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Ten years ago this summer, I was on a family holiday in Mallorca. Four weeks after I became chancellor of the exchequer, the economic waters seemed as calm as the Mediterranean.
Dispatched to buy the morning bread, I picked up a copy of the FT. There, buried inside, was a short report. A French bank had closed three of its funds because they could no longer be confident of their value.
Another report on the same page told me that there were concerns about a German regional bank. The stories made me stand stock still. If this was happening in Europe, the same problems must exist in London and the US. So indeed it proved.
This was the start of the worst financial crisis in modern times. First financial, then economic and deeply political. We are living with the consequences still.
An outward-looking globalised world has been replaced by a darker, narrower political and economic approach. A classic Keynesian model where governments supported their economies was abandoned in favour of austerity.The decade that followed saw falling living standards and increased uncertainty. In the UK it paved the way for Brexit.
Just four weeks after those first European bank crashes, we had the first run on a British bank for a hundred years. As the queues grew outside Northern Rock branches, we saw first-hand what happens when panic sets in. The government eventually had to nationalise it.
That is why, just 12 months later, we were determined to prevent the collapse of the world’s largest bank — RBS. I’ll never forget the call from the bank’s then chairman on October 7 2008. That morning RBS shares had been suspended by the London Stock Exchange as confidence in the lender finally collapsed. He told me his bank was haemorrhaging money. I asked how long they could last. His reply was chilling. Maybe two or three hours, he said. Had RBS collapsed, it would have brought down our banking system in the UK and elsewhere. Truly we were on the brink.
But we had a plan and it worked. The banking crisis inevitably became an economic crisis. In 2008, countries across the world took action to prevent recession slumping into depression. Sadly, that unified approach fell apart two years later, leaving low interest rates and quantitative easing as the weapons of choice. What was intended to be short-term shock therapy is still in use today. QE is not a long-term remedy for a chronic problem.
A decade on, banks are better capitalised and safer. Most people recognise that a new, more robust regulatory regime was needed. Of course, it needs development and refinement. But we cannot return to the past.
What other lessons need to be heeded? One of the biggest risks is the interconnected nature of the world’s financial system. The subprime crisis in the US affected Northern Rock within weeks. Equally, the practice of banks and others acquiring exotic instruments that they did not understand proved to be widespread. No wonder they stopped lending to each other as panic set in.
Equally, in the UK, bad lending decisions were underpinned by the illusion that commercial property would not lose its value.
This makes it imperative for banks, regulators and governments to understand the risks they take on. A CEO of a UK bank tried to reassure me in October 2008 that he was bringing matters under control. He said: “From now on we’ll only take on risks we understand.” So what was he doing before that?
We are right to focus on what will happen when interest rates start to rise and cheap money comes to an end. Growth financed by credit is not a long-term answer to today’s problems.
Of course, when economies are growing, financial problems are more easily dealt with.
Today’s economic outlook is uncertain. The political climate, in which protectionism is preferred to fair and free trade, is a major risk. While we were strong enough to deal with the crisis a decade ago, we are not in the same position today.
Brexit can only exacerbate the problem. The government is trying to salvage what it can but we know from past experience that uncertainty makes the world a much more risky place to do business. We should be on our guard — complacency is perhaps the biggest risk of all.
Almost a decade ago, I said that the then crisis would be more profound and long lasting than people thought. Little did I realise, as I read the paper in the Mediterranean sun, that 10 years on we would still be wrestling with its consequences.
Alistair Darling was chancellor of the exchequer from 2007 to 2010
Photograph: Getty
This article has been amended since publication to reflect the fact that the French bank mentioned above, BNP Paribas, closed three funds in August 2007