Simon Wren-Lewis provides a number of statements of economic understanding that are shared by many other academics. They deserve as wide a currency as possible. This post is one instrument in addressing that need to circulate the truth. Only the other day, I read the words of one Tory minister who had been programmed to repeat the lie that the financial crash of 2018 was due to Labour misgovernment and excessive public borrowing. Fake news, as they say these days, and here's a summary of Simon Wren-Lewis to show why:
- What the West experienced in 2008 - the Global Financial Crisis (GFC) - was a global bank run, a complete collapse of interbank credit. 'Never before', as Tooze writes, 'not even in the 1930s, had such a large and interconnected system come so close to total implosion'.
- It was only the often frantic interventions of central banks and governments that mitigated the impact of the crisis. [RD - The Labour Government with Gordon Brown as PM and Alistair Darling as Chancellor of the Exchequer were vital to that rescue operation]
- The implosion was triggered by events in the US, but … the more fundamental reason for the collapse was that the transatlantic banking system, which is in practice a 'tight-knit corporate oligarchy' of around 25 global banks, had left itself without buffers sufficiently robust to cushion it against local shocks. The banks had become highly leveraged: they had loaned far too much money compared to their capital and so they couldn't cover the total amount of loans going bad.
- It is taken for granted by many [moulded by Conservative ignorance, or misjudgement, or simple lies] that the collapse of the UK banking system reflected a crisis originating in UK borrowing, and that people and governments before the GFC must have indulged in overspending. That is simply not the case.
- The UK banking system got into trouble because it had far too little capital compared to the size of its loan book, and the loans that went bad were not to UK residents or firms. Northern Rock collapsed because it got its money for loans from short-term borrowing on the global interbank market rather than from domestic savers, and in 2007 those loans dried up.
- The GFC was a regulatory failure not just in the sense that an overleveraged transatlantic banking system was allowed to develop in the first place, but also in the sense that the warning signs in the mid-2000s were ignored - by the Bank of England and the national regulator and politicians of all parties.
- The Fed and the US Treasury did respond through bail-outs in a way that rescued the system across the Atlantic. In contrast, European politicians talked and acted as if it were a government debt crisis rather than a banking crisis and there was a widespread adoption of austerity policies in the Eurozone. This in turn was the main cause of a second Eurozone recession in 2012, which - in Tooze's words - 'through wilful policy choices ' drove up unemployment across Europe. 'It is a spectacle that ought to inspire outrage. Millions have suffered for no good reason. ' [My italics]
- In this story, the UK mirrored the worthwhile policies of the United States from 2008 to 2010. The UK economy was beginning to recover from the GFC under the guidance of the Labour government. Then, the newly elected Conservative-led government switched the UK onto the Eurozone's path of austerity. [As Jeremy Corbyn has said time and time again, 'Austerity was never an economic necessity, it was always a political choice'. Remember - millions have suffered for no good reason. Be outraged!]
- And now for the Trump and Brexit conclusions to this story of appalling misgovernment. In the US, although the policymakers succeeded in preventing an outcome worse than the Depression, they did so by fixing Wall Street much more than Main Street. There was modest growth after the crisis, but much of it went to the 1 per cent, not the 99 per cent.
- In the UK, Tory austerity also led to the weakest economic recovery in at least a hundred years. [Keep seeing this sentence whenever you see and hear a Tory minister boasting about what a wonderful state the economy is in because of their policies.]
- All this provided the fuel for populism to emerge as a serious political force. The implementation of austerity meant denying help to millions of people. To carry that off required politicians and influential parts of the media to ignore or actively suppress expert consensus (as well as the overwhelming evidence on which it is based) that austerity is harmful and unnecessary. In other words, a political deceit with huge costs to the economy was enacted in order to achieve a political or ideological goal.
The consequences have been the people's revenge. Alienation has produced Trump in the US and Brexit in the UK.
And at every stage, Jeremy Corbyn and like-minded socialists have been calling it right - speaking words of truth to the wealthy and powerful. Do get a copy of my 'The Road to Corbyn'. Give it as a present to young people you know. Read it yourself. Spread the message. Expose the lies. Here's the link to press: