At the peak of the global financial crisis a decade ago there were some who insisted that politicians and regulators should sit back and just let crumbling banks go bust.
No bailouts. No rescues. What we needed, they said, was creative destruction.
There was plenty of other similarly terrible advice in the following years. There were those who argued that governments needed to slash state spending, even at the very height of the global recession. There were those who shouted that emergency money printing by central banks would rapidly result in destructive inflation. When that crippling spike in prices failed to materialise, they switched to warning that “quantitative easing” would be a form of slow-working poison for the economy, keeping alive zombie companies. They began urging central bankers to put up interest rates as soon as possible.
Although governments, tragically, started to cut deficits far too early, before the recovery was secured, they ignored most of these suggestions. And thank goodness. Such policies would have led to massive economic destruction, and severe social suffering.
To be clear, this isn’t to argue that the mainstream policy view is always entirely right. The mainstream policy view before 2008 was, after all, that the banking system was well capitalised and light-touch regulation was a good idea. Nor is it a rejection of the idea that things should have been handled differently. Unlike the Bank of England, the US Federal Reserve bought other kinds of bonds than just government debt as part of its money printing. The Swedish central bank imposed negative interest rates, where others baulked at going below zero. Iceland put bank bosses on trial. There are legitimate arguments about how the crisis was handled over which reasonable people can disagree.
This isn’t about nuanced policy debate. This is about the dangers of arguments plainly based on ideology rather than evidence, that brush aside the question of trade-offs and uncertainty, whose advocates are suspiciously blasé about the risks of pain that will be borne by others, who seem to luxuriate in their aura of almost Old Testament righteousness.
But, of course, the fact that the advice of the zealots was ignored gave them an opportunity too. It allowed them to say: “Things would have been better if you had done what we said.” And there’s sadly a market for this view of the world. There are plenty of people today who will parrot the line that that money printing has been a disaster, that governments should have cut spending in the bust alongside the private sector, that the financial system should have been allowed to fail in 2008.
Now we can discern a similar dynamic over Brexit. A small caucus clamours for no-deal. A tiny group of economists, whose work has been comprehensively and repeatedly debunked by genuine trade experts, claim it would actually deliver a tremendous boost to GDP. The boss of Wetherspoons, Tim Martin, says crashing out, offering the most risible argument, would be a “huge gain” for consumers, even as the rest of British industry dissolves into terror at the prospect.
We may yet crash out. But the likelihood is, still, that we will not, that responsible voices and reasonable politicians will prevail.
What follows then? The likelihood is that we will be told by the ultras it was because we didn’t drink the Kool-Aid that we haven’t woken up in their Brexit paradise, that the quisling politicians messed it up, squandered the chance.
It’s tempting to hope that the headbangers get what they want. Then they will have to own the fallout.
Then they will be forced to face up to the reality of their ideas and to be held directly accountable. Yet this is to misunderstand their psychology. For the irredeemably ideological it is always someone else’s fault.
There’s always a treacherous stab in the back.
However, responsible policymakers do not knowingly inflict harm on populations in order to win an argument.
There is no simple way out of this trap of responsibility. So how to neutralise the siren voices? We can’t run repeated experiments on economies to discern the merit of various strategies as we might in a video game simulation. The best we have is history and natural experiments.
The US authorities failed to rescue its collapsing banks in the 1930s. The result was an all-encompassing financial panic and, ultimately, a loss of one-fifth of the economy and 25 per cent unemployment. Greece was forced by the rest of the eurozone to cut government spending in the midst of its bust. The result was strikingly similar to America in the Great Depression. Countries that didn’t see demand sucked out of their economies did better. The European Central Bank raised rates and did not start QE until 2015, some six years after the US Federal Reserve. The result was a worse economic performance for Europe since 2008 than in the traumatic 1930s, while the US recovered faster.
For most sensible people that would constitute evidence. But such crutches are not available with Brexit.
There’s no historical precedent for a country leaving a massive trade and regulatory bloc like the EU. And we’re the only one doing so now.
The fact is that there will always be irresponsible ideologues, zealots as dangerous as they are deluded. It’s a test of the maturity of our politics, our media culture, our society as a whole, in how we deal with them.
Sadly, we’ve not been doing too well on that front in recent years.
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