Media Spotlight: Verdict on the crash Edited by Philip Booth
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When the credit crunch struck many were quick to lash out at regulators. There were widespread claims that regulation was too soft and tighter restrictions would have prevented some of the devastation. Verdict On A Crash: Causes and Policy Implications seeks to dispel this myth.
The book features essays from writers such as Anna Schwartz, formerly of the US National Bureau of Economic Research, Geoffrey Wood, professor of economics at the Sir John Cass Business School in London and John Greenwood, chief economist at Invesco.
The theme of the book is that government intervention made the situation worse and that proposed stronger regulation and government control - as discussed in chancellor Alistair Darling’s recent White Paper - could be detrimental.
The first essay, entitled The Successes and Failures Of UK Monetary Policy 2000-08, claims that between 2000 and 2004 the Monetary Policy Committee had a successful run but between 2005 and 2008 it went off the rails.
As the good times rolled the MPC saw the UK’s unemployment figure fall to 4.7% from 10.7% in 1993.
According to Greenwood, who pens the chapter, one measure of monetary policy success in the early part of this decade was that the UK avoided the mini-recession much of the world suffered after the dotcom bubble burst.
The reasons for this are three-fold. First, interest rates were changed with sufficient agility and sensitivity so that monetary growth did not become excessive. Second, the growth of debt owed by households, non-financial corporations, the government and financial institutions averaged just 6.7% between 2000 and 2004.
And finally, after the dotcom crash the global economy was considerably below full capacity utilisation.
Greenwood says the catalyst for the downturn came in 2005 when the MPC cut interest rates from 4.75% to 4.5%. He calls this the first critical policy mistake and says the committee underestimated the impact of rapid monetary growth on inflation.
In the essay entitled Origins of the Financial Market Crisis Of 2008 Schwartz traces the bursting of the asset price bubble. She claims that while it is a cliché to describe an asset boom as a mania it serves to describe how ordinary folk become avid buyers of the objects of their desire.
Schwartz says an asset boom is propagated by an expansive monetary policy that lowers interest rates and induces borrowing beyond prudent bounds.
She claims the government played a role in stimulating demand for housing by “proselytising the benefit of home ownership for the well-being of individuals and families”.
This theme of government blame is continued in the essay titled The Financial Crisis: Blame Governments, Not Bankers in which Dr Eamonn Butler, director of the Adam Smith Institute, claims the story of greedy bankers selling mortgages to poor consumers who couldn’t afford them has little validity. Instead, he claims all follies stem from government action.
But while the book is fascinating and the contributors are clear on the points they wish to make, it is somewhat biased. By now, we all know things are not black and white. The idea of government bad, bankers good is simplistic and the finger of blame can point in many directions.
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