September 15 marks the big anniversary for the world of finance. On this day last year, one of America’s oldest investment banks, Lehman Brothers, went bankrupt, and triggered the worst global economic crisis since the Great Depression of the 1930s. In hindsight, the collapse of Lehman was easily preventable. But for reasons rooted in the unlikely combination of populist politics (no bailout for fat cats) and orthodox free market economics (bad eggs have to go), Lehman was allowed to fail. Of course, that stance was fortunately reversed soon after the severe repercussions of Lehman were felt. That changed stance, along with other proactive fiscal and monetary measures taken (globally) to stem the downward spiral, is probably what saved us from another great depression, turning this into a great recession instead. But the one thing that remains badly scarred, and robbed of credibility, is finance.

The chief villains of the peace, at least if the vast literature on the subject is an indicator, were highly sophisticated financial products and the investment bankers who peddled them to clients all over the world. And now, in September 2009, it’s all too easy to forget how most of the world made merry courtesy the very products and people we now vilify.

Consider, for example, the enormous benefits of the now maligned process of securitisation. This is the process of financial engineering in which a bunch of loans (house loans, auto loans, credit card loans) are bundled together and sold off to an interested investor. Securitisation took loans off the liability side of the balance sheets of banks and brought in funds from those who bought the securitised assets — that enabled them to give even more loans, creating a virtuous cycle of liquidity. Combined with the diversification of risk that securitisation enabled, consumers and businesses were able to access finance cheaply — cheaper than ever before. It’s no surprise then that while the party was on, no one was objecting, not even the subprime borrowers who subsequently lost their homes and savings. Even outside the US and UK, the benefits were enormous. Borrowers (particularly firms) from abroad were also able to access cheap finance and emerging economies like ours were flush with funds propelling growth to levels never seen before.

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