4 lessons from the global financial crisis and austerity

As stock markets around the world continue to fluctuate, academic and author of The global financial crisis and austerity, David Clark, shares his thoughts on the four lessons to be learned from the global financial crisis and the ensuing government response of ‘austerity’ and tells us why he’s pleased to have been born when he was…

David Clark

David Clark

Nearly a decade has passed since the US sub-prime mortgage meltdown that triggered the great financial crash of 2008. The advanced economies of the world have yet to make a full recovery from the crash and subsequent Great Recession.

In fact, 2016 has begun with renewed turmoil in global financial markets, reflecting concerns about the slowdown of economic activity in China and the collapse in the price of oil and other commodities.

These are compounded by fears that mediocre growth may be a ‘new normal’, with austerity and the overhang of debt acting as a drag on household consumption. The spectre of skilled jobs being lost due to automation is also contributing to ‘growth gloom’.

So what has gone wrong? Here are four lessons that I think we need to learn about the global financial crisis and austerity.

Lesson 1 – The experts got it wrong

Or, if you want to be really disrespectful, the people in charge don’t know much more than we do (see here).

The experts who might have been expected to see the crisis coming – policy makers, regulators, the International Monetary Fund, financial and business journalists, most professional economists – were caught unawares by it.

Brooksley E Born

Brooksley E Born Credit wikipedia

All, that is, except Brooksley E. Born, chair of the US federal agency overseeing the futures and commodity options markets from 1996 to 1999, whose campaign for stronger regulation of derivatives trading was disavowed by her fellow regulators.

Why did the experts and people in charge get it so wrong? Well, because they had bought into the ‘market fundamentalist’ consensus that all was well with the financial markets in the best of all possible worlds: the Anglo-American world of free markets and light-touch regulation. Nobody, in short, was listening to Cassandras like Brooksley Born

A keener sense of history would have served them, and us, much better.

Lesson 2 – We need to put the financial crisis into historical context

I’m a baby boomer and old enough to have memories (admittedly rather hazy) of post-war rationing. I have lived through three distinct eras, and two major crises, of democratic capitalism.

The first era was the period of post-war reconstruction (1945-50): a time when household consumption played second fiddle to the goal of rebuilding the productive capacity of the nation.

The second was the ‘great boom’ (1950-1974): a period of sustained growth in living standards, consolidation of the welfare state, and emergence of a new, ‘managed capitalism’ involving tripartite negotiation and compromise between government and the representatives of business (capital) and labour (trade unions).

The slowdown in growth and eventual disintegration of managed capitalism in the wake of the 1973 hike in oil prices by OPEC (Organisation of Petroleum Exporting Countries) was the first major crisis.

“The second major crisis is the great financial crash of 2008 and its aftermath, and it’s far from over…”

The third era is the current period of finance-led capitalism (1980 to the present day): best described, in my view, as a global free-market regime dominated by the big banks and other trans-national corporations.

This global free market is characterised by more precarious forms of employment and, in the advanced economies at least, by much greater inequality in the distribution of income, wealth and life chances than its predecessor. The second major crisis is the great financial crash of 2008 and its aftermath, and it’s far from over.

Cast aside the notion that free market economies automatically return to a stable state after shocks, and we can see more clearly that stability and growth depend upon putting in place mechanisms to balance or moderate recurring fault-lines between capital and labour, on the one hand, and between different types of capital on the other.

The significance of the 2008 crash is that it marks the breakdown of a previously successful method of reconciling finance-led capitalism with the need for manufacturing and finance capital to have a mass consumer base: easy credit. Instead of governments taking on debt to stimulate the economy, as during the great boom, low-to-middle income households did so en masse via credit cards and mortgages.

Lesson 3 – Governments have been pursuing the wrong kinds of policy

Most of the reforms in western countries since the 2008 crisis have focused on reducing public, not household, debt.

Most countries have been pursuing a combination of fiscal austerity (reducing the government’s budget deficit by cutting public spending) and quantitative easing – an unconventional form of monetary policy used by central banks to stimulate the economy, involving the purchase of financial assets from the banks (so helping to rebuild their balance sheets).

Neither policy is working.

Fiscal austerity has either delayed the recovery, as in the UK, or increased public debt due to the effect of sluggish or negative economic growth on tax receipts, as in Greece. And although QE worked as a crisis management measure in the short-term, most academic economists agree that its longer-term effect has been to create unsustainable asset bubbles, especially in the housing market.

Lesson 4 –  It’s more than just a financial and economic crisis

Major crises of capitalism invariably have social and political dimensions, as well as cultural and technological ones.

We can see this clearly in the on-going Greek crisis, which has been described as the cumulative outcome of a financial market crisis, a public or sovereign debt crisis, an economic/employment crisis and an institutional crisis of the EU, its Eurozone and its democratic qualities (see here, p.1).

Superimposed on all this is a migration crisis that, among other things, has significantly strengthened the appeal to European electorates of populist parties of the right.

There’s a lot more to this crisis than an interruption in growth.

And in case you’re wondering, I consider myself fortunate to have been born when I was.

References

Brett Arends, 2013. ‘Six lessons investors should have learned from the financial crisis’, The Wall Street Journal, September 22.

Claus Offe, 2015. Europe entrapped, Cambridge: Polity Press, p 1.

The global financial crisis and austerity [FC]The global financial crisis and austerity is available to order here from the Policy Press website for £9.99.

“This book is a ‘must read’ for anyone who wants a crash course on the global financial crisis and austerity. Written in a highly accessible manner, it uses academic experts’ insights to great effect to explain what happened and why.” Professor Vivien A. Schmidt, Boston University, USA

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The views and opinions expressed on this blog site are solely those of the original blogpost authors and other contributors. These views and opinions do not necessarily represent those of the Policy Press and/or any/all contributors to this site.

3 Responses to “4 lessons from the global financial crisis and austerity”


  1. 1 DEREK WILLIAMS March 9, 2016 at 10:56 am

    An excellent blog; this encapsulates the Political nature of the crisis, and I am struck by the sheer hubris of recent responses to the thoughts of the governor of the Bank of England,[notably by Rees- Mogg],which implies that discussions of the forthcoming referendum on the UK’s role in the EU,can only safely be left to the political class, presumably peers and other unelected ‘experts’ cannot express a judgement then?
    a] this conflicts with the much vaunted pronouncements that we need ‘ an open and transparent debate’ and
    b] reflects the ongoing arrogance of many politicians that the electorate cannot be trusted in a democracy.
    Perhaps we should follow Brecht in his judgement that ‘if the people have lost faith in the government , we should disband the people and elect a new one’.

  2. 2 James Billett March 15, 2016 at 9:55 am

    I completely agree with the comments from Derek above.


  1. 1 Budget 2016: But could we run the economy differently..? | The Policy Press Blog Trackback on March 16, 2016 at 3:54 pm

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