DISCUSSION A decade on, our attitude to wealth hasn’t really changed at all

by Michael Wise _______14th September 2018
Share

Every General Election campaign has its little buzzwords and phrases. One that sticks in the memory last year was the ‘magic money tree’, from which, according to Conservatives on the (no pun intended) stump, Labour were relying on in order to make good on their manifesto. Yet reading a few of the articles marking the 10th anniversary of the collapse of Lehman Brothers serves as a reminder that there isn’t just the one species.

You might remember the names: derivatives; credit default swaps; collateralized debt obligations. All wrapped around sub-prime mortgages and floating in a place called the Shadow Banking System, a part of the financial galaxy that few understand but which became really popular because there were riches to plunder. In fact, it became as important as the actual, normal banking system that exists outside of the shadows. Reading about it – understanding it – as I have tried, is to enter a world of pain. You may as well just whistle the opening theme to Only Fools and Horses.

People thought this particular magic money tree was evergreen. But, starting in August 2007, and ending the following autumn, it went rotten. And since then…well…what, exactly? The largest government bailout the world has ever seen; headlines about austerity, the stagnation of real wages, the Eurozone crisis, the gig economy, inequality, Generation Rent, Brexit, Trump. And headlines about economic recovery, a booming housing market, record low unemployment, Brexit, Trump.

Who to believe? As usual, it’s best to follow your own nose. A decade ago, after trying to log into my Kaupthing Edge savings account and seeing instead a whole load of Javascript errors, I did briefly wonder whether life, as we knew it, had changed forever. Not necessarily that people would be queueing outside empty shops Venezuela-style; but that the number of, say, Range Rover Discoveries bombing about would be noticeably down. Maybe the number did go down, but I can’t say I particularly noticed.

The question then became one along the lines of: well, just what are we all doing with ourselves? What productive work, that is – work that might be of genuine worth and use to somebody somewhere? The cynic within me suggested – shock horror – that it was not a question that could be answered wholeheartedly. There’s earnings, and then there’s wealth.

What appears to have happened – on the surface at least – is that, after a small period of shock and a longer one of recession, things have returned to how they were before. There are still lots of Range Rover Discoveries and nice coffee shops and dog-grooming services. But this is because (unless you’re a small-time saver) wealth begets wealth. As we know, earnings aren’t really going anywhere.

Is debt wealth? In my mind it isn’t, but then I must be wrong because it’s what keeps everything going in our economic system. Before the crash, people were re-mortgaging at will, banking on the bubble getting ever bigger and living accordingly. Why not? If people are throwing it around, then you grab your share. And, of course, much the same could be said for the financial sector – but only more so. With them, it’s as though a collective mania for avarice takes over. But, a decade ago, the debt was way too dodgy and the whole edifice teetered on the edge of collapse. What prevented that from happening was good debt, government-backed debt.

So QE saved the day, and here we are – in this sort of recovery that isn’t.

Reading as I have this week, there were three voices that stood out. Firstly, there was the economist Roger Bootle, who told the BBC: “There’s been a major problem facing the authorities, a dilemma really, because they wanted to clean up the banks and make the banks safe, and that has tended to push them towards being tough on the banks; at the same time, they’ve known they have to rely on the banks to get an economic recovery.

“If they were too tough on the banks then bank lending would be too weak and we wouldn’t have an economic recovery. So maybe for that reason, the authorities in pretty much every country have gone softer on the banks than they might otherwise have done.”

Then there was an article, by John Stepek of MoneyWeek, on the subject of moral hazard: “It refers to the danger that if someone is insured against a loss, then they won’t take the necessary steps to prevent that loss from happening in the first place.

“So, used more widely, moral hazard is what you get when an individual’s actions are divorced from their consequences. Or as (economist) Paul Krugman (loosely paraphrased) puts it, it’s when you take the risk, but someone else bears the cost.”

In other words, the bankers lost other people’s money, other people i.e. the taxpayer picked up the tab and no-one was really punished for their actions. And the impact was greater than it might otherwise have been because the banking sector – as part of the financial services sector – means so much to the U.K. economy as a whole. So when looking for ‘lessons learned’ it’s necessary to pull the lens back, as Will Hutton does in The Guardian.

“As profound was the rupturing of the Faustian bargain between finance and society that had defined the 30 years up to 2008. The bankers made their fortunes, but wider society was offered boundless credit and booming property prices. Companies did not have to create value through innovation, investment and export; instead, they could ride the credit boom. The result: an overblown, featherbedded service sector delivering ungrounded productivity growth.

“Post 2008, the wounded system has been unable to deliver at the same pace, although it tries. The illusory productivity has stagnated; and trust in value-extracting business and capitalism, which continues to displace risk on to the shoulders of ordinary people, has fallen to new lows. Small wonder that Jeremy Corbyn did so well in the 2017 general election.

“Too little has been learned; too little has changed.”

It’s been a decade, then, but the underlying issues are decades old. One can argue that the decision taken by President Richard Nixon on August 15th 1971 to effectively end the Bretton Woods Agreement and pave the way for Fiat Money has had a huge impact. Money might be floating around (more of it seen by some than others, of course) but, as Hutton says, what about value?

Money has become cheaper and so our attitude towards it is more casual. A balance displayed on a screen at the end of the month is not the same as pulling a crisp tenner out of a wage packet, much as a pint bought on the proceeds of honest toil tastes much nicer than one bought after a week spent staring out of an office window. A university student coughs up £27,000 for the privilege, a substantial amount. But since it’s more of an abstract (and because the chances are they might never pay it back) the burden might not be so great after all.

Rest assured there will be another recession – there always are – but one cannot help looking at this current recovery (that isn’t really) and the various graphs of government and personal debt and wonder whether, at some point, this will be one bloated corpse that no amount of CPR will save. Is this economic model sustainable in the long term?

Sign-up to our mailing list to receive all our latest discussions, publications and events.