If you read nothing else today, make sure it’s John Lanchester’s lengthy essay in the London Review of Books, about the decade after the global financial crisis. Lanchester, like Michael Lewis, has a real gift for writing about financial topics and making them not just comprehensible to the laity, but engaging.
Looking back 10 years, Lanchester notes how very, very close the global financial system came to melting down:
The immediate economic consequence was the bailout of the banks. I’m not sure if it’s philosophically possible for an action to be both necessary and a disaster, but that in essence is what the bailouts were. They were necessary, I thought at the time and still think, because this really was a moment of existential crisis for the financial system, and we don’t know what the consequences would have been for our societies if everything had imploded. But they turned into a disaster we are still living through. The first and probably most consequential result of the bailouts was that governments across the developed world decided for political reasons that the only way to restore order to their finances was to resort to austerity measures. The financial crisis led to a contraction of credit, which in turn led to economic shrinkage, which in turn led to declining tax receipts for governments, which were suddenly looking at sharply increasing annual deficits and dramatically increasing levels of overall government debt. So now we had austerity, which meant that life got harder for a lot of people, but – this is where the negative consequences of the bailout start to be really apparent – life did not get harder for banks and for the financial system. In the popular imagination, the people who caused the crisis got away with it scot-free, and, as what scientists call a first-order approximation, that’s about right.
In addition, there were no successful prosecutions of anyone at the higher levels of the financial system. Contrast that with the savings and loan scandal of the 1980s, basically a gigantic bust of the US equivalent of mortgage companies, in which 1100 executives were prosecuted. What had changed since then was the increasing hegemony of finance in the political system, which brought the ability quite simply to rewrite the rules of what is and isn’t legal. One example I saw when I was researching Whoops!, my book on the crisis, was in Baltimore. There people going to buy houses for the first time would turn up at the mortgage company’s office and be told: ‘Look, I’m really sorry, I know we said we’d be able to get you a loan at 6 per cent, but something went wrong at the bank, so the number on here is 12 per cent. But listen, I know you want to come out of here owning a house today – that’s right isn’t it, you do want to leave this room owning your own house for the first time? – so what I suggest is, since there’s a lot of paperwork to get through, you sign it, and we sort out this issue with the loan later, it won’t be a problem.’ That is a flat lie: the loan was fixed and unchangeable and the contract legally binding, but under Maryland law, the principle is caveat emptor, so the mortgage broker can lie as much as they want, since the onus is on the other party to protect their own interests. The result, just in Baltimore, was tens of thousands of people losing their homes. The charity I talked to had no idea where many of those people were: some of them were sleeping in their cars, some of them had gone back to wherever they came from outside the city, others had just vanished. And all that predatory lending was entirely legal.
That impunity, the sense that these things had consequences for us but not for the people who caused the crisis, has been central to the story of the last ten years. It has also been central to the public anger generated by the crash and the Great Recession. In the summer of 2009, when I was writing Whoops!, I remember thinking that a huge storm of rage was coming towards governments once the public realised what a giant hole had been dug for them by the financial system in collusion with their leaders. Then the book came out, and I was giving talks about it all over the place from its publication in January 2010 through the spring and summer, and there was this mysterious lack of rage. People seemed numb and incredulous but not yet angry.
That changed. More Lanchester:
By now we’re eight years into that public anger. Remember that remark made by Robert Lucas, the macroeconomist, that the central problem of depression prevention had been solved? How’s that been working out? How it’s been working out here in the UK is the longest period of declining real incomes in recorded economic history. ‘Recorded economic history’ means as far back as current techniques can reach, which is back to the end of the Napoleonic Wars. Worse than the decades that followed the Napoleonic Wars, worse than the crises that followed them, worse than the financial crises that inspired Marx, worse than the Depression, worse than both world wars. That is a truly stupendous statistic and if you knew nothing about the economy, sociology or politics of a country, and were told that single fact about it – that real incomes had been falling for the longest period ever – you would expect serious convulsions in its national life.
