We always have the poor with us, Jesus said. One year on, it may seem like we’ll have the financial crisis with us too.
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Certainly, a sense of numbness has descended on financial markets. Investors seem resigned to more bank failures, falling house prices and yet more deleveraging. But the numbness doesn’t mean normality. When will normality return?
Probably not for at least a year. That’s what will be needed for house prices on both sides of the Atlantic to hit bottom and for the great deleveraging wave to work its way through the system. It could take longer if the recent unexpected strength of the US economy fades or weakness in Europe and Japan persists—as banks would face more holes in their balance sheets.
But even when normality returns, it won’t be the same as in the heady days of the bubble. There will be three main differences. First, governments will have bigger fiscal deficits—bloated by issues such as slow growth and bank rescues. The long-term consequence is likely to be higher taxes.
Second, the world will have inherited higher inflation. Deleveraging and the recent decline in oil prices will eventually bring some relief to inflation, but we won’t get back to the old days of low inflation and high growth for many years.
Finally, within the financial industry itself, employment levels will take several years to recover to its pre-bubble levels. Bonuses and returns on equity will take even longer to recapture those peaks. The financial crisis won’t always be with us. But its consequences will certainly linger for a very long time.