John Lanchester on the financial crisis

John Lanchester

The financial crash of 2008 was worldwide, and the failure of governments to address the causes of the crash also was worldwide.  Because the same thing happened in different countries under different leaders, the reasons for failure are systemic, not just the personal failings of particular leaders.  The solution must be systemic.  A mere change in leaders is not enough.

John Lanchester, writing in the London Review of Books, wrote an excellent article about the crash and its aftermath.  I hoped to call attention to it in my previous post, but, as of this writing, there has been only one click on the link.

I know people are busy and have many claims on their attention.  If you don’t want to bother reading the full LRB article, here are some highlights.  If you’re an American, bear in mind that, even though so much of what he wrote applies to the USA,  his focus is on British policy.

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.

The consequences of the crash, in the UK as in the USA, were not felt by those who caused the crash.  The middle class, working people and the poor were the ones who suffered.

We are back with the issue of impunity. For the people inside the system that caused a decade of misery, no change. For everyone else, a decade of misery, magnified by austerity policies. Note that austerity policies were not recommended by mainstream macroeconomists, who predicted that they would lead to flat or shrinking GDP, as indeed they did.

Instead politicians took the crisis as a political inflection point – a phrase used to me in private by a Tory in 2009, before the public realised what was about to hit them – and seized the opportunity to contract government spending and shrink the state.

The burden of austerity falls much more on the poor than on the better-off, and in any case it is a heavily loaded term, taking a personal virtue and casting it as an abstract principle used to direct state spending.

For the top 1 per cent of taxpayers, who pay 27 per cent of all income tax, austerity means you end up better off, because you pay less tax.  You save so much on your tax bill you can switch from prosecco to champagne, or if you’re already drinking champagne, you switch to fancier champagne.

For those living in precarious circumstances, tiny changes in state spending can have direct and significant personal consequences. In the UK, these have been exacerbated by policies such as benefit sanctions, in which vulnerable people have their benefits withheld as a form of punishment – a self-defeating policy whose cruelty is hard to overstate.

The consequence is a worldwide concentration of income in the hands of a small financial elite.

The one per cent issue is the same everywhere, more or less, but the global phenomenon of inequality has different local flavors. In China these concerns divide the city and the country, the new prosperous middle class and the brutally difficult lives of migrant workers.  In much of Europe there are significant divides between older insiders protected by generous social provision and guaranteed secure employment, and a younger precariat which faces a far more uncertain future.

In the US there is enormous anger at oblivious, entitled, seemingly invulnerable financial and technological elites getting ever richer as ordinary living standards stay flat in absolute terms, and in relative terms, dramatically decline. And everywhere, more than ever before in human history, people are surrounded by images of a life they are told they should want, yet know they can’t afford.

A third driver of increased inequality, alongside austerity and impunity for financial elites, has been monetary policy in the form of Quantitative Easing.  QE, as it’s known, is the government buying back its own debt with newly minted electronic money.  It’s as if you could log into your online bank account and type in a new balance and then use that to pay off your credit card bill.  Governments have used this technique to buy back their own bonds.

The idea was that the previous bondholders would suddenly have all this cash on their balance sheets, and would feel obliged to put it to work, so they would spend it and then someone else would have the cash and they would spend it.  As Merryn Somerset Webb recently wrote in the Financial Times, the cash is like a hot potato that is passed back and forwards between rich individuals and institutions, generating economic activity in the process.

The problem concerns what people do with that hot potato cash. What they tend to do is buy assets. They buy houses and equities and sometimes they buy shiny toys like yachts and paintings. What happens when people buy things? Prices go up.

So the prices of houses and equities have been sustained, kept aloft, by quantitative easing, which is great news for people who own things like houses and equities, but less good news for people who don’t, because from their point of view, these things will become ever more unaffordable.

What is to be done?  As Lanchester wrote, necessary reforms are easy to understand, but, for political reasons, hard to carry out.   Here’s my list, which I think he would agree with.

  • Shut the revolving door through which people move back and forth between governmental administration and Wall Street, the City of London and the rest of high finance.
  • Prosecute financial fraud.
  • Break up the “too big to fail” banks and financial firms so that no one bank’s failure would jeopardize the financial system.
  • Separate investment banks, which buy and sell stocks and bonds, from savings banks, which concentrate on safe investments and whose deposits are guaranteed by the government.
  • Enforce laws requiring banks to have a minimum of capital so they can ride out recessions.
  • Create a postal banking system to provide free checking accounts and low-interest payday loans.
  • Make an international treaty sanctioning banks and brokers that do business in tax havens.

Lanchester noted that statistics indicate that the world’s poorest people, in China, India and elsewhere, are actually better off than they were 10 years ago.  If working people in the US, the UK and other rich countries have to become worse off in order that working people in poor countries become better off, is that wrong?

I would be willing to sacrifice some of my material standard of living if I believed that would actually help people in foreign countries who are struggling to survive.   But I don’t think working people in the US, the UK and elsewhere should be asked to sacrifice in order to make their rich fellow-citizens even richer.


After the Fall: Ten years after the crash by John Lanchester in the London Review of Books.  It is worth reading in full.  Hat tip to Steve B.


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3 Responses to “John Lanchester on the financial crisis”

  1. whungerford Says:

    Phil writes “The financial crash of 2008 was worldwide, … The solution must be systemic. A mere change in leaders is not enough.” I agree, but then Phil goes on to lambaste banks and bankers. Reforming banking worldwide seems unlikely and would likely not be enough to combat poverty here and elsewhere.

    Phil echos Lenin’s question: “What is to be done?” But what is the answer? Phil’s suggestions might help, but our government is moving in the opposite direction. Why and how to fix it?

    Liked by 2 people

  2. electqualfiedmiddleclass Says:

    As I recall the financial crisis started in real estate., which was related to banking because the bankers were doling out too many high risk mortgages.

    Liked by 1 person

  3. electqualfiedmiddleclass Says:

    GW Bush greatly contributed to the severe recession by his policy and laws giving better tax rates for companies locating outside the confines of the United States. I agree with the author of the book in that better living wages for people in other parts of the world is a very good thing. But, the rapid rise of income inequality in the USA is not a good thing, nor is it acceptable or tolerable, IMO.

    Liked by 1 person

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