We face a new economic shock, and it’s self-inflicted
A decade on, and the hangover from the financial crash is still giving plenty of workers, governments, companies and financial institutions headaches. Understandably, after the biggest debt binge in history, the return to normality has been slow and painful, and, to the surprise of some, it is not yet over.
And to this, without labouring the point, we are seemingly about to administer another huge shock to the
economy in the form of Brexit – an entirely voluntary, self-inflicted one, in stark contrast to the banking crash or previous economic dislocations. Brexit will be the mother of all unforced errors.
A moment, then, to take stock. The banks, now more closely regulated and better funded than they were before the crisis, are now trusted, if not liked. No one is queuing outside the building society to rescue their savings, as happened at Northern Rock. Yet people across the world who paid the price for the banks’ failures during the recession that followed look askance at the way so few bankers have been held accountable for their actions, still less punished. The ladies and gentlemen of high finance are still on their yachts or the golf course, or else spending more time with their money. The sense of injustice about those years still burns. Fred Goodwin is a name that still raises the hackles.
Most of the banks that were nationalised during the crisis – a course of action plotted by Mervyn King and Gordon Brown, and adopted globally – have been returned to the private sector, though Goodwin’s RBS, owner of NatWest, remains mostly in the hands of the British state. “Toxic” home loan books have sometimes turned out to be much better bets than they first appeared, when no one trusted any asset associated with the mortgage-backed security debacle. Calm has returned to the banking sector, though risks remain – from China in particular. The banks are, though, better prepared for any number of unwelcome developments – a major exception being the Italian ones, a timebomb under the euro.
Worries about the financial future, excluding Brexit, focus elsewhere. Emerging markets are volatile, and have been showing signs of weakness over recent months. In a mirror of the “search for yield” that characterised the run-up to the financial crash, investors have been piling into shares everywhere from India to Brazil, with mixed results. Few would rule out a sharp correction in Mumbai or Beijing, and it would reverberate globally.
If the world learned one thing from the financial crisis after 2008, it was that a crash in one market in a faraway land will swiftly make its presence felt across the world. Savers in Britain were hit by home loans in Florida going bad, the mismanagement of overextended Icelandic banks and the failure of institutions such as Fannie Mae (the US Federal National Mortgage Agency) they had never heard of.
Globalisation was well under way by the time Lehman Brothers closed a decade ago; but the scale and variety of the liabilities it left behind were a potent symbol of a new interconnectedness. None of that has changed, only the source of the dangers. Perhaps the next shock will come from a crash in the Indian equity market, or cyber-raids, such as the hostage software that attacked the NHS, or from a meltdown in the boom in car finance leasing schemes or shady financial institutions in emerging economies. We can be fairly sure that there will be one, because human history is littered with them, along with confident predictions that “this time it’s different”.
For households, these past 10 years have been mixed. In many countries – notably excluding the eurozone – flexible labour markets meant a much slower and smaller rise in unemployment than feared. Joblessness in Britain is at a 40-year low. House prices weathered events correspondingly better too, notably in London, where, if anything, the unaffordability of homes has been the problem.
By the same token, however, workers have seen little if any rise in their real incomes for many years, with millennials being especially disadvantaged. This dissatisfaction with stagnant wage growth has slowly turned into a political phenomenon, with populist parties across the world capitalising on the discontent around globalisation and sometimes unprecedented movements of people. Brexit, Trump and Corbyn, offering facile answers to complex problems, can all be traced back to the financial crisis.
Though far-right and extreme leftist parties do suffer setbacks, and have few real answers to the challenges facing western societies, that trend towards political populism and reversing the tide of globalisation seems set to persist. The isolationist and protectionist policies of the Trump administration are, ironically, ones that increase the possibility of a ruinous setback to global growth and living standards in the coming years.
The world cannot afford a trade war.
Much of the debt run up by the banks has, one way or another, found its way into the public sector, through higher national debts and the balance sheets of central banks. The bad debts had to go somewhere. In the early years of the Great Recession, unprecedented boosts to government spending and a regime of monetary expansion and ultra-low interest rates stabilised economies, but at a cost to communities. Under the austerity policies pursued by some, the level of government indebtedness, perversely, sometimes grew faster than otherwise might have been the case.
As for Brexit, the briefing by Mark Carney, governor of the Bank of England, to cabinet ministers was apparently greeted with silence. Whether that was politeness or shock is not recorded. Mr Carney, who has no axe to grind, spelled out the “worst case scenario” – property values crashing 30 per cent, unemployment rates more than 10 per cent (double current levels), net emigration from the UK, inflation, higher interest rates. Mr Carney did not indulge in wishful words about “Global Britain”, summon up the spirit of Dunkirk or extol the “exciting opportunities” that Brexit, as we were once promised, would swiftly bring. The cold hard fact is that Brexit could mean, as he told his political chiefs, economic damage as bad as that which was inflicted in the 2008 banking crisis. There is really nothing that anyone can add to that.