Did Gordon Brown save the world in October 2008? He famously claimed to have done so in the House of Commons in December 2008, to jeers from the opposite benches. But some economists agreed: two months earlier, the British government had persuaded the US and Europe to recapitalise their banks with public money, narrowly averting a global disaster. The UK had been days from losing two of its biggest lenders, and more would have followed. The governor of the Bank of England, Mervyn King, warned that the banking system itself – and with it, the deposits, mortgages and salaries of everyone in the country – was “close to collapse”.
He may have averted that crisis, but Brown failed to address the problems that had caused it in the first place. Labour looked away from the dangers of failing to regulate Britain’s financial institutions properly – he would come to regret that none of the bankers responsible were prosecuted – and he could not get a sceptical public to understand how close they had come to finding themselves suddenly without access to money. At the next election, David Cameron was able to claim that Brown had frittered away the nation’s money on “Labour’s debt crisis”.
As soon as they took office in 2010, Cameron and his chancellor, George Osborne, kept the ostrich’s head firmly below ground with austerity: the aggressive reining-in of Britain’s public spending. The explanation was that someone (us) would have to pay for the deficit incurred by the banks, but the reality was that by removing the single biggest spender (the government) from the economy, they hampered recovery. The Bank of England had little choice but to keep interest rates on the floor.
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The safety valves that had been opened in 2008 – including quantitative easing (QE), the mechanism whereby the Bank of England injected cash directly into the economy by buying UK government and corporate bonds – were never closed, and the little financial sector regulation that Brown and his contemporaries had brought in was never built upon. Or they were simply innovated around: the collateralised debt obligations (CDOs) that had turned subprime mortgage debt into investment-grade securities were replaced by collateralised loan obligations (CLOs) that do a similar job with corporate debt.
In 2014, Cameron himself warned that “red warning lights are once again flashing on the dashboard of the global economy”, as the Eurozone faced another recession – to which the answer was yet another round of QE. In the UK, meanwhile, with the Bank forced to keep borrowing as cheap as possible, the asset bubble that had formed before the 2008 crash simply carried on inflating: since March 2009, the average London property has increased in value by around £20,000 every year.
Ten years after the 2008 crash, Brown warned that the UK, and the world, was “sleepwalking into the next crisis”. But because the policy response had never changed, the original crisis had never really gone away. It had got worse. In the cataclysm Brown foresaw, he predicted governments would “neither have the fiscal and monetary room for manoeuvre that we had in 2008, or the willingness to take that action”.
Willing or not, the Bank and the government were made to act by a global pandemic that forced them to conduct even more QE, and to lower interest rates even further. With monetary policy keeping financial markets on steroids, speculative investment led money towards whatever seemed to carry the most risk: companies with a failed business model, or ones that had actually gone bankrupt; a delicatessen in New Jersey run by the local wrestling coach somehow became a $100m business. Cryptocurrencies – a wasteful and expensive payment system with no intrinsic value – became a market for almost $3trn in unregulated investment.
Brown was right to say that an international response would not be possible. Worse still, the high energy prices and inflation of commodity prices caused by the pandemic would provide the Russian kleptocracy with the money, and the opportunity, to conduct a brutal invasion of Ukraine.
The war in Ukraine was the first item on a list of factors that the World Bank’s Global Economic Prospects, published yesterday (7 June), predicted were likely to lead the world into a new global recession. The report points to the ostrich in the room: “Since 2010, the global economy has been experiencing the largest, fastest, and most synchronised debt wave of the past five decades amid a protracted period of monetary policy accommodation.”
What it also makes clear, however, is the problem of leaving this solely to central bankers. A sharp tightening of monetary policy – raising of interest rates, tapering of QE – may be necessary, but it could also be disastrous. “Financial stress could spread across countries,” the report continues. “The production and shipping of food and fertiliser could be further disrupted, leading to widespread food shortages, pushing millions of people into food insecurity and extreme poverty.”
In an ostrich economy, few people want to listen to someone like Nouriel Roubini. He was dismissed as “Dr Doom” when, in 2005, he forecast that mass speculation on the US housing market could trigger a wider recession. In April 2020, his prediction that the world’s failure to act on its systemic risks – that economies weakened by huge public debts, ageing populations and abrupt changes in work would be unable to cope with new shocks from climate change and geopolitical instability – was treated in a similar fashion.
No one wants to accept that the world faces a “decade of despair”. While the World Bank and financial institutions are reluctantly beginning to agree – the CEO of America’s largest bank, JPMorgan’s Jamie Dimon, described the coming storm last week as a “hurricane” – central bankers are still holding out hope for a “soft landing”. And politicians are happy to let them do so, because the longer the ostrich keeps its head in the sand the more it can be made a scapegoat when the hurricane arrives. If Roubini is right, then there are no easy answers – but further prevarication is the worst possible option.
This piece was first published in the Crash, the New Statesman’s regular update on the global economy and the challenges it now faces. Click here to sign up.
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