The heady days
leading to the global financial crisis were never meant to last so there is no
point in expecting to turn back the clock
It is the time for great merriment but Christmas office parties across London still leave many wishfully thinking back to the good old
days. Despite much talk of an economic
recovery, it can still be tough to find reasons to be cheerful about and less
cash being spent by companies on seasonal festivities is another reminder of
this. But we should not be asking Santa
for a return to the days of lavish Christmas dos with workmates and big
entertainment budgets (if they ever did exist).
The economy of old which allowed such excesses could only bring in a few
good years of partying before the good times inevitably turned bad.
Living the high life
on borrowed time
The boom times that were still in swing a decade ago seem a
long way off. It was a time when all
seemed good with the economy and nothing much would go wrong. This spirit seemed best exemplified by the exuberance
among economists who (mistakenly) thought that their ideas had conquered the ups and downs of the economy. The great evil of past
decades, inflation, had been kept in check and the recession following the dotcom bust passed without much strife.
This new stable economic environment seemed to benefit the
finance sector most of all. Banks came
up with new ways of making lots of money with bankers themselves reaping much
of the rewards. Even some among the rest
of us got to enjoy a sprinkling of the good life with many companies splashing
out the odd treat on their workers (especially around Christmas time) even if
this generosity was not reflected in wages.
The enthusiasm was infectious and we all wanted our share. The result was loads of new debt as our
spending reflected these new aspirations even if our income was lagging
behind. Even the governments in many
countries spent beyond their means and got their finances in a mess. Since inflation remained subdued despite the
elevated spending, interest rates never rose by much enabling the debt levels to soar beyond what
was prudent. And banks were only too
happy to lend since new financial products, such as mortgage-backed securities,
allowed them to pass on increasingly dubious loans to others.
Not banking on trouble
This was one party that could not go on for ever. An increase in debt is good for spurring the
economy along but this can only go so far until lending becomes more reckless. The final straw was mortgage lending in the
United States where new rules encouraged housing loans to individuals who were
never likely to be able to afford repayments (so-called sub-prime
mortgages). The many who lost their jobs
(including Your Neighbourhood Economist) and even their homes in the ensuing
financial turmoil ended up with little to show from the good years. Yet, on the other hand, the exorbitant pay
packets received by many bank employees left them sitting pretty whatever was
to happen.
We should all feel repentant like Christmas drinks where we get
carried away and make a fool of ourselves.
One way of stopping ourselves getting into trouble is to rein in the banking sector. This does not mean the equivalent of
alcohol-free Christmas festivities but just stricter rules to make sure that things don’t get out of hand. The
perils of too much debt should have always been obvious but it is inability of
the banking sector and the financial markets to suitably regulate lending that
is perhaps the biggest lesson that we need to address.
Time to sober up
Any economic growth does not count for much if we have to
give back most of the gains after a few good years. Yet, giving up on this easy way of making
ourselves richer also means that we cannot expect the economy to grow like in
the past. It will take hard work and
sensible policies rather than financial wizardry to make genuine improvements
in our standard of living. The trade-off
being that we can create a world where our jobs and what we make for ourselves
is more secure.
The government could have a big role to play in this especially since companies are not
investing as much as they used to. Greater
spending on infrastructure and education as well as lower medical costs would
be a good start to help increase productivity (and wages) as well as going some
way to propping up spending. The
solution sounds simple enough but politics is never easy especially at a time
when the easy option is for politicians to offer up false promises. It is voters most of all that need to be
realistic in terms of what is achievable.
No party is worth a hangover on the scale of the global financial
crisis.
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