THE TIMES 8.12.08
A crash as historic as the end of communism
The credit crunch has destroyed casino capitalism. From the rubble a
new, less divisive, economic model will emerge
Robert Peston
Most of us planning for the next few months are building the economic
equivalent of bomb shelters: 2009 will be treacherous. We face a
formal recession in most developed economies, and the contraction is
highly likely to be more severe in the UK than almost anywhere else.
Companies and consumers will continue to tighten their belts. There
will be a sharp rise in unemployment. Many businesses, especially big
ones, will become unviable - and will present the Government with an
appalling dilemma of which ones to put on life support. We have
borrowed too much money and the process of paying it back is not only
leading to a fall in living standards but is also precipitating very
significant changes in how the global financial economy operates.
Capitalism is changing in fundamental ways. What's happening will
affect the relationship between business and government, between
taxpayers and the private sector, between employers and employees,
between investors and companies for many years to come. Arguably the
crisis will turn out to be more significant for us and other
developed economies than the collapse of communism.
A New Capitalism is likely to emerge from the rubble, one which may
well seem fairer and less alienating than the model of the past 30
years. The system's salvation may require it to be kinder, gentler,
less divisive, less of a casino in which the winner takes all.
Here are some of the numbers that tell us what's gone wrong. If you
combine consumer, corporate and public sector debt, the ratio of our
borrowings to our annual economic output is a bit over 300 per cent,
or more than £4,000 billion. Over the past decade, we borrowed and we
borrowed and we borrowed: we assumed that the day when we had to pay
it back would never arrive.
One of the best ways of understanding how all our debts were
accumulated is to look at the gross foreign current liabilities of
our banks. These rose from £1,100 billion in 1997 to £4,400 billion
this year - again, about three times the size of our annual economic
output.
This trend tells two stories. It shows the massive and unsustainable
growth in the City of London and our financial services industry -
which is now shrinking with a vengeance, at the cost of massive job
losses and evaporating tax revenues (perhaps £30 billion to £40
billion of income for the Exchequer gone for ever). But it also shows
that our debts are, to a large extent, the recycled savings of other
countries, notably the massive surpluses of China, other Asian
economies and the Middle East.
To put it in crude terms, for much of the past decade, millions of
Chinese slaved away on near-subsistence wages and still managed to
save, both as a nation (China swanks £1,400 billion in foreign
exchange reserves) and as individuals. This imbalance - between
savings in the East and our indebtedness in the West, between their
massive trade surpluses and our deficits - was never sustainable.
For me, the most important event of the past week was the chastising
of the US Treasury Secretary, Hank Paulson, by Zhou Xiaochuan,
governor of the Chinese central bank. Mr Zhou said that
"overconsumption and a high reliance on credit is the cause of the US
financial crisis" and "the US should take the initiative to adjust
its policies, raise its savings ratio appropriately and reduce its
trade and fiscal deficits".
This seemed a pretty unambiguous statement by the Chinese that they
are no longer prepared to finance the spendthrift ways of the US and
UK: they don't want to lend more and they want to be confident that
what they have lent won't disappear in a puff of bad debts and
inflation.
So the big question is how much debt we will have to repay until our
economy is returned to some kind of stability. Over just the past few
months British taxpayers have provided loans, commitments, guarantees
and capital to our banks in excess of £600 billion. Which is probably
just the beginning.
During the boom years we created twin connected bubbles in assets and
credit. Both of those bubbles have burst. Falling asset prices are
leading to losses for those who borrowed to buy those assets (from
hedge funds to homeowners). And as they struggle to pay their debts,
they sell other assets, driving down their price and causing losses
for other borrowers. And when they can't repay banks, the resources
of banks are depleted, which means there is less credit available,
which drives down asset prices further, and so on in a vicious cycle
of decline.
So it is unrealistic to expect our banks to cease the insidious
process of contracting the volume of credit they will provide until
the price of property, shares, commodities and other assets stops
falling. Asset prices have to find a floor before the financial
economy can rebuild itself and the real economy can receive the
necessary finance that will allow the recovery to begin.
Who's to blame? The short answer is all of us. But it's hard to mount
a convincing argument against the notion that the most at fault were
the banks and bankers - because they systematically failed to do what
they were handsomely remunerated to do, which was to assess properly
the risks of all that lending. Their survival as institutions now
wholly depends on the goodwill of governments and taxpayers.
There are reasons to believe that credit from taxpayers can't and
won't be repaid for many years. So if we've witnessed a semi-
permanent nationalisation of the banking system and will soon see
significant taxpayer support for real companies in the real economy,
then our banks and companies will have to work much harder to sustain
the goodwill of those who are keeping them alive: millions and
millions of taxpayers.
That means that those running our biggest businesses will have to be
more visible. They will have to manifest a genuine understanding not
only of the anxieties of their employees but of all taxpayers. Those
chief executives who succeed will be those who imbue their businesses
with simple, commonsense standards of decency. And they'll almost
certainly be paid less for doing more.
But the biggest lesson of all is that we are a million miles from
having created the political and regulatory institutions to help us
to contain the risks of globalisation. If the unfettered movement of
capital, goods and services is going to survive, if there is not
going to be a retreat into national fortresses that could impoverish
all of us over the longer term, we will have to find a far better way
of monitoring global risks and of bringing governments together to
deal with them.
Some may regard this as a threat to national sovereignty, as the thin
end of an anti-democratic wedge that will see the world ruled by
unaccountable bureaucrats. Reconciling our political traditions with
the imperative of making safe the globalised world will be a
challenge, to put it mildly. But it's not a challenge we can shirk.
----------------------------------------
Robert Peston is the BBC business editor and author of Who Runs
Britain and Who's to Blame for the Economic Mess We're in?
=-=-=-=-=-=-=-=-=-=----- A Postscript------->
Car companies will be forced to seek state aid, says Robinson
Geoffrey Robinson, Labour MP and former Jaguar boss
Newsnight, BBC 2
Mr Robinson said that British car companies would be forced to seek
state aid in the near future, with new car sales down 36% compared to
last year.
He said: "It's going to come down...to a request for direct
assistance, I'm afraid to say...and it's going to be difficult but
we're going to have to minimise and concentrate it."
On specific action needed, he said: "If we're going to help the car
industry...we should help them with the finance to buy the cars."
He added that it would be inconceivable for the government to let an
industry that employs a million people deteriorate to the point of
collapse.
"How can we can turn our backs on that? Just be realistic, we can't,"
he said
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