The great debt bubble of 2011

Have our governments averted a financial disaster – or paved the way for one?

‘The worst of the storm has passed,’ declared Barack Obama at the start of last year, seeking to calm the fearful. For his part, Gordon Brown assured Britain that talk of tough years ahead was ‘simply not true’. Both men spoke of their resolve to cure their economies, and did not seem to mind using the same techniques that created the old bubble. Bank bailouts and massive stimulus efforts have indeed encouraged us to borrow, spend and speculate again. Bank interest rates have dropped to historic lows, bringing cheap credit to the housing market and the high street. The mood this year is one of cautious optimism. It would all be reassuring, were it not so eerily familiar.

In 2003, after the dotcom crash and the 11 September attacks had sent America into recession, everybody wanted the debt-fuelled consumer binge to continue. Not that they said so in terms. Euphemisms were deployed, then as now: there should be government ‘support’, a little touch of Keynes. The Nobel-winning economist Paul Krugman urged Alan Greenspan to ‘create a housing bubble to replace the Nasdaq [stock market] bubble’. The Fed chairman obliged, cutting interest rates to a new low. In Britain, base interest rates halved between 2000 and 2003. Money was as cheap as it needed to be to get everybody borrowing again, and returning to the market. House prices boomed. It looked like prosperity. Bubbles so often do.

Nothing is more dangerous than an idea when it’s the only one you have. There is a broad consensus that the financial crisis of 2007 was at least in part a result of record-low interest rates, huge deficits and large-scale credit-financed consumption. Today, governments across the world are trying to solve the crisis — by means of record-low interest rates, huge deficits and large-scale credit-financed consumption.