What caused the 2008 global crisis?

One of the real pleasures of my life was reading economics, and I have enjoyed my subsequent efforts to keep abreast of developments in the subject – particularly macroeconomics, the management of the economy as a whole. I am blessed with a good memory and can recall the moment in a seminar room at Lancaster University in 1966 when a capable lecturer, simply by drawing a line on a graph, explained the rationale behind Keynesian economics. I became a Keynesian as a result and have held this position ever since.   I believe that government intervention in the economy is essential. Without this intervention there is a strong chance that an economy will settle into a stable situation with unacceptable levels of unemployment. Leaving it all to unbridled market forces does not work and there is growing evidence that it produces massive inequality.

It gave me great satisfaction when one of my sons went on to read economics at Cambridge – where Keynes and his colleagues developed this school of analysis.   It would be pleasing if one of my grandchildren or later generations in turn went on to study the subject. If this happened he or she would be likely to be sitting in an examination room attempting to write an answer to the following question: ‘Was the UK recession of 2008-18 caused by excessive government spending?’

I hope that the family economist of the second half of the 21st century will gain top marks by producing an answer along the following lines: ‘The recession of 2008-18 was not a UK recession: it was a global phenomenon. The central cause was a massive and irreversible shift in economic power across the world and a failure of the financial and banking system to cope with the new streams of investment capital generated as a result.   Specifically surplus funds from the emerging economics in Asia, seeking high rates of return at a time of low economic growth, were used to fund house purchases, particularly in the United States. This produced a speculative bubble that was unsustainable in the long term. In the short-term this underlying problem was exacerbated by the introduction and excessive promotion of over-engineered, complex products, by under-regulated investment banks. This last point was not adequately recognised until Lehman Brothers filed for bankruptcy in September 2008’.

This model answer would then go on to argue that, with the benefit of hindsight, any Government would have been well advised to keep a tight rein on public expenditure as the global economy moved into crisis. However it would be wholly incorrect to argue that excessive government spending in the UK (or indeed elsewhere) caused the recession.

Unfortunately honest analysis counts for little in the face of well-timed and well-delivered propaganda. The Conservative Party engineered a quite remarkable political success in the period round the 2010 general election.   They were able to convince the electorate that it was the profligacy of Labour Prime Minister Gordon Brown that was the primary cause of the crisis. The public deficit was too high and the solution was to balance the books as quickly as possible by cutting public spending. In 2011 Prime Minister David Cameron argued that the only way out of a debt crisis is to ‘deal with your debts’. He went on to suggest that ‘That means households – all of us – paying off the credit card and store cards bills,’ The advice on domestic credit cards was subsequently qualified and revised but the underlying idea had enormous resonance. Labour’s economic recklessness has become the central Conservative theme for the 2015 General Election.

History will be kind to Gordon Brown. He took prompt action to co-ordinate the international response to prevent further bank failures and a complete collapse in the financial system. However in the UK an inevitable consequence was a rise in the Budget deficit: from 2% before the crisis to 11% by the time of the 2010 general election. This gave the Conservatives sufficient ammunition and they used this as the basis for a sustained ideologically led attack on public expenditure, particularly local government.

It was Labour’s misfortune to be in power when the inevitable crisis occurred. Whoever had been in office would have been in difficulty and the opposition would have been given a unique opportunity to make political capital. The Conservatives opportunistically chose to put the blame on excessive public spending by Labour. Had the positions been reversed Labour would have seized on the under-regulation of the banking system and the need for international co-operation.

We shall see how this plays out over the forthcoming general election. Broadly Labour’s argument under Ed Miliband will be that day-to-day government spending should be met by tax receipts and longer-term investment by borrowing. However this may prove to be too subtle a point to be put across on the doorstep.

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