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When copies of The Great Crash: 1929 by JK Galbraith were on their way back from the printer in 1955, its author was giving evidence to a Senate hearing – during which there was a sudden stockmarket crash. He was blamed for it.
Galbraith wasn’t a market maker or breaker. His book just made a simple point, repeatedly: that among financiers a sense of responsibility for the system they are part of is not just low, but virtually non-existent. Hence the permanent need for strong regulation.
Alan Greenspan, the former chairman of the Federal Reserve, clearly wasn’t listening because his recent words appear forlorn, almost childishly naive: “I made a mistake,” he said, “in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms.”
Yesterday Alistair Darling, Adair Turner and Mervyn King were all hauled before the Treasury select committee to answer for the handling of the crisis. Darling, the chancellor, and King, the governor of the Bank of England, do have much to answer for (Turner being too new as head of the Financial Services Authority). But were they even asked the right questions?
The predictable crisis in the global system is the most important sign yet that a new economics is emerging. The tragedy is that the crisis-ridden financial system has long since failed to do the basic job required – to underpin the productive economy, and the fundamental operating systems upon which we all depend. These have been variously neglected, taken for granted or cannibalised by finance. They include the core economy of family, neighbourhood, community, and society, and the natural economy of the biosphere, our oceans, forests, and fields.
Worse, even when the financial system has been working at full throttle, it corrodes the real economy by its sheer profitability and faulty measuring and dominates the policy priorities of politicians.
If nothing else, the crisis provides an opportunity to rebuild a financial infrastructure which does the job, which means investing – not just bailing out failed banks – but in loan facilities for an interdependent network of productive local economies that genuinely underpin life and works within the tolerance levels of the natural environment. This is now possible because the state owns a large slice of the financial system.
The priority of politicians is to restore the normal functioning of the banking and financial system. A rapid return to ‘business as usual’ is the plan, which will hopefully be accompanied by an ‘upside’ for taxpayers as governments are able to sell their equity stakes at a profit when normal market conditions return.
This is all very comforting of course, but is it actually such a good idea? After all, it was ‘business as usual’ that got us into this mess in the first place. We now have a unique opportunity to pause and consider what the financial sector is actually for and to put in place institutional and regulatory structures that enable it to perform these functions well.
new economics regards finance as a means to an end: to support inclusive, equitable and sustainable economic activity that creates real value – economic, social and environmental. It is difficult to argue that much of what the financial sector has been focusing on relates positively to these factors, or that a return to ‘normality’ would change this.
If our current system does not support these outcomes, the question arises as to what would. The following six principles are the starting point for rebuilding the financial system so that it supports, rather than corrodes, the real economy.
It was not so long ago that Gordon Brown claimed to have abolished ‘boom and bust’. As we enter what everyone now thinks will be a deep and prolonged recession this claim is looking – being as generous as possible – a little over optimistic.
The government is keen to stress that the current crisis was not ‘made in the UK’, and it is certainly true that this is now a global crisis that no country can insulate itself from completely.
Having said that, we have long heard claims that the UK is in a better position to weather economic and financial storms because of our stable economy and sound system of financial regulation and macroeconomic policy…
If this is true it is a bit odd that only a few weeks ago the OECD argued that the UK was, in actual fact, the worst placed among the major developed economies. Rather than being in a better position than everyone else, it seems that we are in actual fact in the worst.
Why might this be?
The most obvious reason is that the crashing financial sector is much more important to the UK economy than to most others – even the US. At least until very recently, the financial sector accounted for 10 per cent of UK GDP, and a quarter of all income tax, and had been growing in importance since the 1980s at the same time as the importance of manufacturing has steadily fallen.
This has not just happened of course – successive governments have championed the growth of the financial sector, much to the irritation of manufacturers who have long complained that economic policy has been skewed towards the needs of the financial rather than the real economy. This seemed fine during the ‘long boom’, but looks very unwise now.
The second factor is consumption. As with the financial sector, the UK has the highest level of consumption (around 90 per cent of GDP) of any other G7 economy. Again, this has been growing steadily since the 1980s at the same time as investment has become less important.
The final piece of the jigsaw is debt. UK household debt is the highest of the G7 economies at 109 per cent of GDP and has also been growing fast in recent decades.
This does not sound like a stable, well-balanced economy equipped to withstand turbulent times, but one that has become increasingly dominated by the financial sector, and which is fuelled by unsustainable consumption based on ever higher levels of debt.
When commentators talk gravely about the dire impacts of falling consumer spending they do so with good reason. The UK economy has become less stable, less diverse and more dependent on consumption and debt – which has obviously been of great benefit to the financial services sector – than any other major economy.
As we look to rebuild from the ashes of the current crisis it is vital that we do so in a way that invests for the long-term to build a diversified, sustainable economy, where finance is the servant and not the master.
Now, this is the country that brought the world the Hooters Mastercard (“It says Hooters on the card!” No kidding.) so perhaps we shouldn’t be too surprised. But who would bet against there being a similar trend in the UK?
There are several reasons we might want to worry about excessive and unsustainable borrowing, but one we should be talking about a lot more is mental health. As the new Foresight report makes clear, much of the latest research implicates debt as a major causal factor in clinical mental illness.