What has changed 10 years on from the collapse of Lehman Brothers?
The Boom before the Bust
I started working life in the late summer of 2005. Times were good, very good in fact. It was a great time to be a young management consultant in the City of London as the place was awash with money. Big dinners and lavish away days were pretty commonplace and there was a real feeling of a classic boom that our parents had seen in the 1980’s. The pubs and wine bars around London were full every night of the week and everyone was buoyant in spite of the uncertainty that had been created by tragedies of 9/11 and 7/7.
Tony Blair’s government had arrived on the scene a number of years earlier in 1997 with a promise that “things could only get better.” Blair and his then Chancellor, Gordon Brown, began to relax regulation across the City. The similarities with the Thatcher Boom created by The Big Bang in the mid 1980’s were clear to be seen and by the mid 2000’s the boom was in full flow. The benefit of this boom was not just felt by those in the City. For example homeowners across the country benefited from an increase in the average house price £100,000 in 2000 to a staggering £190,000 by 2007. A near doubling in 7 years really should have rang more alarm bells as the classic signs of the bubble were there.
Some predicted the impending Global Financial Crisis (GFC), see The Big Short for those that want the Hollywood version. Many, however, did not and it is clear that the majority of the population have suffered the consequences over the past 10 years despite what many politicians will attempt to tell you.
The end of Lehman Brothers
Lehman Brothers fell on 15th September 2008 and for many this will be the abiding memory of the crisis. I was on holiday with some friends in Cyprus when that particularly drama unfolded. The image of men and women being escorted from large offices across the globe with cardboard boxes will live long in the memory. Watching images of those reports with stock tickers showing double digit % drops in markets across the globe underneath was truly frightening.
The reality is the crisis started long before the drama of Lehman Brothers. Their investment decisions and high levels of exposure to the US subprime market were enough to signal their end. The relaxation of regulation, the availability of cheap credit and the securitization of mortgages were the real culprits behind the crash of ’08. The aforementioned boom sucked many in and it became a classic gold rush.
From a personal perspective, the impact on me was limited in the first couple of years. I worked at one of the leading professional services businesses in the UK and they are often well protected against downturns as their clients need help to survive, innovate or die. However, many close to me were feeling the strain. Investments that friends had made went wrong and fast. Some lost money overnight in investment schemes exposed to Iceland. By Christmas of 2008, the FTSE 100 had fallen by 23.4%. The markets would recover to record levels but many would have a torrid 10 years as the effects took hold.
Are we better off now?
Let’s start with the good news, and there is some. The markets have by and large been booming. An investment in a FTSE All share index of £10,000 just before the crash would now be worth £14,893, without including dividends, and £21,352 if you had reinvested dividends (Source: The Guardian, September 2018). Doubling your money in 10 years should always be seen as a superb return from any investment. Once you account for inflation, this increase is still over 60%.
Homeowners have also seen a rise in the value of their assets. Average house prices have risen by over £56,000 from September 2008 to the most recent data from this year. Average house prices in the UK now stand at £228,384 (Source: ONS Data). This data point is very broad and the detail is not as positive. London prices have soared post the crash and this has benefited many. Some areas of the country, however, are still only around pre crash price levels, including the average house prices in Scotland and Wales. Once you consider inflation, then real house prices have actually been static.
The boom of the early 00’s felt like a boom. Some of the data above may make many look around for signs of the boom we should be in now. It is pretty clear it hasn’t materialised. It has been a long hard 10 years for most. Austerity has impacted many, particularly those from the traditional working classes, whilst the middle classes have been squeezed. The data point that brings this home is the fact that the real wage growth has pretty much been static for the past 10 years. Data from the ONS reveals that there has been a 1.17% drop in real wages from September 2008 to June 2018 (Source: ONS Data). This figure is shocking in light of the fact that GDP has grown approximately 12% in the same period.
When you combine these data points together it doesn’t take much analysis to work out who has benefitted from the last 10 years. Wealth inequality since the Global Financial Crisis has grown to obscene levels, the rich are getting richer, the home owning middle classes are going nowhere fast and the poor are getting poorer. That is the legacy of the Global Financial Crisis of 2008.
So what can be done?
This is all a bleak picture. We have had a 10 year so-called boom that has only been enjoyed by a tiny percentage of the population. We are now facing increasing levels of personal debt in the UK, a bizarre situation of our country heading towards a suicidal Brexit with no u-turn in sight and Trump’s America de-regulating their financial services sector once again. Many have argued that another crash is coming but to be quite frank well over 90% of the country haven’t got over the last one yet. The impact that such a crash will have is a concern to many, perhaps not our politicians but certainly everyone else.
The record low interest rates of the past 10 years have not put off savers in the UK. Hargreaves Lansdown recently released data that says there has been an enormous rise in the amount of money held in accounts paying no interest in the last decade. The figure has risen in September 2008 from £48bn to £164bn today (Source: Gov.UK Data). It is well publicised that interest rates post 2008 have been at record low levels. This has hurt savers but they have continued to put money in to accounts that lose them money once inflation is considered. Since 2008, over 100 million Cash ISA accounts have been subscribed to whilst only 28 million stocks and shares ISA accounts have been subscribed to. These figures are slightly more balanced when you look at the amount saved vs invested (standing at £415 billion vs £182 billion).
The UK have a good saving culture but we are not the most prolific investors, certainly compared to our US cousins. Over 55% of Americans own stocks in some capacity (Source: Statista). There is not a directly comparable data point for the UK, other than the fact that only 10% of the UK stock market is owned by individuals from this country. That is down from well over 50% in the 1960s (Source: Financial Times)
Many would argue that it is not the best time to invest given we are on the back of one of the longest bull markets the world has seen. However, a longer term shift in investor patterns and behaviours is needed in the UK. This may help smooth some of the inequality that exists today as many do not feel confident enough to invest their money so they continue to save money that is being eroded by inflation. I believe that this is one of biggest challenge that exists in the UK economy today. How can we change behaviours so that the middle and working classes can start to fight back against the inequality that has grown since the crash of Lehman Brothers 10 years ago last week?
This is what Pia has been built to do. It is time to change the way people view investing in the UK. Get in touch to find out more or register at yourpia.com for early access.
