On 15 September 2008, Lehman Brothers filed for Chapter 11 bankruptcy, triggering a financial crisis worse than that of the 1930s. A decade later, the baleful consequences of the crash endure. UK wage growth has been weaker than at any time since the Napoleonic wars.
The boom and bust that underlay the financial crisis have been investigated extensively. In the 1980s, banks discovered they could package up mortgages into securities to be bought and sold on financial markets. When US borrowers began to default on “sub-prime” mortgages, banks stopped lending to each other, creating a liquidity crisis that quickly became a solvency crisis when financial institutions realised they had no idea which mortgages were in the securities they had bought.
Regulators have responded to many of the problems revealed ten years ago. Banks have been forced to increase the capital they hold against potential losses. Shadow banking has been brought into the regulatory orbit. Regulators are increasingly focused on “systemic risk” – that is, of a sudden, widespread collapse, rather than individual failures.
But the crash was not just a systemic crisis of the Anglo-American banking system, but of the financialised economic model constructed in the 1980s: a model built on debt-fuelled asset price inflation that made people feel wealthier without sustainably increasing economic growth.
Margaret Thatcher’s 1986 “Big Bang” deregulation of the City of London and the removal of capital controls allowed the FTSE All-Share index to grow from under 100 points in 1970 to almost 3,500 points in 2007. Easy credit and a mass sell-off of council housing multiplied house prices by ten from 1979 to 2007.
Most of the returns from this asset price inflation accrued to the top one per cent: the “rentier share” of UK national income increased from 4 per cent to 14 per cent between 1970 and 2000. But the genius of neoliberalism was to use the privatisation of national industries, private pension funds and Right to Buy to extend these capital gains to a large section of the electorate. With huge numbers of the middle classes benefiting from the financialised growth model of the 1980s, the system proved exceptionally durable.
But it was ultimately built on fragile foundations. Private investment in the UK stagnated as companies became more focused on boosting share prices than paying employees or investing. After Thatcher crushed the trade unions, workers were unable to defy these changes and a large gap opened up between wages and productivity. The wage share of national income fell from 65 per cent in the early 1970s to 52 per cent in the late 1990s. Low earnings were disguised by mounting levels of household debt, which reached a record 150 per cent of disposable income in 2007.
During this time, growth was driven by two things: debt-fuelled consumption and the speculative wizardry of the UK’s finance sector, whose profits rose from 1.5 per cent of total profits in 1970 to 15 per cent in 2007. This is the model that collapsed in 2008.
Our collective failure to recognise the problems of the pre-crisis economic model is why the hangover from the crash has been so severe. Austerity, quantitative easing (QE) and corporate tax cuts have only worsened the situation by increasing households’ debt burden – reducing consumption and business’s appetite to invest.
Resolving the extended crisis that began in 2008 requires moving towards a new economic model, built on more sustainable foundations than debt-fuelled consumption. Properly regulating the banks is just the start. Unpayable consumer debt must be written off, with the banks incurring a significant “haircut”. Investment and ownership must be socialised and our trade unions revived to ensure that the gains from growth are widely distributed. And growth itself needs to be rebalanced away from speculation and asset price inflation, towards green, sustainable production.
If we fail to recognise the roots of the lost decade since the financial crisis, we risk stumbling into another. Only a bold transformation of our economic model will rectify the avoidable harm of the last decade. This will require more than just new ideas. It will require taking on the vested interests that have captured economic policymaking in this country, and redistributing assets and power from those who live off wealth to those who live off work.
Grace Blakeley is writing a book on financialisation
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This article appears in the 12 Sep 2018 issue of the New Statesman, The return of fascism