More than a decade has passed since the first tremors of the Great Recession began to register in 2007. What started as a crisis in the American mortgage market snowballed into one of the worst economic downturns in recent history. Communities in North America, Europe, Russia, and Japan shared in the coming misery as jobs vanished, businesses closed, homelessness soared, and debt piled up. While the Great Depression of 1929–39 had been more devastating in some respects (at least in the United States), the financial crisis of 2007–8 represented something altogether more troubling. It showed that the ever-growing interconnectedness of the world economy — the bedrock of the post-1945 economic miracle — is a curse as well as a blessing. Economic diseases can now spread in record time, traveling across oceans and borders in a matter of days or weeks. Gordon Brown, then British Prime Minister, called it ‘the first crisis of globalization’.
A period of political upheaval followed in 2008–12, though the outcome of this turbulence depended on place and circumstance. In some countries, such as France and the United States, right-wing governments were discredited to the benefit of left-wing challengers. In Japan, the dominant Liberal Democratic Party failed to attract the most votes at a general election for the first time since 1955. In Sweden the similarly dominant Social Democratic Party recorded its worst share of the vote since 1920. Everywhere political attentions turned inwards, and beneath the inevitable rounds of finger-pointing the real problem lay festering until, conveniently, it was forgotten.
In many countries, what should have been a conversation about global financial regulation instead became an argument about the perceived failings of this or that political party. Great wells of time and energy were spent on rectifying these supposed causes, and as the urgency of the situation receded, attention drifted elsewhere. Today, we are in many ways no closer to preventing another global financial crisis than we were back then. Financial regulation remains weak; global regulatory cooperation is almost non-existent; and in place of serious solutions, we occupy our time with fake economic narratives that were created for short-term political gain.
Britain’s experience is emblematic of this problem. When the financial crisis began to hit in 2007, the United Kingdom had been governed for ten years by the traditionally left-wing Labour Party. Tony Blair was Prime Minister for most of that period, leading a rebranded ‘New Labour’ movement that was more in line with the small-government, low-taxation vision that had given their opponents, the Conservative Party, electoral success in the 1980s and 1990s.
‘New Labour’ abandoned old socialist misgivings about the financial sector and stock markets, relying instead on a soft-touch (or no-touch) regulatory approach begun during the Reagan-Thatcher ascendancy in the 1980s. The City of London was encouraged to mimic and ultimately rival New York in share trading. While the government came to rely ever more on the City to provide revenue, it allowed Britain’s manufacturing base to decline at a faster rate than in any other comparable economy — a trend that continued under New Labour.
A new economic balance had arisen, but the government’s regulations had not kept up. Gordon Brown, as Britain’s Chancellor of the Exchequer (finance minister) from 1997 to 2007, talked the talk about the need for strong international oversight of the financial sector. In reality, however, he oversaw a rickety, toothless system of regulation that left the government blind to the problem that was now brewing beneath the shiny veneer of Britain’s unsupervised banks. Left alone, and revered for their apparently magical ability to generate profit, their risk-taking grew ever more reckless.
The financial crisis erupted with daunting violence after Brown succeeded Blair as Prime Minister in 2007. The principal issue was the implosion of America’s sub-prime mortgage system, in which lenders agreed to give millions of customers mortgage packages regardless of their actual ability to pay. Banks across the world bought into this market with incredible recklessness, leading to the contamination of almost every major economy. Britain’s banks, free from proper oversight, were no exception. The small Northern Rock bank was the first to hit trouble in 2007. Bigger banks — including Royal Bank of Scotland, which boasted an international business larger than Britain’s entire economy — were soon in trouble as well.
An epidemic of bank failures now threatened to bring the economy to a grinding halt. In response, the British Treasury bought up ‘toxic’ assets from banks and replaced them with government bills, while also pumping hundreds of billions of pounds into the financial sector to ensure banks had the capital to function. Billions in personal savings were guaranteed by the government to alleviate the panic. The pivotal moment came in April 2009 at the G20 conference in London, when Brown convinced other heads of government to commit to a combined $1 trillion international financial rescue package, the largest ever agreed. Arguably even more significant was the commitment to unprecedented cooperation between central banks and the creation of the Financial Stability Board to provide an early-warning-system in future. The details were murky, but the outline of a genuine solution were now in sight.
