How blame for the financial crash has shifted from the City and what it means for British politics
To most people, the causes of the banking crisis and the recession that followed seem distant, impenetrable and alien. In a climate of such incredulity, and as spending cuts finally start to bite, the need to blame somebody – anybody – for a crash that seemed to simply come out of the blue is naturally strong.
Self-righteous shots and cries of “I told you so” are fired at anyone who looks a little like a captain, often without care or consideration for their actual culpability in running the ship aground. Throw into the mix age-old dogma, the ghosts of Keynes, Marx, Reagan and Smith, and it’s clear that this quest for a culprit is emotive, divisive and highly unlikely to ever yield a consensus result.
People may be angry at the banks, but, increasingly, they’re angrier with their elected representatives.
A recent IPSOS Mori poll for The Economist demonstrates the differing views among the British public as to who to point the finger at. While the Coalition Government itself seems to escape with little direct responsibility for austerity measures (10%), there is a clear tendency to lay the blame for austerity either at the door of the Labour administration who presided over the crash (31%) or the banks (29%), whose supposed casino culture brought the system to the edge of collapse.
Though, the banks continue to take a sizeable chunk of the blame, factor in the respondents who see Local Councils (5%) and the formation of the Coalition as directly responsible for the cuts, and there emerges a significant majority of people who see government, not markets, as the prime cause of the economic hardship being felt in homes across the country. People may be angry at the banks, but, increasingly, they’re angrier with their elected representatives. How did we get here?
Bash the Bankers
As the crisis unfolded in 2008, ageing Marxists had a field day. “This was it”, they cried, “the collapse of Capitalism. Get the popcorn in, it’s going to be a good one!” With the right-wing US administration’s audacious nationalization of Fannie Mae and Freddie Mac, it seemed that big government was very much back in fashion. The financial system, indeed, the free market itself, had, it appeared, utterly failed, leaving the state to come to its rescue, the knight in red (for Labour and the Republicans) armour.
The narrative seemed clear enough. Excessive risk taking and undercapitalization, the repackaging of subprime mortgages doled out to people who didn’t have a hope in hell of paying them back, and their subsequent slicing, dicing and spreading through the system using ever-more complex financial instruments, which few people truly understood, had caused serious contagion in the global financial system.
…freewheeling bandits actively encouraged by unfathomable bonuses…
Banks seemed to have morphed from their much-romanticized – but long dead – role of rather boring, safe providers of credit and protectors of deposits into excessively leveraged (100 to 1, anybody?), freewheeling bandits actively encouraged by unfathomable bonuses to foist us products we couldn’t afford and then cream off the interest.
In his wonderfully readable tract on the crash, Whoops!, John Lanchester laments that the banks “weren’t just wrong-in-practice, the way you are wrong if you call heads and the coin lands tails; they were philosophically wrong. They were exposed as doing something which was contrary to the nature of reality.”
…we knew there was something very seriously wrong.
Greed and avarice had won out, the geniuses and quarts of the financial industry had managed to convince themselves that risk was just a word, with disastrous consequences when the real world eventually caught up with them. And then, when the banks stopped trusting even each other, we knew there was something very seriously wrong.
Although his stock has fallen significantly since moving into that awful slayer of reputations called government, British Business Secretary and (whisper it) Liberal Democrat, Vince Cable’s contemporary summation of the sheer scale of the crisis remains pertinent:
For the best part of sixty years the world has enjoyed a remarkable period of apparently ever expanding production, rising living standards and integration across frontiers… In the wake of the international banking crisis and the recession that has followed it, the inexorable suddenly looks uncertain… Panic and the collapse of apparently secure financial institutions have reawakened long-dormant fears about the stability and sustainability of what seemed to be unstoppable, fool proof, historical forces of economic expansion.
Or, in the words of another qualified observer, one George W. Bush, “this sucker’s going down”. Here stood Western civilization, at the edge of the abyss, looking down, and it was the one-time saints in the City who’d walked us there. Even Alan Greenspan, former hands-off chairman of the Federal Reserve, disciple of ultra-libertarian, Ayn Rand, and all-round pre-crash Apostle figure, admitted that the financial meltdown had caused ‘the whole intellectual edifice’ of the banking industry’s extreme self-confidence in its ability to wish away risk, to collapse. The party was over, the illusion shattered. Whoops indeed.
