this panic, although there is some reason to hope that we’re beginning to turn the corner.  What has happened in the wake of it all?  It’s worth taking stock and seeing where we stand.

An un-named Lehman employee grabbing his stuff from the London office

Rewinding the clock, the popular media was caught absolutely unprepared for the crisis, even though there were serious warning signs as much as a year earlier.  Policy makers had not discussed their worries in public even as a series of crises played out in financial markets, one after another.  The problem with Lehman was that despite heroic efforts the Federal Reserve and the Federal Government simply could not find a buyer to take the on whole – they had to fail before everyone would become serious enough to step up and save the global financial system.

Eventually, $700B was pumped in to stabilize the system – and today all but $30B has been paid back.  That’s not bad, considering we were looking at complete financial ruin at the time.  The main reason Barataria has called this a “Managed Depression”, distinct from the Great Depression of the 1930s or the Long Depression of the 1880s is that the system worked to keep the effects from the public about as well as it could.  Even when it became very obvious and public in September 2008 the system largely performed as it was supposed to.  It could have been a lot worse.

However, no one at the top of these institutions has ever faced criminal charges for their actions.

That’s not to say there haven’t been major changes.  The big story since then has been the rise of the developing world, fueled in large part by cheap capital that was supposed to prop up the developed world instead.  Massive outflows of cash buoyed BRIC nations, particularly China – which now has four of the world’s ten largest banks.  The great convergence of what were two separate worlds just five years ago is the most lasting effect of the meltdown.

It also took 15 months for the meltdown to fully register in jobs, with the low point of employment not coming until January 2010.  It will be at least four years more before we recover them, the slowest recovery in jobs after an official recession ever.  The only one that comes close is the “jobless recovery” of the official recession of 2001, where job loss continued for two and half years and did not recover the net loss for over four years, as shown in this chart of total employment:

Total employment in the US, 2001-today, from the St Louis Federal Reserve

There is little doubt that the collapse of Lehman was not an isolated incident or something that was not foreseen, but was in fact a part of a larger trend as the market absorbed the bubble in housing created by low rates through the 2000s.  Policy makers kept interest rates low in an effort to avoid the mistakes of the Great Depression – but in the process made different mistakes.  That Ben Bernanke, appointed Fed Chair in 2005, wrote his thesis on the errors of the Great Depression was not a coincidence.  Up until Lehman the management of the ongoing depression appeared to be going pretty well.

Small businesses have been hiring much more rapidly

The big question for today is, “What have we learned from all of this?”  Sadly, not quite enough.  The small victories that have started to create an economic restructuring are coming from very small companies who are innovating and doing things very differently than before.  Large companies are only now starting to step up and hire people, long after corporate profits came back.  Yet the whole system is clearly focused on continuous stimulus to keep the party going, much as they were during the extended period of low rates that created the bubble in the first place.  It’s all still based on socialized risk.

There is still not a system of global finance that can prevent big collapses, nor are there appropriate firewalls to prevent failure from going global in a heartbeat.  The biggest playahs are able to move money to offshore banks and “park” it without investing in genuine growth as they are supposed to.  The US Federal Budget is still a mess and no one is even trying to make sense of it.

Five years on much has changed and yet little has changed.  We are still not ready for the next economy, thanks to an incredible leadership vacuum that has paralyzed the developed world.  The Managed Depression will not truly end until that is corrected.  But we are getting back to equilibrium due to some successes, large and small, around the world.  It’s something.

Footnote:  As Barataria said in December 2007, “What we can say for sure is that the imaginative minds that created all these wonderful new financial instruments have created side-effects that have to be cleaned up by ever larger policy institutes that will, ultimately, have the appearance of making a major power grab not for the interests of stability in the industrialized world, but for the sake of power alone.”