Anniversary: The Lehman Brothers crash 10 years ago today brought with it credit markets worldwide and is felt by many to have triggered the global economic crisis of 2008

Ten years ago today, September 15, the American financial services firm Lehman Brothers lodged the largest bankruptcy filing in US history.

Conspicuously without the assistance of the US Federal Reserve, Lehman - now a household name in most of the western world - collapsed overnight. Lehman brought with it credit markets worldwide and is felt by many to have triggered the global economic crisis of 2008. Could this kind of far-reaching implosion happen again? The author and financial expert Larry McDonald, founder of The Bear Traps Report and once himself a trader at Lehman on Wall Street, says it can.

Today, McDonald's dedicated investment research publication works with roughly 150 different pension funds, asset managers, hedge funds, mutual funds, and family offices, and uses what he calls the "21 Lehman Systemic Risk Indicators" to keep tabs on movements in the market and warn clients of possible pitfalls ahead.

"If you didn't re-invent yourself [after the banking collapse], then you're probably not around any more," McDonald tells Review.

He says that a close relationship with regulators caused much boldness on the part of banks and lenders, then and now.

"When I was on the Lehman trading floor in 2006, the Fed [the US Federal Reserve] was giving Lehman management so much visibility into policy that Lehman management was telling us: take more risk, take more risk, take more risk," McDonald says.

According to McDonald, the Fed created a dynamic that was conducive to complacency. "I think that if the Fed raised interest rates the way they did in 2004, or 2006, in a preemptive move, the financial crisis might not have happened," he says.

McDonald says that the reason so much risk is being taken today is that central bankers in many jurisdictions continue to share their plans with banks. "Look back 70 years," he says. "Each financial crisis brings with it a metamorphosis into another serpent, another shade of beast. When I was in my early 20s, it was the S&L Crisis in America. Ten years later, emerging markets and currencies, and 10 years later, Lehman and the banks."

The regulators have turned their attention to the banks but, according to McDonald, the next big risk is likely exchange-traded funds [ETFs]. He said some 600 ETFs owned seven or eight of what are known as "FANG" (Facebook, Apple, Netflix, Google) stocks. "So many ETFs own these stocks. So much American wealth is tied into them and there's no regulation, no controls," McDonald says. "Two trillion American dollars has gone into passive asset management. And that means that money has to go into FANGs, they're the big stocks. Everybody owns the same thing. That's the next big fallout."

McDonald thinks that global economies are "within six months of a major, major drawdown".

"It's not going to be anything like Lehman," he says. "There's no one specific bank that's going to blow up, that's then going to blow up the world. That's been fixed. The next crisis will be much more leverage-driven from emerging markets."

According to Steve Keen, professor of economics at Kingston University London, "the mistake of the regulators is they're all trained in conventional economics. And conventional economics says there is nothing wrong with a high level of private debt.

"That's what caused the crisis. It's like a sailor who has spent their entire time learning how to sail a ship on the equator and is now sailing towards the North Pole and thinks that icebergs are nice fluffy things you can ride right through to get some extra moisture for people on the deck," Keen adds.

"In other words, they have no bloody idea what's caused the crisis and everything they've done has not reduced the levels of private debt, or stopped credit from becoming too much a part of demand.

"They've done absolutely nothing about either of those things. When the crisis hits in the future, they'll be just as blind as they were in 2007."

Keen says that regulators needed to limit what banks were able to create money for. "At the moment they create money for speculation on assets," he says.

"The whole thing is an asset cost that continues to rise, and what allows costs to continue to rise is more leverage. They don't understand that private debt is dangerous."

Banks need to be prevented from lending on the basis of asset costs alone, Keen says, lending instead on income or earning capacity.

"They don't understand that private debt is dangerous," he says. "If you don't understand that, you have no chance of starting a regime that can stop that from happening in the future."

One such measure suggested by Keen is "PiLL" which stands of Property Income Limited Leverage. With this plan, banks could only lend to income or earning capacity.

"So for example you're buying a house, you would not allow banks to lend more than 10x the annual rental income of a property. That would no longer reward leverage," Keen says.

"There would be a maximum people could get and it would be the same for everybody. Nothing like that has been brought in."

Ireland allowed a "ridiculous level" of private debt to build up before the crash, according to Keen, who notes: "You've got another housing bubble already."

Keen was in Ireland last year and was stunned to see a quote in a news story from the governor of the Central Bank that read "house prices are not a one-way bet". "You couldn't make this up," he says.

"Nothing has been said or done to change how banks behave.

"Ireland is one of the prime candidates for another crisis, I believe," Keen continues. "And so are Australia, Canada, South Korea and China, who pushed private debt to avoid their own crises 10 years ago."

For Keen, a long-term critic of conventional economic thought, the response from mainstream economists to his accurate predictions pertaining to 2008 and beyond has been interesting.

"They originally treated us the same way the Catholic Church treated Copernicus and Galileo," Keen says.

"When we said they weren't the centre of the universe, they weren't very happy with us. When it turned out Copernicus and Galileo were right, the church got even angrier. That's how conventional economists respond. They don't like being told they are wrong."

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