The real reason for the Financial Crisis

The Greens in England and Wales are campaigning on the basis that a failure in banking regulation led to the financial crisis and to (what they call) “austerity”. This is comprehensively wrong.

The marginal buyer of Swiss luxury goods nowadays is more likely to be in Beijing or Shanghai than Frankfurt or Paris”. So said Kit Juckes of the Societe Generale to explain why Switzerland has stopped pegging the Swiss Franc against the Euro (or, more precisely, has stopped intervening to stop it falling below a certain value). That statement alone explains the real origin of the financial crisis – even if populists, on left and right, do not care to admit it.

I outlined the long story last year, but the short story is simple. We are not as rich as we were. By “rich”, I really mean that we are not providing goods and services to the value, compared to the rest of the world, that we (in the West) once did. This has partly to do with the rise of the East, as it becomes more efficient, diligent and knowledgeable; and it has partly to do with the decline of the West, which has become inefficient, lazy and ignorant. It is this which has caused the West to become indebted, as its people seek to maintain a standard of living – modern gadgets, owned homes, wide-ranging welfare etc – which they have not actually earned.

Lax banking regulation was a symptom of the problem, not the cause. It came about because Westerners increasingly sought to borrow money – in companies for gadgets, in households for mortgages, in governments for welfare and public sector wages – which could only be lent through ever more complex “financial products”. These “products” existed because of the demand for them, not the other way around. Or, put another way, if the borrowing had not been allowed due to lax banking regulation, the economy would not have boomed in the first place – because we would have consumed less; rented more; and had fewer public services and welfare provisions. Public expenditure (but also consumer spending and business borrowing) only reached the level it did because no one asked too many questions about where the money came from (hence governments’ generosity to the banks and other financial institutions). In other words, in the alternate universe where banks were properly regulated and thus borrowing was restricted, public spending would be much lower anyway as it would be harder for governments to borrow and the economy would have grown more slowly due to lower consumer spending and less trade.

The crux of the problem is that populists – again, on left and right – are suggesting that somehow 2007 was the “norm” for the UK (and broad Western World) economy. 2007 was the blip, on the back of a crazed binge. Anyone who suggests otherwise should not be entrusted with the stewardship of the economy, because they refuse to understand the global context. Meanwhile, we should get rid of all those graphs which compare today with the situation in 2007 – 2007 was the ideal world; we are now in the real world.


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