Paul raises a significant and surprisingly under-appreciated point - that there’s a worryingly wide gap between economic explanations of the crisis and political responses.
My preferred explanation for the crisis draws heavily upon Ravi Jagannathan’s (pdf). Put simply, the combination of China’s export-driven growth and the desire to build up FX reserves to prevent a repeat of the 1998 currency crises generated a glut of savings which was invested in western bonds, causing a fall in their yields.
In principle, this drop in interest rates might have triggered a boom in real capital spending. But it didn’t, perhaps because the “great stagnation” meant there was a dearth of investment opportunities. Instead, lower rates unleashed a bubble in house prices, the bursting of which brought down banks.
There are five features of this account which politicians ignore:
1. This is a global story, not a parochial one.
2. The squeeze on workers’ living standards is not merely due to high inflation (which is temporary) or to the legacy of the crash. It is also the result of the increased supply of labour created by China’s entry into the world economy.
3. Banks are not the prime mover here, but rather a conduit for these global forces. I mean this is in two senses. First, their creation of mortgage-backed securities was a response to demand; falling yields on proper AAA securities led to a “hunt for yield” which bankers thought they could satisfy by bundling up mortgages. Secondly, the counterpart of current account surpluses in Asia is current account deficits in the west. And a current account deficit, by definition, is an excess of investment over savings; investment here means house purchase, not just capital spending. But if a nation has an excess of investment over saving then it is likely that its banks will have to rely upon wholesale funding, because deposits (savings) will fall short of loans (investment). It is no accident that the “UK” domiciled banks that weathered the crisis were those that were properly globalized such as HSBC and Standard Chartered, and so able to call upon a large Asian deposit base. And it’s no accident that the banks that failed - Northern Rock, Bradford and Bingley - were dependent upon retail deposits, which were lacking.
4. The fact that the government was running a fiscal deficit before the crisis was not its fault. It was instead a simple accounting identity. If foreigners and companies are net savers, then other sectors must be net borrowers. This was partly the household sector, but also the government.
5. Policy can do little to raise growth. This is not merely because the effect of financial crises is to depress growth rates. It is because the crisis has its origin in large part in a decline in potential growth, which is what the dearth of investment opportunities represents. Deregulation or a “plan B” might ameliorate this problem, but they are unlikely to solve it.
What we have here, then, are two narratives between which there is an almighty gulf. There’s the economic narrative of the crisis. And there’s the party political narrative, which blames bankers’ greed, neoliberal economics, regulatory failure or Labour’s profligacy - all of which are only incidental features.
This, I suspect, helps explain or justify why there is so much apathy towards party politics, even amongst the most intelligent.
As for what could be done to change this, I would recommend that politicians stop pretending to have ways of getting us out of the mess, and focus instead upon how to more equitably distribute the hardship. A first step here would be to stop stigmatizing the unemployed.