During this period of financial fire-fighting, however, Brown’s standing in Britain started to crumble; the media piled on and Labour’s poll numbers slumped. His own remarks from his time as Chancellor, when he claimed to have abolished ‘boom and bust,’ came back to haunt him. Using billions of pounds of public money to bail out reckless banks did not play well, either — although by that stage there was no realistic alternative. National debt hit 86% of GDP, while the budget deficit rose to 6.9% by 2010. The social effects were considerable, with unemployment peaking at 8.5% in 2011. Clearly, something had gone very wrong.
Whatever Gordon Brown’s failures — and there were many — he cannot reasonably be blamed for the eruption of the American mortgage market. The contamination of Britain’s economy, however, is a different story. It was caused by a light-touch approach to regulation and the failure of successive leaders to challenge that attitude, Brown included. Put simply: he did not cause the crash, but he did fail to prevent it.
Not that his political opponents showed much interest in the details of what happened. At such a critical juncture, when the immediate danger of global meltdown had been averted but the underlying problem remained, they instead opted to waste the public’s time on a cheap distraction.
The British Conservative Party found itself in a quandary during the ‘New Labour’ years. Labour’s centrist policies seemed to encroach on traditional Conservative ground, while the tried-and-tested attack on Labour as a tax-and-spend socialist party was not sticking the way it used to. In response, when David Cameron became Conservative Party leader in 2005 he tried to appear more socially liberal, more environmentally conscious, and more open-minded than his predecessors. He even promised to match some of Labour’s public service spending plans. In other policy areas, however, old Conservative instincts shone through. For instance, Cameron pledged to cut back government ‘red tape,’ which entailed even less scrutiny of banks and speculators.
This background made it all but impossible for Cameron to attack Brown as being weak on the banks, even if he wanted to. The idea of having the government intrude deep into the realm of business was, in any case, anathema to the political traditions he represented. In the 2010 general election campaign, Cameron’s attacks on Brown duly focused not on his fundamental failure to oversee and rein in the City’s impulsive gambling, but on Labour’s supposed mismanagement of government finances. The notion that ‘Labour overspent,’ and that this caused the recession, was the new mantra. Conservative campaign posters, commercials, and flyers bewailed the national debt. And the solution, so they said, was ‘austerity’. The grand distraction was underway.
After the election Cameron entered 10 Downing Street as Prime Minister. His government immediately launched a program of severe cuts in government spending, including a freeze on public sector pay, a 25% reduction in local government funding, a major squeeze on unemployment and disability benefits, and the decimation of front-line services like the police. While these policies cut deep into the lives of the already-disadvantaged, they failed in their single stated objective. National debt stood at 86% of GDP in 2010, and it still stands at 86% today.
Regardless of the effects of austerity, the great tragedy is that it was always a prescription for a false diagnosis. In the early stages of the New Labour government, public expenditure reached a record low for the post-war period of 36%. It later increased, but even so, public finances were not remotely in a state of crisis before the Great Recession hit. With a national debt of 36.5% of GDP in 2007–8, Britain’s was the second lowest of any major economy (and at historically low interest rates). The budget deficit, meanwhile, was just 0.6% of GDP. These figures only shot up after the financial sector nearly collapsed in 2007. In other words, the national debt was a result — and a necessary result — of the crash. It was not the cause.
Today Britain has spent nearly a decade debating the pros and cons of a policy that has failed to solve — in fact, was never meant to solve — the perilous imbalances and risks inherent in twenty-first-century economies. Communities around the world have endured similar experiences. Left-wing and right-wing governments alike have pulled the wool over our eyes in pursuit of ideological remedies.
There have been some steps in the right direction. The Financial Stability Board, for example, was successfully established in 2009. From its base in Switzerland, it studies and regularly reports on emerging trends and threats in international finance. Other regulatory reforms have succeeded in keeping the global economy stable through numerous diplomatic crises, trade and currency wars, and political disturbances like Brexit.
But the public and political will to do more — to truly master the shadow of the Great Recession and change not only the details but the structure of the modern economy — has unfortunately been sapped by the medley of false economic narratives strung out amid those panicked days.
Fake economics has triumphed, and we are the victims. The only question now is whether we allow ourselves to fall for the same ruse when the next financial meltdown inevitably hits.