Politics

How everything got broken

September 10, 2013
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Welcome to the Prospector, Prospect’s in-house blog covering politics, economics and the circumstances that arise when the two meet.

It is a lively area of debate, here in Britain and also globally. But for a long time, it was much more settled terrain. When Paul Volcker, the former chairman of the US Federal Reserve Bank, took on inflation in the late 1970s, with the express purpose of wringing it from the American, and global, economies by sharply raising interest rates, he fought an economic battle; and won. He got inflation out of America’s veins, thus allowing his successor, Alan Greenspan, to drop rates, and to hold them right down.

The passing of Margaret Thatcher this year led to various reprisals of the old saw that “we are all her children.” But more than this, we are the children of Greenspan and Volcker, the two Fed Chairman who ushered in and laid the groundwork not only for 1980s Reaganomics in the US and the Wall Street growth that ensued, but also the Big Bang in the City of London in 1986, when Margaret Thatcher’s government deregulated finance, triggering a sharp spike in activity and profits.

Blair happily adopted this turbo-charged financial sector and used the tax revenues for schools and hospitals. As such, New Labour owed much to the low interest rate policy of the Federal Reserve Bank, which emitted a steady supply of dollars into the globalised, digitised financial infrastructure, a supply on which so many businesses, financial and otherwise, came to rely. Inflation was low. Growth was high. Such was the “Great Moderation”.

And now it’s all gone. The 30-year upward progression that started with Volcker in 1979 ended on 15 September 2008 with the collapse of Lehman Brothers. No longer can governments assume that their Treasuries would be filled. The Eurozone periphery looked for a time as if Treasuries would not so much be depleted as stripped bare. The welfare states of European countries, Britain included, began to pose extreme challenges to governments. Benefits and social services were reduced sharply.

Everywhere, there are cuts, high unemployment, sluggish growth, and even when there is growth, the benefit is felt only very faintly; for many, “growth” feels like a mere economic technicality. Added to this the emerging markets of China and India, which for a while seemed poised to take over as the motors of global growth, have stalled.

The economic and political consensus of the Great Moderation has broken down and it is not yet certain what will follow it. Attempts are being made at present to engineer a new consensus. This blog will bring you the ideas, from Westminster and elsewhere, which are shaping that debate.