There’s a lot more to Lanchester’s essay, but the gist of it is that inequality is the biggest problem today — and it’s a far more complicated thing than a mere imbalance of wealth. If you read Lanchester’s piece, you can see a catastrophe coming. You may also see something that being a man of your generation blinds you to. This passage really got to me:
Napoleon said something interesting: that to understand a person, you must understand what the world looked like when he was twenty. I think there’s a lot in that. When I was twenty, it was 1982, right in the middle of the Cold War and the Thatcher/Reagan years. Interest rates were well into double digits, inflation was over 8 per cent, there were three million unemployed, and we thought the world might end in nuclear holocaust at any moment. At the same time, the underlying premise of capitalism was that it was morally superior to the alternatives. Mrs Thatcher was a philosophical conservative for whom the ideas of Hayek and Friedman were paramount: capitalism was practically superior to the alternatives, but that was intimately tied to the fact that it was morally better. It’s a claim that ultimately goes back to Adam Smith in the third book of The Wealth of Nations. In one sense it is the climactic claim of his whole argument: ‘Commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours and of servile dependency on their superiors. This, though that has been the least observed, is by far the most important of all their effects.’ So according to the godfather of economics, ‘by far the most important of all the effects’ of commerce is its benign impact on wider society.
I know that the plural of anecdote is not data, but I feel that there has been a shift here. In recent decades, elites seem to have moved from defending capitalism on moral grounds to defending it on the grounds of realism. They say: this is just the way the world works. This is the reality of modern markets. We have to have a competitive economy. We are competing with China, we are competing with India, we have hungry rivals and we have to be realistic about how hard we have to work, how well we can pay ourselves, how lavish we can afford our welfare states to be, and face facts about what’s going to happen to the jobs that are currently done by a local workforce but could be outsourced to a cheaper international one. These are not moral justifications. The ethical defence of capitalism is an important thing to have inadvertently conceded. The moral basis of a society, its sense of its own ethical identity, can’t just be: ‘This is the way the world is, deal with it.’
I notice, talking to younger people, people who hit that Napoleonic moment of turning twenty since the crisis, that the idea of capitalism being thought of as morally superior elicits something between an eye roll and a hollow laugh. Their view of capitalism has been formed by austerity, increasing inequality, the impunity and imperviousness of finance and big technology companies, and the widespread spectacle of increasing corporate profits and a rocketing stock market combined with declining real pay and a huge growth in the new phenomenon of in-work poverty. That last is very important. For decades, the basic promise was that if you didn’t work the state would support you, but you would be poor. If you worked, you wouldn’t be. That’s no longer true: most people on benefits are in work too, it’s just that the work doesn’t pay enough to live on. That’s a fundamental breach of what used to be the social contract. So is the fact that the living standards of young people are likely not to be as high as they are for their parents. That idea stings just as much for parents as it does for their children.
I was twenty years old in 1987, more or less a contemporary of Lanchester’s. That worldview is my own, in ways that I don’t always realize. I believe it’s fair to say that people my age and older have a psychological barrier against accepting that the economic deck is stacked so starkly against the young, in ways that it simply was not for us. We had better get over it, or we are not going to see what’s coming.
Lanchester talks about how it really is true that the rich are getting vastly richer than the rest of us, and storing their money away. People my age and older are still prone to thinking in trickle-down terms. And if we aren’t quite like that, we well know that socialism is a dead end, because we’re old enough to remember the Cold War. Some of us are old enough to remember the 1970s, and the economic misery of those days. Thatcher and Reagan didn’t come from nowhere.
Our problem, it seems to me, is that we are not capable of understanding how the world has changed, and how we need to change with it for the sake of stability (if nothing else). It simply isn’t enough to say that because Socialism Is Bad, therefore anything that’s Not Socialism is therefore good, or good enough. In Lanchester’s view, this means that governments really will have to start enacting policies to break up the concentration of wealth among the superrich. He concludes:
If changes benefit an economy as a whole, they need to benefit everyone in the economy – which by implication directs government towards policies focused on education, lifelong training, and redistribution through the tax and benefits system. The alternative is to carry on as we have been doing and just let divides widen until societies fall apart.