What should economists and policy makers learn from the financial crisis?

Ben Bernanke, Mervyn King, Larry Summers, Olivier Blanchard and Axel A. Weber talk at the LSE about the lessons of the crash.

They packed us in like late boarders on a budget flight. I shuffled shoulder-to-shoulder down the narrow passage between the rows of folding chairs in the LSE’s Old Theatre, where in an hour’s time Mervyn King would take the stage with Ben Bernanke, Larry Summers, Olivier Blanchard and Axel A. Weber to discuss the financial crisis.

A returns queue stretched out the door and back into the main lobby where students camped with blankets. I took my seat beside a young man clutching the syllabus of his development economics course while another, to my left, texted Chinese characters. Mobile phones and open laptops flickered like moths in the lamplight as the audience waited.

Anticipation hung in the air and it wasn’t surprising. Since the UK Budget and the crisis in Cyprus it seems that “policy makers” have grown complacent to inflicting pain and, when faced with protests, comfortable with popping in their earplugs. Although the US has embraced stimulus, the country has accrued debt in exchange for small boosts in growth, while some figures point towards the bank bailout (over which Bernanke presided) costing the country 20 times as much as it did in the UK.

Would the outgoing governor of the Bank of England (King), the Chairman of the Federal Reserve (Bernanke), the chief economist of the IMF (Blanchard) a foremost central banker (Weber) and a former US Treasurer (Summers) offer optimism to a jilted audience?  It was hardly Question Time, but there was a sense that we deserved some answers.

The esteemed panel didn’t offer much in the way of revolutionary talk, but humility and an openness to change both arrived as common themes. Each offered filial praise to King, who will step down as BOE governor in June. (Summers credited him with both the industry's most formidable intellect and elegant accent).

For Ben Bernanke, who spoke first, this financial crisis was “a classic” but also “novel” in the complexity of its aftermath. Bernanke’s pet project is the Great Depression and he drew insight from looking back to the other American-born crisis that left the world reeling, and the subsequent currency fluctuations associated with the dropping of the gold standard, which Britain abandoned in 1931. As head of the Fed during the Wall Street crash, Bernanke has been criticised for buying up the troubled assets of AIG and Merrill Lynch. While a lesson in economic histories is fascinating, I couldn’t help feeling he’d shirked the more riveting contemporary account many were hoping for.

The closest he came to outlining an actionable “policy” was an encouragement of “domestic objectives” achieved through “domestic tools”, discouraging emerging markets which rely too heavily on exports.  Fair point: as we’ve seen, demand is less an abundant meadow so much as a grassy cliff on the other side of which lies a self-sufficiency void. It’s wise to be sceptical of heavy capital investment in export processing zones, inherently vulnerable to demand bubbles, but is that really possible in a globalised world? It’s hard to imagine corporations pulling back from cheap labour, or the governments of sweatshop nations turning them away. Export-based economies are often touted as the cure-all investment for third world poverty (think of Bangladesh and post-quake Haiti) and foolish as that may be, until economists put forward a real alternative it seems unlikely to change.

Olivier Blanchard, speaking next, managed to charm with his five take-away lessons to be learned from the crisis: 1. Humility (economists got it wrong); 2. The importance of detail (the minutia of financial systems matter); 3. Interconnectedness (the world is one big economic family); 4. Macroprudential reform (better risk management) 5. The re-examination of central banking (how free should they be to set their own rates?).

Such decent and technical points will surely keep the generation of future economists filling the seats beside me busy – but the most important sting was the first. Blanchard spoke eloquently on the myth of progress (some people already knew) and the myriad problems associated with a rhetoric of upward ascension. It is true and terrifying that economists often forget we aren’t just getting better and better at doing things – and that history often repeats itself.

General conclusions drawn by all were that the crisis will force a reconstruction of macroeconomics and redefine the role of central banks. Though none seemed keen to embrace the policies of frugality (and implicitly backed a Keynesian approached to recovery), the evening lacked the damning tone towards austerity which would have pleased many listeners.

It was left to a nasal Larry Summers to do most of the plain talking; speaking in lofty, maple syrup-coated sentences. While the panel debated how they would each reconstruct macroeconomics, Summers chipped in:

I think there’s a central question: do we define macroeconomics as being about... cyclical fluctuations around something that was determined someplace else, where the goal – if you were successful – was to reduce their amplitude, or as tragic accidents where millions more are unemployed at costs of trillions of dollars that are avoidable with more satisfactory economic arrangements?

Until we adopt the second vision I think we are missing our principal opportunity to achieve human betterment. And as long as this question is conceptualised as ‘what new friction should we insert into the existing model’ I don’t think we’re gonna get to the kind of perspective that I’m advocating.

Economics is perhaps the eeriest of sciences: a lingering, omnipresent force without big bangs or supernovas or medical breakthroughs, but rather a complex and continually shifting clockwork that occasional implodes and shakes the world to its foundation.

For all but the economically adroit (I include myself with the amateurs), a lecture such as this haemorrhages hope like a picked scab. The distance between the policy makers and the people, from their academic language to their casual in-jokes and lack of clear solutions, is troubling. Should it have been a grave affair? Perhaps not, but it would be nice to see someone look a little scared. Down here in the audience, things don’t feel so relaxed.

To hear a podcast or to watch a video of this lecture click here.

US Federal Reserve Chairman Ben Bernanke speaking at the LSE on 25 March, 2013. (Photo: Getty Images)

Charlotte Simmonds is a writer and blogger living in London. She was formerly an editorial assistant at the New Statesman. You can follow her on Twitter @thesmallgalleon.

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To stop Jeremy Corbyn, I am giving my second preference to Andy Burnham

The big question is whether Andy Burnham or Yvette Cooper will face Jeremy in the final round of this election.

Voting is now underway in the Labour leadership election. There can be no doubt that Jeremy Corbyn is the frontrunner, but the race isn't over yet.

I know from conversations across the country that many voters still haven't made up their mind.

Some are drawn to Jeremy's promises of a new Jerusalem and endless spending, but worried that these endless promises, with no credibility, will only serve to lose us the next general election.

Others are certain that a Jeremy victory is really a win for Cameron and Osborne, but don't know who is the best alternative to vote for.

I am supporting Liz Kendall and will give her my first preference. But polling data is brutally clear: the big question is whether Andy Burnham or Yvette Cooper will face Jeremy in the final round of this election.

Andy can win. He can draw together support from across the party, motivated by his history of loyalty to the Labour movement, his passionate appeal for unity in fighting the Tories, and the findings of every poll of the general public in this campaign that he is best placed candidate to win the next general election.

Yvette, in contrast, would lose to Jeremy Corbyn and lose heavily. Evidence from data collected by all the campaigns – except (apparently) Yvette's own – shows this. All publicly available polling shows the same. If Andy drops out of the race, a large part of the broad coalition he attracts will vote for Jeremy. If Yvette is knocked out, her support firmly swings behind Andy.

We will all have our views about the different candidates, but the real choice for our country is between a Labour government and the ongoing rightwing agenda of the Tories.

I am in politics to make a real difference to the lives of my constituents. We are all in the Labour movement to get behind the beliefs that unite all in our party.

In the crucial choice we are making right now, I have no doubt that a vote for Jeremy would be the wrong choice – throwing away the next election, and with it hope for the next decade.

A vote for Yvette gets the same result – her defeat by Jeremy, and Jeremy's defeat to Cameron and Osborne.

In the crucial choice between Yvette and Andy, Andy will get my second preference so we can have the best hope of keeping the fight for our party alive, and the best hope for the future of our country too.

Tom Blenkinsop is the Labour MP for Middlesbrough South and East Cleveland