No one saw it coming, did they?
Article published: Sunday, August 2nd 2009
Alternative thinkers have warned of impending economic disaster for years. So why does the mainstream view persists that the crash took us completely unawares?
Following the financial crisis of 2008, the idea that “no-one saw it coming” was voiced by a number of politicians and others with their jobs and reputations on the line. Such a belief has for the most part been echoed by the mainstream media. The BBC’s economics editor, Stephanie Flanders, for example said these very words. It turns out, however, that “no-one” doesn’t refer to everyone and in fact just refers to professional economic forecasters in the City and in major institutions like the IMF, the European Commission and the OECD.
That such a narrow group of opinions can be classed as all the opinions that matter may seem pretty arrogant. But it’s typical of the views held by many top economists. For decades alternative voices have been ignored and mocked in university departments, the media and the City itself. This was very much the case in the run up to the financial crash.
However it seems there were people who got it right. Dr Catherine Cowley of the University of London is just one example. In a 2006 book she warned of the threat posed to the UK by trading in risky and unstable financial assets with the US. She wrote that this was because of the lack of transparency and the way in which risks would flow from market to market. This was made worse by the fact that the more unstable and volatile an asset was the more investors could make from them. Banks were dealing in derivatives that were so complex no one understood them and as a result no one knew where the risk actually lay.
Regulation, she said, was also deeply flawed, with the Financial Services Authority’s (FSA) position largely resting on the integrity of bankers. The words ‘banker’ and ‘integrity’ don’t often pop up in the same sentence nowadays, but this really was regulatory practice.
Cowley was insulted and ridiculed when her book came out, but given that she was right on the money, why wasn’t she listened to? The answer lies in what ‘people in the know’ held as common sense.
Dr Bernard Walters, a senior economics lecturer at the University of Manchester, says the assumptions made by those at the top have been the foundation of all economic thinking. The basic idea is that the free market distributes resources most efficiently – it’s natural. So it should be left alone, and the political and social stuff should be put aside. The market is also meant to deal with risk most efficiently, so regulation is seen as holding back wealth and economic growth. The system also relies upon the “enlightened self-interest” of bankers, who want to keep things stable and predictable for long-term profits.
So those who warned of a coming crash weren’t listened to because government and mainstream economists really believed in the markets and that they wouldn’t fail. Why rock the boat?
But there’s something else. In the last thirty years or so this system just so happened to see a huge amount of wealth move from the poor to the rich. Those who have profited most, well, they’re the ones with the money to fund economic research. No surprises that more goes to those who say that this system’s best, who see economics as a science and agree politics should be kept well away from it.
And the media? That’s pretty big business too. The Mule showed a few issues back just who runs the British press. People like Rupert Murdoch have made a lot of money off this system too. Economic editors generally aren’t exactly rogue journalists, and they are spoon-fed their ideas by the ‘reputable’ analysts in financial institutions and universities.
This is also down to the failings of the regulators. Professor Peter Gowan of London Metropolitan University, who also predicted the crash, explains how regulators failed because they were too closely linked to big speculators. For years there’s been a ‘revolving door’ between the FSA and big banks.
The economics of the 1980s has failed, we know that. But the ‘experts’ say leave it to them, they know best, “Yes, yes, we made mistakes, but no one saw it coming”. Not really true. Maybe we should listen to those who didn’t have their blinkers on and who understood and predicted what’s going on in the global economy. A revolution in economics? A start might be reconnecting economics with everyday political and social life – you know, reality.
Ruben Seveelaventhan
More: Features
Comments
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Just about every marxist economist since, er Marx, had been predicting a pretty big implosion – two books worth reading to understand how we got in this mess are Peter Gowan’s (mentioned in the article) ‘The Global Gamble’ and David Harvey’s ‘Brief History of Neoliberalism.’
Comment by andyb on August 2, 2009 at 11:49 pm
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