Economy on the edge

Did Lehman Brothers' demise trigger fears of a global collapse?

BBC Radio 4's Analysis: Economy on the edge is broadcast on Monday 8 June at 20.30 BST.

Read the programme transcript

In this week's Analysis programme Martin Wolf of the Financial Times talks to some of the world's leading economic policy makers about the reasons the word's economy was pushed to the brink of collapse in the autumn of last year.

Are we past the worst or will the green shoots that have been sprouting up of late wither on the vine?

It was an accident which had catastrophic results Goerge Soros, chairman of Soros Fund Management

Turning point

The global financial system has witnessed some of the most dire events since the Great Depression of the 1930s.

Most observers agree that there was a moment when everything changed - the day that Lehman Brothers was allowed to collapse.

"It was a policy mistake - it was an accident which had catastrophic results" says George Soros, chairman of Soros Fund Management and author of the book "The Crash of 2008."

"But it doesn't necessarily mean that if that accident hadn't occurred that no other accident might have occurred.

"So yes it did change the game - it changed history in a way."

Pinpointing the demise of Lehman Brothers as the trigger for dramatic fears of a global systemic collapse is a view shared by Lawrence Summers, director of President Barack Obama's National Economic Council.

"Certainly there was no moment more decisive than the Lehman moment and its aftermath.

"But I think it is important to recognize that a global event was caused by fundamental imbalances and building up of asset price bubbles and so a very, very difficult period was almost inevitable.

"That said, I think the authorities in allowing the Lehman situation to unfold uncontrolled, substantially underestimated what the collateral consequences would be."

The only green shoots I've seen are in my garden Willem Buiter, professor of European political economy at the London School of Economics

It has been several months now since governments around the world started working together and put huge amounts of money into the banking system to keep the world in working financial order.

Are these conventional and unconventional actions working?

Is there really light at the end of the tunnel and the sightings of those all important green shoots?

Willem Buiter, professor of European political economy at the London School of Economics and former member of the monetary policy committee of the Bank of England, thinks not.

"The only green shoots I've seen are in my garden.

"I do believe that things are getting worse at a rather slower rate now.

"President Trichet of the European Central Bank referred to the economy as being at a point of inflection.

"That's basically a point where things get worse at a slower rate and I think that's where we are now.

"We haven't bottomed out yet, we haven't reached a turning point, but we are approaching the turning point.

"We are no longer declining as fast as we were before.

"But for the world as a whole, no, this is going to be a long slog still."

Public and private

Christine Lagarde, Minster of Economic Affairs, Industry and Employment in France also believes we are not out of the woods yet and the only way that real growth is going to happen is when private sector stability does not rely on help from the public sector.

"We need the recovery and we need to be able to finance the recovery which at the moment can only be done through public finance which themselves, in the main, are funded by growing deficits, some countries more than others.

"But it's not a recovery that can be prolonged on the basis of that financing and that funding.

"So, we need to be able to pass the baton to the private sector to the traditional ways of financing growth in our respective economies."

Uncertainty - defining characteristic of the global recession?

And in China, until last year known as the work shop of the world, Zhu Min, executive vice president of the Bank of China, has also been looking at the global economic data.

It may be that green shoots have been sprouting up solely because of the force feeding of exceptional stimulus packages and that more trouble is still on the horizon.

"My basic estimation is that the whole crisis probably will cost the whole financial sector roughly $2.8tn US (£1.75tn).

"Now, if we take $2.8tn as a number, so far we've only written off roughly $1.4tn.

"We still have half to go - if one half made the world such a mess how can we go another half?

"Who has the money?"

Uncertainty seems to be a defining characteristic of the Great Global Recession of 2008.

It may be some time before experts can say with any certainty that they can truly see growth and prosperity returning to the world economic stage.

---

Contributors:

Lawrence Summers, director, National Economic Council, United States

Christine Lagarde, Minister of Economic Affairs, Industry and Employment, France

George Soros, chairman, Soros Fund Management and author of The Crash of 2008

Zhu Min, executive vice president, Bank of China

Willem Buiter, professor of European Political Economy, London School of Economics

Presenter: Martin Wolf

Producer: Sandra Kanthal

Editor: Innes Bowen

---

Coming up

Next week: As British troops complete their withdrawal from Iraq, Bronwen Maddox investigates what the country's future will look like.