The filing for bankruptcy of investment bank Lehman Brothers on 15 September 2008 triggered, as we now know, the great financial crisis, the worst economic downturn in the US and other advanced and emerging economies since the Great Depression of the 1930s. There are many contours to the fallout of the Lehman collapse, but one which was perhaps not well anticipated was the rise in populism that we are currently witnessing as a principal political fall-out.
It was entirely to be expected that the collapse of Lehman, and the associated meltdown of the US subprime mortgage housing market, would shake faith in the global financial system, and the insouciant assumption made by the world’s central bankers and leading macro-economists before the crisis that financial markets largely functioned well and could be expected to sort out any crises on their own, without the heavy hand of government intervention and heavy regulation.
What was perhaps less obvious was that with the global financial crisis, would follow eventually, a backlash against the global trade regime, and the globalisation project, tout court. It is perfectly logically consistent, and consistent with conventional economics, to support free trade and yet be opposed to unrestricted capital flows, due to the inherent and excessive volatility they create: indeed, economists as otherwise contrary as Jagdish Bhagwati and Joseph Stiglitz agree on this latter point.
Yet, in the public discourse, the global trade and financial regimes were wrongly conflated by both supporters and critics of globalization. The dangerous consequence was that the damage to the global economy wrought by a malfunctioning global financial regime—due as much to the absence of a global monetary order, as argued most pungently by economist Robert Mundell—falsely also tarred the global trade regime. The latter, while hardly perfect, in no way was the proximate cause of the global financial crisis, although—and this is relevant to the rise of populism—it was, and is, widely perceived as resulting in income distributional impacts which favour the wealthy and the skilled to the detriment of the unskilled and poorly educated, especially in advanced economies such as the US.
By 2016, paradoxically, while the worst effects of the crisis were receding, and the world was returning to normalcy, the political backlash appeared with a lag, resulting first in the ‘Brexit’ vote in the UK on 23 June 2016 and then election of insurgent candidate Donald Trump to the US presidency on 8 November 2016. Since then, we have witnessed the rise of populist parties and political candidates (both on the far left and far right) across Europe and elsewhere. Even Canada, seen as one of the last bastions of the old liberal order, elected a populist right wing firebrand in the mould of Trump, Doug Ford, as premier of the most populous province, Ontario, as recently as 29 June.
Populist leaders such as Trump and others cannily tapped into the public’s discontent with the established liberal order, with its twin commitments to free trade and open capital markets, which, as noted, were conflated and jointly painted as the villain of the global financial crisis. Fuelling the discontent was an inchoate sense among many that the global economy had bypassed them, and in a sense they were not wrong: proletarian wages in the US and other advanced economies have stagnated, while the incomes of the educated, wealthy, and well connected have continued to grow apace, resulting in widening inequalities.
It would be hard to deny that globalization, in the form of both unfettered capital flows and of relatively free trade, has contributed to the changing income distribution in the US and other advanced economies. Unfortunately, instead of conceding this possibility, and arguing that harmful distributional consequences could and should be ameliorated by an active public policy response, including income redistribution and worker retraining programmes, many defenders of globalisation derided the critics as misguided and poorly educated malcontents — the notorious “basket of deplorables", as they were termed by Hillary Clinton.
It is not at all surprising, in hindsight, that liberal demonisation of populist leaders and their support base creates a backlash — helping “Leave" to trounce “Remain" in the Brexit referendum, and helping Trump defeat Clinton, among other instances. Indeed, on the latter, I had warned in these pages (“Demonizing Donald Trump won’t work", 6 June 2016) earlier than many that demonising Trump would backfire, and so it would prove.
With the liberal global order appearing increasingly discredited in the eyes of many voters, and populist leaders on the march the world over, it is hard to see how the populist genie may be re-corked anytime soon. This may well be the most lasting and most consequential legacy of Lehman’s collapse.
Vivek Dehejia is a resident senior fellow at the IDFC Institute.