Ten years after the collapse of Lehman Brothers sparked the worst financial crisis in history, its effects still shape contemporary politics and economics. Coming on the heels of military fiascoes in Afghanistan and Iraq, the crisis destroyed whatever lingering reputation U.S. elites retained for competence and fairness. As fading graffiti on the wall of an empty parking lot in West Texas declares in the 2016 thriller Hell or High Water, “3 tours in Iraq but no bailout for people like us.”
The polarized, radicalized political chaos we see today, in fact, is in large part the classic aftermath of major economic turmoil. As the economists Carmen Reinhart and Vincent Reinhart note in a new essay for Foreign Affairs, “Financial crises do so much economic damage for a simple reason: they destroy a lot of wealth very fast.” When wealth is destroyed, people get angry. And when they realize the mandarins supposedly looking out for them were actually taking the other side of their trades and laughing all the way to the bank, they get even angrier. In retrospect, anything less than a virulent populist backlash would have been surprising.
Surveying the historical record, Manuel Funke, Moritz Schularick, and Christoph Trebesch argue, “Far-right parties are the biggest beneficiaries of financial crashes.” Why not the left? Because downward mobility pushes people to the right, especially when demagogues offer up outsider scapegoats to blame for the problem. Usually the boost lasts just a few years, however. The effects of this crisis have lasted twice as long, because it was so huge and was turbocharged by other issues such as terrorism and immigration.
Given the pretensions of economists to scientific rigor, one might expect the economic side of the postcrisis ledger to be clearer, with a clean story line and consensus lessons learned. Actually, they’re still fighting over what happened and why. The economist Raghuram Rajan has done a good job tracing the structural economic problems that gave rise to the crisis and warning about the dangers of easy national credit. The British historian Adam Tooze explains the overlooked international dimensions of the disaster. And former U.S. Secretary of the Treasury Timothy Geithner warns that postcrisis reforms have so neutered executive branch policymakers, they will be unable to improvise successfully next time.
The supposed “great moderation” of the first decade of the twenty-first century—the notion that wise policymakers had tamed economic cycles for good—proved to be an illusion. Nobody expected the whole system to collapse into world-historical disaster. Nobody thinks the system is fully safe now. And nobody thinks we have adequate plans and resources to handle the next crisis, which may well be coming soon to a developing country near you.