The collapse of US investment bank Lehman Brothers is nearing its tenth anniversary. Today stock prices have recovered, banks have beefed up their equity capital, and they’ve refound their conception of themselves. Is the next financial crisis a long way off?
Manuel Ammann Market participants have done quite a lot in the intervening time. You mentioned banks’ equity capital, but I’m thinking also of other measures that market regulation has brought about, such as the institution of centralized counterparties for certain derivative transactions. I see greater transparency and greater stability on the whole today, also because banks have now redesigned their incentive structures with the long term in mind. But there still are some structural factors that make the financial system fragile. The financial crisis ten years ago was partly a debt crisis, and debt in general hasn’t diminished since then – quite the contrary, in fact. The growth in debt is not sustainable, and sooner or later it may lead to another crisis.
Stefan Leins As an ethnologist, I think from the perspective of people. And here, too, I can discern that something has changed. Public awareness of certain risks has certainly increased, though that in itself doesn’t avert them. What’s important to understand is that it’s ultimately people who constitute the market, and because of that, future crises cannot be ruled out.
Ammann Moreover, it would be illusory to believe that crisis-proof markets could even exist. Taking risks is not just part of human nature, but is also an essential component of the mechanism of the market.
Which market participants were to blame, then, for the last financial crisis? When the dot-com bubble burst, scapegoats were quickly found in financial analysts.
Leins The Financial Times in 2001 even ran an editorial titled “Shoot All the Analysts.” The year 2008 was different. The problem evidently was too complex to blame it on a single group of market participants. Yet it was this financial crisis that inspired me to undertake my field research. Over a period of two years, I worked in the financial analysis department of a large bank and conducted participatory observation fieldwork there. Among my colleagues at the bank, there were a few who found themselves at fault. The fact that they had issued recommendations to buy risky stocks or structured products made them guilty in their own eyes. But those financial analysts were the exception rather than the norm.
Ammann As an economist, I harbor near innate doubts about the predictability of markets. Was that a subject of your research?
Leins It was exactly. I asked myself why financial analysts exist in the first place when economic theory actually delegitimizes their forecasts. In this context, and tying in with the question of fault, it’s interesting that although an individual financial analyst cannot steer markets, the entire guild of analysts can indeed move individual stocks or sectors. That’s because there’s a frequently discernable consensus across banks. Take the BRICs, for example, the construct that lumps the individual states of economic development in Brazil, Russia, India, and China into one bucket. The propagation of the BRICs story and the corresponding investments made caused the formulated expectations to actually materialize in the market.