The Credit Crunch Demystified @Battle of Ideas

This session was an on-stage debate between:
· Phil Mullan, director of Business Transformation, Easynet (in a personal capacity)
· Dr Michael Savage, Investment Banker (in a personal capacity)

God this session was packed! Standing room only in the biggest room of the building. As Phil Mullan pointed out, you can usually house the economics session in the broom cupboard, with room to spare. As an aside, at the meeting of the CILIP Update Editorial Board on Friday, the icebreaker at the start of the meeting was to state what you’re reading, and at least 2 people said they’d stopped reading novels in order to be able to follow the news and gain an understanding of the economic situation.

The essence of the debate was:

• What is the severity of the current crisis? Well, it’s very severe! But although it’s being described as the worst financial crisis ever, the human dimension is muted – having said that, it’s so far had a limited effect on the economy – unemployment isn’t as bad as it was in the 1980s for example. But there’s a lot of misery and hardship to come.
• Phil: The most important thing is that the crisis isn’t just about economic recession: it reflects a fundamental atrophy of economic activity in the West. This is very serious, with politicians unable to cope, it will be more difficult for them to contain the consequences.
• Michael: Right across the board, everyone failed to see this coming. In terms of steps taken by governments, allowing Lehmann to fail has proven catastrophic, but that this couldn’t have been foreseen. The British banking system was within hours of failing.
• Phil: The past 14 months had been characterised as panicky paralysis with intermittent firefighting. George Soros had said that governments have been consistently behind the curve, displaying oscillation and lack of imagination. We’ve lived with an economic paradigm of “There is no alternative” [to the market] for a quarter of a century now, with a very technical as opposed to political approach to running the economy. But the people elected democratically failed to see this coming. There’s been no attempt to date to grasp the fundamentals.
• Michael: Some of the growth and dynamism in the West has been false, but this has nevertheless been a period of great consistent growth and innovation, although we should have picked up on the issues in the financial sector earlier.
• Phil: This position amounts to a fetishisation of numbers – growth looked good but what about the quality of growth? In reality, the West has experienced prosperity based on growth elsewhere. Economic activity in countries such as the US and UK has been based on a. Property and retail, and the interactions between the two b. Financial services c. Public sector. So a huge amount of activity has been based on circulation and services around it, while the productive economy has shrunk. Manufacturing in the US now only represents 12% of the economy. 30 years ago, financial activity comprised only 20% of the average US corporation, whereas today that figure is 50%. Back to the drivers, only c. public spending now remains. This introduces a very real risk of a state deficit crisis. The economy has been hollowed out. When an economy doesn’t make much, and the financial, property and retail sectors implode, what’s left? Apart from making money out of the East, of course.
• Michael: US still makes up 25% of the global economy. The East is still led by the US – the only country with the financial depth and breadth to manage the crisis. The current crisis is driven by additional money in the system, not just because of bank lending, but money from Asian and oil-producing economies. Simply put, US, UK et al have been spending more money than they’ve made. Other countries, by contrast, have been saving masses of money and pumping it into the West. This has led to low interest rates in the West. The West has then made money where it can – for example from property.
• Phil: China has been keeping the West afloat. Value production continues in the West, but it’s not new value creation, but creaming off value created elsewhere in the world. China is going to have a hard time in the next two years with the spillover from this. US is the most indebted country in the world, and yet presumes to be the world leader. The economy pre-crisis was characterised as SAD – stable; anaemic; durable. The West has been able, since the 1980s, to cope with its difficulties; political stability and credit availability have together removed the need for economic restructuring. This was like a hiatus period of muddling through. The West has now had its comeuppance, and needs a long period of regeneration. Everyone is going to feel a lot of pain, but at the moment there’s a strange feeling of denial in society about the future repercussions of the downturn.
• Michael: The recent period has been characterised by consistently high growth and employment. It hasn’t been SAD at all – actually it’s been a great period in the economy. The banking sector had to be bailed out, though, because there was a blunt choice between bail-out or generalised depression. We now need to think fully about how to manage the economy, the banks and restructure society.
• Phil: 40% of GDP in China is based on economic investment. They create more values than they can use. This is much more than an economic / financial problem. Intellectually, the most important point is the hollowness of economic life, and the imbalances between economics and politics globally. We’re closer to barbarism than we were 10 years ago; we’re at a tipping point. There’s a potential to restructure using the East as an engine, but how likely is that?