Some 10 years ago, Lehman Brothers filed for bankruptcy. On September 29, 2008 the Irish Government announced a blanket guarantee of all the liabilities in the Irish banking system.
Finance Minister Brian Lenihan, persuaded that the country faced a financial liquidity rather than solvency crisis, bet the house and the wager then backfired.
In the words of Lorenzo Bini Smaghi, a member of the ECB’s Executive Board, “it turned a banking crisis into a sovereign crisis”.
Mr Lenihan’s move, resulting in savings being sucked out of the UK, enraged his British counterpart, chancellor Alistair Darling, and put this country on the international map for all the wrong reasons.
The flavour of these times has been well caught by the Irish playwright, Colin Murphy. But much more detail regarding the crisis and its impact continues to emerge.
A new book by the English economic historian, Adam Tooze, is perhaps the most thorough and comprehensive explanation to date regarding the crash of 2008 and the long recession that followed it.
Mr Tooze made his name writing on the economy of Nazi Germany, with a book called Wages of Destruction.
His grandfather, Arthur Wynn, was a communist activist, if not recruiter of agents, in the 1930s and 1940s, before going on to have a distinguished career as a civil servant.
Let’s start with the run in to the crisis.
Much has been made of the huge level of dodgy subprime mortgages, with loans to dodgy borrowers being funded from afar by European deposits, in the main.
The financial engineering in place turned out to be faulty.
It is clear that the regulators and the banks’ own boards did not really understand what was going on.
By the time the crisis began to emerge in 2007, the banks had radically altered their funding model due to a revolution in the savings market.
The banks long relied on long-term deposits from savers, but increasingly such funds fell into the hands of professionally managed funds offering higher returns.
Lenders came to rely on short-term, including overnight, money.
At the time of its collapse, Tooze points out, Lehmans was borrowing $180bn overnight.
The banks were lending long, but borrowing short.
All of this hinged on tiny returns earned on the money markets.
It was vital that banks retained confidence in each other.
Each morning, a bank had to persuade its funders to reinvest the funds in it, that day, so that the wheels could keep rolling.
By the late summer of 2008, such confidence had ebbed away.
By September, flows of money between the banks had plummeted by 95%. The whole system was rocked.
The regulators were complacent in the run-up to the crisis, but fortunately Ben Bernanke had by then replaced the long-serving Alan Greenspan as chair of the US Federal Reserve, America’s central bank.
Mr Bernanke was quick to recognise the scale of the crisis, one he saw as “the worst in global history”.
One fear was that the Chinese would move to sell off billions of assets held in US treasuries.
Vladimir Putin tried to push the Chinese leadership in this direction but in fact, China responded over the next year or so with what amounted to the greatest fiscal and monetary expansion effort in history.
This, in turn, played a major role in pulling much of the rest of the world out of the huge financial hole that had swallowed it up.
Mr Tooze estimates that Beijing injected the equivalent of one-quarter of its then GNP helping to generate the largest construction boom ever while raising global commodity prices in the process.
But this rebound could not have occurred without the dramatic global financial rescue effort that got underway as the debris of Lehman Brothers and US global insurance giant AIG, was being swept.
At the time, British prime minister Gordon Brown famously misspoke, telling the British parliament amid much laughter that he had “saved the world”.
Mr Brown played an important part in the rescue in fact, but it was the US Fed with the backing of the US Government which played the key stabilising role.
Mr Tooze recounts how the Fed pumped between $500bn and $600bn in capital into the European Central Bank allowing the latter to access $2.5 trillion in liquidity.
Swap lines were established to allow for an exchange of euros into dollars.
The Fed had become the de facto backstop of the global banking system. In November 2013, this arrangement was made permanent.
Central banks can now draw unlimited amounts of currency from each other.
What we have, in effect, is a system of global governance that has been slipped into place almost surreptitiously.
Accounts of the financial crisis usually focus on the villains and the shamed, the Fred Goodwins and Sean Fitzpatricks, but there have been quiet heroes too.
One such figure was the late Andrew Crockett who, while in charge at the Bank of International Settlements, put in place mechanisms for cooperation in a crisis which bore fruit in a short few years.
Another crisis, no doubt, is coming down the tracks, but will we secure the sort of response that enables us to avoid another Great Depression?
Some key players are pessimistic. Gordon Brown, last week, warned that we are “sleepwalking into the next crisis” and that the “global economy lacks an early warning system”.
He questions whether the current set of leaders, led by populists like Donald Trump will display the same sense of vision as their predecessors.
With China entangled in a trade war with the US, there is no guarantee that Beijing — with an economy three times as large as in 2008 — will be as cooperative as it was in 2009.
One wonders about the likely contents of the next Adam Tooze tome.
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