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.

Photo: Getty
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Theresa May's U-Turn may have just traded one problem for another

The problems of the policy have been moved, not eradicated. 

That didn’t take long. Theresa May has U-Turned on her plan to make people personally liable for the costs of social care until they have just £100,000 worth of assets, including property, left.

As the average home is valued at £317,000, in practice, that meant that most property owners would have to remortgage their house in order to pay for the cost of their social care. That upwards of 75 per cent of baby boomers – the largest group in the UK, both in terms of raw numbers and their higher tendency to vote – own their homes made the proposal politically toxic.

(The political pain is more acute when you remember that, on the whole, the properties owned by the elderly are worth more than those owned by the young. Why? Because most first-time buyers purchase small flats and most retirees are in large family homes.)

The proposal would have meant that while people who in old age fall foul of long-term degenerative illnesses like Alzheimers would in practice face an inheritance tax threshold of £100,000, people who die suddenly would face one of £1m, ten times higher than that paid by those requiring longer-term care. Small wonder the proposal was swiftly dubbed a “dementia tax”.

The Conservatives are now proposing “an absolute limit on the amount people have to pay for their care costs”. The actual amount is TBD, and will be the subject of a consultation should the Tories win the election. May went further, laying out the following guarantees:

“We are proposing the right funding model for social care.  We will make sure nobody has to sell their family home to pay for care.  We will make sure there’s an absolute limit on what people need to pay. And you will never have to go below £100,000 of your savings, so you will always have something to pass on to your family.”

There are a couple of problems here. The proposed policy already had a cap of sorts –on the amount you were allowed to have left over from meeting your own care costs, ie, under £100,000. Although the system – effectively an inheritance tax by lottery – displeased practically everyone and spooked elderly voters, it was at least progressive, in that the lottery was paid by people with assets above £100,000.

Under the new proposal, the lottery remains in place – if you die quickly or don’t require expensive social care, you get to keep all your assets, large or small – but the losers are the poorest pensioners. (Put simply, if there is a cap on costs at £25,000, then people with assets below that in value will see them swallowed up, but people with assets above that value will have them protected.)  That is compounded still further if home-owners are allowed to retain their homes.

So it’s still a dementia tax – it’s just a regressive dementia tax.

It also means that the Conservatives have traded going into the election’s final weeks facing accusations that they will force people to sell their own homes for going into the election facing questions over what a “reasonable” cap on care costs is, and you don’t have to be very imaginative to see how that could cause them trouble.

They’ve U-Turned alright, but they may simply have swerved away from one collision into another.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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