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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After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

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