Philip Whiteley's Blog

January 4, 2011

Short memories, long-term impact

Filed under: Uncategorized — felipewh @ 9:52 am

Although I love Christmas, I quite enjoy putting the decorations away. The days are getting longer and there’s a new year to look forward to. And we hardly lack predictions when it comes to the economy, with projections for inflation, the eurozone, growth etc published copiously in the news websites and papers. I often think they should form part of the astrology section.

We do, however, have to look back as well; or at least retain a good memory. It is alarming that the causes of the recent economic crisis already seem to have passed from popular discourse.

In the UK, for example, and there were similar dynamics in other Western countries, there were the following features:

  • Excessive government borrowing. Gordon Brown abandoned the principle of borrowing only for investment and began borrowing for current spending – effectively taxing future generations in order to try to buy votes. He claimed that the economic cycle had ended.
  • Excessive bank lending, fuelling a property bubble. This was exacerbated by reliance on the embarrassingly crude accounting profit measure as performance indicator. This masks underlying risk and encourages short-termism. High bonuses provided further perverse incentives.
  • Faulty risk management by the investment banks, who traded securitised debt of dubious quality, and thought they could ‘model’ market behaviour.

I would have thought the above was fairly obvious, but seems almost to have been written from history already. Labour, who had been in charge, conveniently forgets its role, and denounces ‘cuts’, as though a deficit at an eye-watering 11% of GDP were somehow sustainable. On the right, there is similar reticence to acknowledge that the neo-liberal risk models and excessive short-termism by some banks were at least as much to blame.

The debate has sunk into sectarianism, with the anti-bank crusade launching themselves at the entire sector, rather than those who messed up, while defenders of the City point to the exports it earns, but overlook the colossal state subsidies it receives, and the risks that certain institutions took, for which others have to pay.

Both sides lump the responsible and irresponsible banks together. The questions seem to be ‘Which sector is to blame? Should it be restructured/regulated?’ – when they ought to be: ‘What are the behaviours that led to crisis? What are the beliefs that guided them?’

So Happy New Year. I don’t know if understanding what has recently occurred guarantees a way out, but collective amnesia and ignorance doesn’t feel like a sound basis.


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