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| The trouble with the global economy – and why fixing it might take some time | The trouble with the global economy – and why fixing it might take some time |
| (6 months later) | |
| "How do we fix this mess?" That may be one of the stupidest questions I have ever asked myself, as of course I don't know the answer. What I do know, however, is that few of the structural flaws in how the global economy operates, which took us from unsustainable boom to intractable bust, have been fixed. And that leads me to fear that in the rich west, and perhaps more widely, it will be many years yet before we enjoy the kind of recovery that raises most people's living standards. | "How do we fix this mess?" That may be one of the stupidest questions I have ever asked myself, as of course I don't know the answer. What I do know, however, is that few of the structural flaws in how the global economy operates, which took us from unsustainable boom to intractable bust, have been fixed. And that leads me to fear that in the rich west, and perhaps more widely, it will be many years yet before we enjoy the kind of recovery that raises most people's living standards. |
| Here are just a few of the surreal characteristics of the worldwide financial and economic system that is our lot. | Here are just a few of the surreal characteristics of the worldwide financial and economic system that is our lot. |
| We have global regulations for banks that incentivise them to make it impossible for ordinary mortals – including their owners, regulators and even their own directors – to know with confidence the risks they are running. And at the same time these rules encourage senior bank executives to run their respective operations in a way that maximises the short-term profits they make – and of course their pay and bonuses – subject to those regulations, rather than simply concentrating on providing the credit and services of most use to their customers. | We have global regulations for banks that incentivise them to make it impossible for ordinary mortals – including their owners, regulators and even their own directors – to know with confidence the risks they are running. And at the same time these rules encourage senior bank executives to run their respective operations in a way that maximises the short-term profits they make – and of course their pay and bonuses – subject to those regulations, rather than simply concentrating on providing the credit and services of most use to their customers. |
| I am referring to the so-called Basel rules, set by a largely unaccountable priesthood of regulators and central bankers who meet in camera in a sleepy Swiss town and have determined how banks protect themselves against shocks since the 1980s. Think of these money priests as the financial equivalents of the members of Fifa's governing body or the International Olympic Committee – which is not to suggest that there has ever been a hint of corruption at the Basel committee on banking supervision, but is to say that transparency and openness are not the strongest suits of a committee whose recommendations have a powerful bearing on all our livelihoods. | I am referring to the so-called Basel rules, set by a largely unaccountable priesthood of regulators and central bankers who meet in camera in a sleepy Swiss town and have determined how banks protect themselves against shocks since the 1980s. Think of these money priests as the financial equivalents of the members of Fifa's governing body or the International Olympic Committee – which is not to suggest that there has ever been a hint of corruption at the Basel committee on banking supervision, but is to say that transparency and openness are not the strongest suits of a committee whose recommendations have a powerful bearing on all our livelihoods. |
| The Basel rules were originally designed to ensure that all big banks anywhere in the world retained a minimum amount of capital relative to their loans and investments, to absorb losses when it all goes wrong. In other words, they were supposed to make the banking system safer and to create a level playing field between banks. In practice, and almost from the start, the rules were written in such a complicated way that they created a virtual licence for clever bankers and their respective banks to cheat. And the devastating consequence is that they actually allowed banks to become both dangerously enormous and to hold less capital relative to their loans than at any point in history, although you could not see how weak banks had become because of the eccentric way that the rules calculate capital and risk. | The Basel rules were originally designed to ensure that all big banks anywhere in the world retained a minimum amount of capital relative to their loans and investments, to absorb losses when it all goes wrong. In other words, they were supposed to make the banking system safer and to create a level playing field between banks. In practice, and almost from the start, the rules were written in such a complicated way that they created a virtual licence for clever bankers and their respective banks to cheat. And the devastating consequence is that they actually allowed banks to become both dangerously enormous and to hold less capital relative to their loans than at any point in history, although you could not see how weak banks had become because of the eccentric way that the rules calculate capital and risk. |
