The ghost of 2008 is still haunting us

It was ten years ago, but the after‐effects of the 2008 crash still threaten to erupt in another crisis.

Article updated: 17 September 2018 11:00am Author: Michael Baxter

We have not learned the lessons. The underlying forces that led to the 2008 crash have not gone away — and this is leading to a new, and quite terrifying second stage.

The lesson is in history. The biggest parallel with today is the 1930s. It took a world war to fix the underlying problems. In 1944, at Bretton Woods, the world’s leading economists tried to create a new framework for how the global economy would operate. Keynes had a bold vision, which would have created a wonderfully stable world if it had been realised, but US distrust of this too clever by half Brit, representing a country that was in massive debt to the US, led to a compromise. The formation of the IMF and World Bank did result.

The post war years saw a rules based global system emerge — the UN, WTO, for example and indeed the European Coal and Steel Community, the forerunner of the EU.

There was a popular call for greater social justice and for greater fairness in the labour market — so that it was easier for people from a poor background to rise‐up in the world.

From an economic point of view, World War II was itself like a massive Keynesian stimulus, once and for all banishing the Great Depression to the history books.

2008 — 1929

The crash of 2008 had many similarities with 1929. The main difference, post‐crash, is that policy makers put into practice some of the lessons. In the US, after 1929, banks were allowed to fail, creating a massive contraction in the money supply. The banking bailouts, unpopular as they were, and quantitative easing, were attempts to ensure past errors were not repeated.

But other issues were not fixed. In 1929, inequality was high, and indeed had been rising, wages to GDP were low. In 2008, QE helped exacerbate inequality, wages to GDP are as low as they were in 1929.

Globalisation and new technology has created a small number of winners and a lot of losers.

From an inequality point of view, the US is a basket case. In the UK, inequality of wages rose under Thatcher, but has remained largely unchanged since. Instead inequality of wealth has become a bigger issue.

Before 2008, strapped households funded spending by borrowing against the increase in the value of their homes.

Globally, this has been playing out again — UK private debts to GDP may be lower today than in 2008, but they remain excessive. More to the point, private sector debt to GDP has reached unprecedented levels across the world.

The wrong backlash

But unscrupulous politicians have taken popular discontent and channeled it into easy targets. Immigrants, globalisation, the global rules based system of trade and human rights, even political correctness, have been blamed.

We repeat the nastiest errors of the 1930s that led to a world war.

On top of this, the economy and stock markets are displaying bubble like properties.

The 2008 crash is still affecting us.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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