About ten thousand years ago, man learned to control fire. That was one of the most important events in pre-history: a crucial part of the transition from a humanoid past to a human future. But the flames were domesticated, not tamed. Ten millennia later, fire is still a killer and a destroyer. In our cities, the sirens of the fire engine are part of the symphony of daily life. For fire, read credit, a more recent development, but one which is the economic equivalent of fire. Without it and its handmaiden, paper money, humanity would be much less prosperous: governments, less powerful. So which is more destructive — fire which has leapt free from the fireplace, or credit which has leapt free from reality?
It took several decades before academics reached a consensus about the causes of the Great Depression. It will be many years before there is an agreement on the causes of the current degringolade (probably just in time for the next one). There are two separate though related crises: that of the euro-zone, and the Anglo-American one. In the case of the eurozone, the implosion was predicted. Many British Eurosceps are entitled to say ‘I told you so’.
Not that it was hard to diagnose the euro-nonsense. The European single currency is similar to apartheid. Both could have worked, but only through an unattainable transformation in human nature. It would have been possible to solve the problem of black political rights by apart-ness: a fair division of South Africa between the different racial groups. As the whites would never have agreed to that, apartheid became an oppressive hypocrisy. The single currency might have succeeded, if monetary union had been reinforced by fiscal union and the richer nations had been willing to subsidise the poorer ones, just as Mayfair subsidises Motherwell and Manhattan supports Mississippi. Again, that was never going to happen, so the euro has become an oppressive hypocrisy, condemning many people in southern Europe to unemployment and poverty: threatening to condemn many poorer countries to social unrest.
Even with fiscal transfers, the euro would have created moral hazards: the danger of subsidised idleness, as in Greece. The idea that the euro could ever have been right for Greece is risible. So when the Greeks sidled up with a Trojan horse full of monopoly money, it was criminally negligent of the European financial authorities to welcome them. Fear Greeks bearing bonds. The standard work on currencies is Goldilocks and the Three Bears. A well-run country needs a Baby Bear’s porridge currency: neither too hot, nor too cold, but just right. The euro condemns almost everyone to porridge at the wrong temperature, except the Germans, who are scoffing everyone else’s.
There is no nursery-tale answer to the difficulties of the Anglosphere, and it is impossible to evade a bleak conclusion. Hardly anyone emerges with credit. Leaving aside the odd chronic Eeyore, whose instinctive response is ‘no good will come of this’ and who had predicted six of the last two recessions, the credit crisis was unforeseen. Wise men, who should have known better, failed.
There are two explanations for this. Around the turn of the millennium, it did appear as if we might have arrived at a sunlit upland in economic management. Thanks to the new paradigm of the 1990s, inflation was under control. Thanks to just-in-time stock ordering, courtesy of the internet, firms did not have to accumulate overhangs of inventory, so perhaps it would be possible to flatten out the business cycle. Everywhere, economies were growing and share prices were rising. In the Anglo-Saxon world, thanks to American traditions and Thatcherite labour-market reforms, full employment was an attainable goal. In the US, unemployment was around 4 per cent — which meant that every able-bodied American who wanted a job could have two of them.
For the politicians, this was wonderful news. In a post-deferential age, the sovereign people is often an unreasonable master. It expects its governing servants to spend like social democrats while taxing like right-wing conservatives. At the beginning of this century, it seemed possible to satisfy these caprices and demands. David Cameron probably now wishes that he had not expressed the prevailing mood so quotably: ‘share the proceeds of growth’. But on both sides of the Atlantic, every politician of consequence shared that socially generous aspiration (social generosity is not the worst excuse for poor economic judgment).
It was as if we had returned to the mediaeval belief that perpetual motion and alchemy were realistic goals. Growth would continue indefinitely while base paper was transmuted into gold. All this was reinforced by a modern superstition: that US house prices could never fall. In that spirit, Congress virtually prohibited American banks from inquiring into the finances of those applying for mortgages. In part, this was an attempt to open the road to the American dream. In part, it was a sop to poor and minority voters. But the bankers did not protest. The more mortgages, the higher their profits, the larger their bonuses — and after all, mortgages were as safe as houses. So there was a lethal combination of idealism, opportunism and greed.
One small group of economically motivated persons ought to have been immune from the superstition and the attendant sloppiness: central bankers. This leads to the second explanation. The average central banker is a prosperous sixtysomething white male. He has educated his children and paid for his houses. At the other end of the ladder, poor, hard-working families are striving to climb on to the lowest rung. If he raises interest rates, he will be kicking them away. Again, social generosity was the enemy of sound money. We had all forgotten that there is nothing so terrifying as the sound of crashing paper.
An 18th-century Irish parliamentarian once said: ‘Ireland’s cup of troubles is running over — and it is not yet full.’ That is still true of Ireland, and of most western economies. We are a long way from the sunlit uplands.
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