August 2005, and the people who steer the world economy gather in the mountains of Wyoming. Flying in are finance ministers and central bank chiefs. In front of this global elite, the International Monetary Fund’s chief economist will sound the gravest warning of his life. Raghuram Rajan must try to avert a catastrophe, yet as he leaves home he tells his wife, “Either this talk will make me or I’ll look a fool for evermore.”
The summit is supposed to be one big leaving bash for Alan Greenspan , stepping down after nearly two decades running the US Federal Reserve. “We were all competing to say how great a central banker he had been,” Rajan told me in an interview for a Radio 4 programme to be aired this month. He’d even begun researching a presentation about “all the wonderful things that had happened” in finance under Greenspan’s reign. Except the closer he looked, the more frightened he became.
The managers of our savings and pensions were getting paid vast amounts to take extreme risks and trade financial products so complex that few grasped their dangers. The smallest slip, Rajan thought, and there would be catastrophe.
In 2005, the world’s most powerful economists react not with horror, but heckles. “Stone age” thinking, Rajan is told. No less than Bill Clinton’s former Treasury secretary, Larry Summers, damns him as a “luddite”. Didn’t he know banking crises were a thing of the past?
Mocked and marginalised
Three years later, on 15 September 2008, Rajan is proved right as the financial world comes crashing down. Lehman Brothers collapses and just three weeks later, the chairman of the Royal Bank of Scotland rings the chancellor, Alistair Darling, to warn that by evening the world’s largest bank will run out of cash . Holed up in No 10, prime minister Gordon Brown rages : “The whole thing will just explode. If you can’t buy food or petrol or medicine for your kids, people will just start breaking the windows and helping themselves … it’ll be anarchy … we’d have to think: do we have curfews, do we put the army on the streets, how do we get order back?”
That November, the Queen visits the London School of Economics and asks the assembled econo-brains, “ Why did no one see it coming? ” What they don’t tell her is that Rajan and a few others did – it’s just that they were mocked and marginalised and bullied into shutting up. One of those bullies was Brown himself.
For years before the crash, economists, bankers and politicians fervently agreed that the world needed more finance – everywhere. Debt could substitute for wages. Poor Americans should be force-fed subprime mortgages. Payday loans would rescue the former factory workers of Stockport. This was financial globalisation, and from the fall of the Berlin Wall to the death of Lehman it was the only game in town. Over two decades, consensus became orthodoxy and orthodoxy hardened into dogma. Doubters – whether Rajan in America, Steve Keen in Australia or the rump of the British left – were dolts. They didn’t deserve cabinet posts, professorships or jobs running big institutions.
Long before today’s polarised politics and angry mobs, it was the powerful who could not brook dissent. The result was first financial crash, then political crisis, ultimately breeding this decade’s extremism.
Cockatoos in the same cage
Asked before the 2008 US elections whether he was fonder of John McCain or Barack Obama, Greenspan replied: “Thanks to globalisation, policy decisions in the US have been largely replaced by global market forces … it hardly makes any difference who will be the next president.” Voters moaned about politicians looking and sounding the same, but for the former head of the US central bank and his friends on Wall Street, it was a huge plus. And this trend was international.
On the same day in June 2006, Brown and David Cameron both made speeches in London about banking. One Labour, one Tory, yet each addressed the City in the same lovestruck terms. For Cameron, London was “a great UK success story”. Brown believed that “London’s success” demonstrated the miracles of “light-touch regulation, a competitive tax environment … open to competition and to new ideas”. In Cameron’s mouth that became: “ Low tax. Less regulation … Openness. Innovation. ” They sound like a pair of cockatoos in the same cage.
It was almost funny – if you didn’t know that, based on IMF figures, the eventual punchline would be that each and every man, woman and child in Britain would underwrite the finance sector to the tune of £19,271 in bailouts, loans and state guarantees.
Brown and Cameron believed the promises made by the financiers: that they brought jobs, taxes and vital credit. None of these stand up to scrutiny. Even during the biggest boom in history, the finance industry created barely any new employment , as shown by the Bank of England’s chief economist Andy Haldane.
Tax? All the finance sector’s payments to the exchequer between 2002 and 2008 were immediately wiped out by the upfront costs of the bank bailout. As for lending to manufacturers and other productive businesses, forget it. Professor Sukhdev Johal of Queen Mary University of London calculates that they received just over 6% of all loans. That is dwarfed by the 33% of loans made by banks to other financial institutions.
No escape from long shadow
For the economic mirage offered by the City, our political classes happily threw other industries and regions aside. Towns and cities that had had their guts pulled out by Margaret Thatcher were lectured by Tony Blair about luring in finance firms and “high value” services. Even after the crash, Cameron declared finance to be “the national interest” and flounced out of a Brussels summit to try to save the industry from any further regulation. But a steel town such as Redcar? It could die.
Today’s politics and economics cannot escape the long shadow cast by the crash. You can draw a straight line from Lehman to Donald Trump, or from RBS to austerity and Brexit. Yet whatever rotten tomatoes and Daily Mail headlines are thrown at the financiers, they still command the centre of our politics.
The finance sector stumped up over half the cash for Cameron’s party when it gained power in 2010. One in four Tory MPs elected in 2015 came from finance backgrounds--more than all who worked in schools, universities, health, the armed forces and agriculture put together. All the government reports on banking after the crash are dominated by bankers, and the Bank of England’s Mark Carney celebrates the prospect of a finance industry becoming 20 times the size of our GDP.
The central task of our time is to build an economy where the finance sector is smaller, serves the needs of other industries, and is less voracious for fast and high returns. Ten years on from the crash, Britain has barely begun that task.
By Aditya Chakrabortty (his programme “Cassandras of the Crash” will be broadcast on BBC Radio 4 at 8 p.m. GMT on 19 September)