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From boom to crash, then slow, painful, sluggish recovery. As austerity bites and monetary wheels stick fast, this is the story of where it all went wrong.

The Financial Crisis ebook

The Financial Crisis: How did we get here?
Phillip Inman

£1.99/$2.99

Every day brings another gloomy economic statistic. Countries heading for bankruptcy; banks running out of money; production down; shop prices up: and no end seems to be in sight. Newspapers and TV news shows dwell on the troubled times and report on the inability of politicians to present a coherent way for Britain and the rest of Europe to pull out of a long and seemingly never-ending depression. Nothing seems to give employers the confidence to hire more people, pay them an inflation-proof wage rise and reverse a long decline in living standards.

In The Financial Crisis: How Did We Get Here?, Phillip Inman explains what economic levers are available to policymakers, which ones are being pulled and which are being left idle. It examines why certain approaches are adopted, not just by politicians, but also by businesses, investors and workers, to give you a rounded, informed view of the current crisis.

Kindle

About the Author

Phillip Inman

Phillip Inman is economics correspondent of the Guardian and Observer.

Extract

This is the Introduction to The Financial Crisis

 

Every day brings another gloomy economic statistic. Countries heading for bankruptcy; banks running out of money; production down; shop prices up: and no end seems to be in sight.

Newspapers and TV news shows dwell on the troubled times and report on the inability of politicians to present a coherent way for Britain and the rest of Europe to pull out of a long and seemingly never-ending depression. Nothing seems to give employers the confidence to hire more people, pay them an inflation-proof wage rise and reverse a long decline in living standards.

This e-book is concerned with explaining what economic levers are available to policymakers, which ones are being pulled and which are being left idle. It will attempt to explain why certain approaches are adopted, not just by politicians, but also businesses, investors and workers.

In the spirit of the Guardian’s Explaining the News series, we examine some of the undercurrents driving the economy, including the impact of the west’s ageing population and how they invest their savings. The way young people are finding their voice is another factor that shows, as ever, how the economic situation is driven by politics.

Longer term, there is hope, because, as the former US Labour secretary Robert Reich says, there is every possibility progressive forces will win the argument.

However, we start from a weak position. The credit crunch made the most recent recession more complicated and more serious than any of its 20th century predecessors.

In the UK it is certainly going to last longer than any recession in the last 100 years because we had, in 2012, barely made up for half of the 7.1% lost output registered in 2008.

The National Institute for Economic & Social Research (NIESR) says the path of recovery will be longer than the 1930s by some way.

All western economies experienced the crunch in a similar fashion, though Japan suffered twice following the tsunami in 2011, which had a similarly damaging effect on output.

In a strangely Dickensian development, Britain, like the rest of Europe, has become the image of a wealthy Victorian family fallen on hard times.

Imagine this family lives in a comfortable, leafy part of town. Theirs is a traditional, three-storey, terraced house, with steps up to a grand doorway. Inside, a crystal chandelier lights a spacious hallway. On the right hand side, through a panelled door, is the front parlour, with its formal furniture and roaring open fire. Hot tea and crumpets await visitors who call.

The front parlour is all that most guests see. It is the Lake District, London’s West End, the Cotswolds or the 2012 Olympics. It is the showpiece that reaffirms everyone’s sense of well-being. Just as an April shower or winter cold snap confirms the changing seasons and dispels fears of global warming, the welcoming embrace of the front parlour appears to confirm all is well.

If guests venture off the beaten track, if they make their way upstairs or down, they will be in for a shock. For several months the children of the house have spent their time breaking up the bedroom furniture, taking in washing and darning the socks of neighbours to earn a few pennies. While their clothes still have their frilly lace and braid, and look a picture of affluence, the young and the old no longer have a bed each and it is a while since a fire was lit in the rooms where they sleep.

The part-time cook works with a smaller budget week by week and the cleaner turns up only once a fortnight.

Keeping up appearances is a speciality of European culture. Each country has developed its own way of doing it and funding the growing gap between what people earn and what they spend.

Life was affordable when there were captive markets for the EU’s goods. Cheap commodities like oil, copper and sugar made imports cheap and allowed many businesses to survive without being very efficient. But since the 1970s, when oil prices quadrupled and a few years later quadrupled again, life has become much harder and successful attempts to close the gap between what we earn and how much we spend have proved only short lived.

Prior to the crash continental European politicians believed their success at preventing the debt gap from widening by all but a few percentage points each year meant this process could continue for decades without a major change of policy. But the decision of some countries, notably Ireland, Portugal and Greece, to make a dash to join the rich club through a massive binge on personal or state borrowing undermined the project. The US and Britain did the same to maintain their pre-eminent status. Iceland, as if from nowhere, became a poster child for high living standards with no visible means of support.

Countries like Holland, Belgium, Finland, Austria and Denmark found their calculations unravelling. Even France and Germany discovered that years of overspending and a reliance on selling goods and profits from loans to debt ridden countries was unsustainable.

Like their flaky neighbours, they were greedy for more. They avoided generating fake wealth through property speculation like the get-rich-quick club, but they harboured banks up to their necks in loans to Greece or, in the case of Germany, direct investments in US sub-prime mortgages that had become worthless.

One of the difficulties in describing the UK’s current situation and the issues facing policymakers is the way elements of the economy are interconnected. The UK’s links with other countries and major shifts in the way economies are organised has also complicated the story.

A bit of recent history is needed because it will feed back into the way things are now. That’s because the debts built up ahead of the credit crunch are still with us and without some big changes to the way we tax and spend, could cause a repeat of the crisis in the next few years.

The Victorian family analogy takes us only so far. There are many more elements to the current mess.

 

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