Are we experiencing another ‘Lehman moment’?

With fears of a global recession and the UK market in free fall, Money Management journalist, Alexandra Vanags, reflects on her own ‘Lehman moment’ 14 years ago.

On a September day 14 years ago, my colleague and I walked out of Canary Wharf station in London. We were on our way to a pre-arranged meeting with a contact. Nothing unusual, except the contact was from Lehman Brothers and this was the day of the Lehman Brothers collapse.

“Are you sure it’s still okay to have this lunch?” I asked uncertainly as he came down to meet us.

“Why not. This afternoon’s going to be tough,” was the reply.

I don’t remember the now-famous images of people walking out of the office with their possessions in cardboard boxes. Perhaps that came later in the day. What I do remember is how quiet the restaurant was, and how much our lunch partner talked about concern for his team as he waited helplessly for the coming storm.

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That day is now probably considered the key moment of the Global Financial Crisis (GFC). There are others that stand out too – a few months before, I saw older relatives transfer their savings between different accounts to stay under the deposit guarantee after the run on mortgage lender Northern Rock.

I watched a friend who had migrated to the US abandon his house after its value dropped dramatically and it became a ‘debt prison’.

As an M&A journalist, I had spent the past few years reporting on cashed-up private equity firms doing one highly-leveraged buyout after another. This went completely into hibernation and some assets even came back on the market after falling values and revenues made it difficult to maintain debt covenants.

When I told my editor that my British husband and I were moving back down under, she said with a sigh: “I don’t blame you. Everyone’s getting out of London”.

A turning point

When I arrived back in Australia, I was somewhat bemused by the dramatic exclamations about the GFC, which seemed at odds with the mildness of the situation, at least compared to the UK (incidentally, GFC was a term I never heard before I moved back here). The impacts of the financial crisis, while not completely absent, were noticeably less severe than on the other side of the world. We all know that this was due to a number of reasons, including limited exposure to the US housing market, and China’s appetite for our natural resources.  

Now, we could be at another turning point. The UK is heading for recession, or may already be in one. The pound has been dropping, which may put even more pressure on already high living costs.

My impression, from speaking to family, friends and contacts over there, is that the national mood is already starting to reflect this. The US may enter a recession too, and it may even take hold globally.

Another RBA rate hike is imminent, and in recent days some economists have said the hikes are putting Australia at risk of a recession too.

Jo Masters from Barrenjoey warned of a recession if the Reserve Bank of Australia (RBA) keeps raising rates as predicted. AMP’s Shane Oliver says the risk of recession is now around 40%, if the cash rate peaks around 3%. If it rises to 4.3% as predicted by the money market then recession is probable. He argues that the RBA should not raise rates as aggressively as the US Fed – the main argument on the other side, of course, is that the Australian dollar could crash otherwise. 

CommSec’s Craig James says that if people can hold on to their jobs and continue to spend, the better the chance of slowdown, not shutdown. He says that 1994 [a period of rate hikes in Australia and the US] shows that “the aggressive pace of rate hikes is not something to fear in its own right”.

In an address to Parliament in September, RBA Governor Philip Lowe said the RBA will do what is necessary to bring inflation back to the two to three per cent target range, but also that we are “not on a pre-set path”.

That path, he says, “is a narrow one and clouded in uncertainty”. One on hand, he notes, household spending is under pressure from rising rates. Yet we are still benefitting from a strong labour market.

I’m no economic expert myself, but as an interested observer, I’ll be keeping an eye out to see if this is indeed another Lehman moment.  Many readers probably remember our last recession; I was still in primary school when Paul Keating stood up and uttered the famous words of that time, ‘the recession we had to have’.

Let’s see what we remember from this era in years to come.