Prospect event: On 17th September, Martin Wolf, described in the current issue of Prospect by the economist Kenneth Rogoff as “the world’s premier financial journalist,” will be visiting our London offices to talk about his new book, “The Shifts and the Shocks: What We’ve Learned—And Have Still to Learn—From the Financial Crisis”. To book tickets, click here.
In this brief extract from the conclusion to the book, Wolf assesses the political, as well as economic, damage caused by financial crises. Perhaps the most “insidious” legacy of the crash of 2008, Wolf argues, is a crisis of democratic legitimacy that breeds “outraged populism, on both the left and the right.” Recovering from the massive shock administered to the global financial system six years ago requires more than restoring western economies to growth. Political leaders need to learn the lessons of 2008 and act on them. If they don’t, Wolf concludes, “next time a big crisis arrives even our open world economy could end in the fire.”
Financial crises do more than impose huge costs: they have bigger and more insidious effects. Inevitably, such crises help undermine belief that a globalising economy is of benefit to the vast majority of people. They make people anxious and angry and rightly so. Angry and anxious people are not open to the world. They want to hide in their caves, together with similarly angry people.
Equally inevitably, crises undermine confidence in the elites. In democratic societies, a tacit bargain exists between elites and the rest of society. The latter say to the former: we will accept your power, prestige and prosperity, but only if we prosper too. A huge crisis dissolves that bargain.
Here then are three huge failures of the western elites.
First, the economic, financial, intellectual and political elites misunderstood the consequences of headlong financial liberalisation. Lulled by fantasies of self-stabilising financial markets, they not only permitted but encouraged a huge and, for the financial sector, profitable bet on debt. The policy-making elite failed to appreciate the risks of a systemic breakdown. The financial elite was discredited by both its behaviour and its need to be rescued. The intellectual elite was discredited by its failure…