Bring down Big Government
Yet, in 2011, the picture looks very different. Every major economy affected by the crisis is either considering or actively implementing austerity measures, designed to drastically reduce levels of government spending and combat our ballooning deficits. Welfare benefits are being slashed, hospitals face spending squeezes, school-building programs have ground to a halt.
The narrative of the crisis has shifted dramatically, from one of recklessness and greed in the financial sector, to one of an over-weaning and flabby state, whose overspending has crippled the UK economy and left us bankrupt in the face of a downturn that the state should have predicted. The threat of downgrading our international credit rating has allowed the British coalition government to perform a miraculous conjuring trick. By the new logic, it wasn’t the banks that got us here, or even the government’s failure to regulate their activities: it was, according to their approach, state spending itself that caused the crisis.
The bailouts seem to have vanished from the collective consciousness…
This is an audacious leap of faith by anyone’s standards, conflating a legitimate Conservative opposition to rising state spending (although then-shadow Chancellor George Osborne notably backed Gordon Brown’s spending plans in 2007) with total culpability for the financial meltdown. Somehow, in the minds of many voters, the debts accumulated by the rescue of the banks and the collapse in tax revenues during recession have morphed into debts that were entirely caused by Labour’s ‘wasteful’ spending. The bailouts seem to have vanished from the collective consciousness, instead, the “enemies of enterprise” should have given business a mile, not just an inch.
In spite of this questionable conclusion, to pretend government is entirely without blame for the financial crisis is, of course, ludicrous. We are where we are, unquestionably mired in debt, and “dealing with the deficit” now seems an inescapable fact of British political life. Interest payments in servicing our debt are indeed reaching eye-watering sums, and the next few years would not have been easy under any administration. Crucially, much of Labour’s investment was, it would appear, built on sand, reaping the benefits of an unsustainable housing bubble and an ultimately toxic financial services boom. Undeniably, successive governments have helped to put all of the British economy’s golden eggs into one poorly-weaved basket.
…the Left dropped the ball on the economy, plain and simple.
For better or worse, the idea that government got us here, seems, as the Ipsos MORI polls demonstrates, to have irrevocably taken hold, with profound consequences for social democratic, “big government” parties across the world. As David Miliband argued in a recent LSE speech:
Politics across Europe is not determined by economics, but it is shaped by it… and the increased budget deficits, the symptom of the expansionary budget antidote to slump, has provided a new and simple rationale for the centre right.
In the eyes of the public, the Left dropped the ball on the economy, plain and simple. Labour reaped the electoral benefits of the boom years and dared to let us believe the myth that a national government in an increasingly globalised and interconnected world could end “boom and bust”. If the good years were supposed to be to the government’s credit, voters asked, why weren’t the bad years now their fault? Whatever mistakes Labour thinks the Right may now be making, it can’t escape the damage its former hubris has wrought on its future electoral chances. Blame may be misplaced, but it’s not entirely unfair.
A Look in the Mirror?
One option conspicuously absent from the IPSOS Mori poll was the choice to blame ourselves for the financial crisis. In many ways, we all played our own useful part in the bringing on of the present economic morass. Those greedy bankers and incompetent politicians may have encouraged it at every possible opportunity but many of us have, in the past thirty years, chosen to live our lives largely as debtors, believing that our unearned rising house prices somehow made us better people. At the peak of the credit crunch, British personal debt significantly outstripped GDP. Just think about that fact – we personally owed more than the country was worth. As even Polly Toynbee and David Walker note in their sympathetic study of the Labour government in office, The Verdict:
Guiznot had said make yourself rich by hard work and thrift. Brown all but said: do it by pushing up your credit card balance… The wealth illusion depended on the banks lending on higher multiples of income to finance consumption. Bankers were the alchemists of Labour-era prosperity. Ministers turned a blind eye to financial excess so long as it filled Treasury coffers and in return kept consumers and house-owners happy.
So, yes, all of us saw debt not for what it was but rather for what we wanted it to be. The banks stopped treating it as a risky venture, grounded in somebody, somewhere owing someone else money, and instead began treating it as mere abstraction. Supreme self-confidence saw them believe they had engineered human frailty out of existence.
And our all-knowing governments were all too keen to let this happen, seeing exorbitant bank profits and subsequent increases in tax takings for apparent “investment” as undoubted social goods. Meanwhile, the availability of extraordinarily cheap credit and ever more ludicrous mortgage deals allowed us all to live beyond our means, comfortable, contended voters. In short, we fell in love with debt. Banks exploited it, governments allowed it, and we all too happily swallowed it whole. So, if there is some confusion, who’s to blame?