| Here is what should perhaps worry us all. Although banks are being forced to hold more capital (a good thing), the Basel rules have become even more complicated, creating even greater incentives for banks to cheat. So for me, one of the great mysteries of the aftermath of the 2008 financial crisis, which was a big cause of our current malaise, is why the Basel rulebook was not torn up and replaced with something a lot simpler. Arguably, it would have been much more sensible to give banks more freedom to manage their operations in a commercial way, subject to simpler stipulations that would place stricter limits on how much banks can lend relative to their capital, and how much cash they have to hold as protection against runs. | Here is what should perhaps worry us all. Although banks are being forced to hold more capital (a good thing), the Basel rules have become even more complicated, creating even greater incentives for banks to cheat. So for me, one of the great mysteries of the aftermath of the 2008 financial crisis, which was a big cause of our current malaise, is why the Basel rulebook was not torn up and replaced with something a lot simpler. Arguably, it would have been much more sensible to give banks more freedom to manage their operations in a commercial way, subject to simpler stipulations that would place stricter limits on how much banks can lend relative to their capital, and how much cash they have to hold as protection against runs. |
| To return to the analogy with sport, we all know that the simpler and clearer are the rules of any game, the easier it is to prevent cheating. Unfortunately, this is not a lesson that the global financial priesthood seems keen to learn. | To return to the analogy with sport, we all know that the simpler and clearer are the rules of any game, the easier it is to prevent cheating. Unfortunately, this is not a lesson that the global financial priesthood seems keen to learn. |
| So what else about the wonky way the world generates wealth is still in need of reform? Well it might be an idea for there to be a less sharp distinction between the consuming and borrowing countries on the one hand – that's the UK, the US and the shakier parts of the eurozone – and the producing and lending countries, such as China and Germany. To put it in slightly simplistic and emotive terms, it is surely barking mad that Chinese workers toil every hour of the day to make stuff for us, which we buy with credit that to an extent China has provided to us. | So what else about the wonky way the world generates wealth is still in need of reform? Well it might be an idea for there to be a less sharp distinction between the consuming and borrowing countries on the one hand – that's the UK, the US and the shakier parts of the eurozone – and the producing and lending countries, such as China and Germany. To put it in slightly simplistic and emotive terms, it is surely barking mad that Chinese workers toil every hour of the day to make stuff for us, which we buy with credit that to an extent China has provided to us. |
| The way I see the crash of 2008 is the moment when the penny dropped that a number of economies – and the UK was in the frontline of these – had borrowed more than they could afford to repay. I am talking here about aggregated debt, or the sum of what consumers, companies, banks and government owe. Since that painful awakening, we have not started to pay down the debt in any meaningful way. Instead we have shuffled it, so that government debt has increased as a direct consequence of largeish repayments by banks and modest repayments by consumers. But until the sum of all that debt starts to fall, economies such as ours and America's and much of the eurozone will continue to be on fragile foundations. | The way I see the crash of 2008 is the moment when the penny dropped that a number of economies – and the UK was in the frontline of these – had borrowed more than they could afford to repay. I am talking here about aggregated debt, or the sum of what consumers, companies, banks and government owe. Since that painful awakening, we have not started to pay down the debt in any meaningful way. Instead we have shuffled it, so that government debt has increased as a direct consequence of largeish repayments by banks and modest repayments by consumers. But until the sum of all that debt starts to fall, economies such as ours and America's and much of the eurozone will continue to be on fragile foundations. |
| Which brings me to an elephant that has been in the room in which prime ministers and business leaders swank and swagger for 20 years – namely that globalisation is real and (ahem) global, but government is national. Or to put it another way, the flaws in globalisation cannot and will not be tackled effectively unless and until there are much better mechanisms for politicians and people to hold in check global capital and global businesses. But if even a region with a large degree of shared history, such as the eurozone, is struggling to centralise political decision-making, it may be naive to hope that the US and Chinese presidents will one day come to think of themselves as playing for the same team, in collective efforts to limit the tendency of globalisation to lurch from crisis to crisis. | Which brings me to an elephant that has been in the room in which prime ministers and business leaders swank and swagger for 20 years – namely that globalisation is real and (ahem) global, but government is national. Or to put it another way, the flaws in globalisation cannot and will not be tackled effectively unless and until there are much better mechanisms for politicians and people to hold in check global capital and global businesses. But if even a region with a large degree of shared history, such as the eurozone, is struggling to centralise political decision-making, it may be naive to hope that the US and Chinese presidents will one day come to think of themselves as playing for the same team, in collective efforts to limit the tendency of globalisation to lurch from crisis to crisis. |
| Or to put it another way, the most I hope to achieve with my new book, "How Do We Fix This Mess", is that a brighter light is shone on what has gone wrong with global finance and the global economy, in the hope that – at perhaps a snail's pace – we may one day mend some of it. | Or to put it another way, the most I hope to achieve with my new book, "How Do We Fix This Mess", is that a brighter light is shone on what has gone wrong with global finance and the global economy, in the hope that – at perhaps a snail's pace – we may one day mend some of it. |
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