The only surprise about the economic crisis of 2008 was that it came as a surprise to so many
Matt Ridley, as chairman of Northern Rock, was the canary in the coal mine when it came to the calamitous financial crisis of 2008 as he presided over the first run on the bank in Britain since the Victorian era.
He was made to answer for the 'reckless' policies of his bank and the roulette-wheel gambling of his less senior colleagues in Parliament. One man very clearly cannot be held responsible for an international economic collapse.
But, Ridley’s philosophy of ‘lukewarm’ neoliberalism was tested to absolute destruction in 2008 and the cost to millions of people around the entire world was both enormous and avoidable.
And yet, he retains his faith in neoliberal economics – and this remains the foundation of his climate ‘lukewarmism’. Where does this faith come from? And who really was to blame for the 2008 crisis?
Friedrich von Hayek, at the end of the Second World War, argued that creeping Socialism would lead to Nazism and any state control of the economy, including taxation, regulation and planning, would be disastrous. What was needed instead was a 'free market'.
Hayek believed in a form of social Darwinism where the most successful form of society will have come into existence through competition with other cultures and economies. He argued that the economy, like nature, would evolve into a state of perfection, a 'spontaneous order'.
People acted only in their own self-interests, but the money they spent signalled where production should take place. This meant that markets could find equilibrium and stability; they would be self-correcting as successful businesses would boom and poor firms would fold.
His ideas were championed by the Institute of Economic Affairs (IEA) in Britain and around the world by his own organisation, the Mont Pelerin Society (MPS). The most famous disciple of the MPS was Milton Friedman who would become known as the father of the Chicago School of free market economics.
The free market radicals remained on the margins, however, as the regime of taxation, state ownership and price controls widely attributed to Keynesian economics correlated with the 1960s post-war boom, D. H. Lawrence and the Beatles.
The oil crisis of 1973, amid increasingly militant industrial action including miners’ strikes, signalled the end of the Keynesian era. Hayek's ideas, channelled through oil funded free market think tanks on both sides of the Atlantic, were ready to be plucked off the shelves as an answer to the impasse.
Margaret Thatcher in 1979 and Ronald Regan in 1982 came to power and using the state to impose the new free market order as advised by the quasi-academics. The energy industry in Britain was sold almost overnight, taxes were slashed, and unions broken. The spoils of the world's last major oil discovery, in the North Sea, were squandered paying for the transition to a low tax, low spend government.
The promise made by Thatcher was a new era of shared prosperity. Everyone would be better off. Everyone bought their houses and shares in the new nationalised industries.
They bought into capitalism of the free market kind. Nigel Lawson, as chancellor, was “chief orchestrator” of the free market“revolution”. It was he who deregulated the banks and seeded the housing bubble.
Lawson almost immediately experienced Black Monday when his beloved market turned on him and almost destroyed his career. He was forced to resign as inflation ran out of control. He was branded the “bankrupt chancellor” - on the bidding of Thatcher's press enforcer. The economy lurched until the miracle of the Internet and the tech-industry boom.
Robert Skidelsky, author of Keynes: The Return of the Master, explains that the fundamental change with neoliberalism – or New Classical economics – was an assumption that people were rational and everyone knew exactly the right price they should pay in the market.
“The New Classical economists developed the rational expectations hypothesis to demonstrate the uselessness and even harm of government interference with the market process,” he argues.
Joseph Stiglitz, the Keynesian and former chief economist at the World Bank, takes up the story Freefall in his indispensable account of the recent crisis. He begins his account with the bursting of the dot.com bubble, which began in March 2000 and, in less than three years wiped 78 percent off the value of tech stock.
George W. Bush, he explains, used the crisis to drive home even further tax cuts, his “cure-all for any economic disease”. Alan Greenspan, the free market chairman of the Federal Reserve in the United States, relied on monetary policy and lowered interest rates to flood the money markets with liquidity.
The move got the United States out of a crisis – but, rather than stimulating the tech bubble, investors simply moved on from the wreckage and created a new housing bubble.
The economy was put under extraordinary strain because of the invasion of Iraq in 2003. Oil prices spiralled from $32 a barrel to $137 a barrel in July 2008. “This meant that Americans were spending $1.4billion per day to import oil (up from $292 million per day before the war started) instead of spending the money at home.”
The markets were awash with cash, and the housing bubble appeared, to free market economists and to those even more naive, to be an everlasting stream of milk and honey. And the banks chose to devise mortgages that would make them the most profits – not help homeowners or indeed investors.
Aggressive sellers pushed mortgages onto unsuspecting American families, charging high fees and being reckless as to whether they would ever be able to pay. These were turned into complex financial products by the banks, stamped by rating agencies and sold to investors – often pension companies. “It was this involvement in mortgage securitisation that proved lethal,” Stiglitz claims.
By 2007, the US had a deregulated market drowning in liquidity, low interest rates, a housing bubble, subprime lending, and an out-of-control financial sector. It was boom time. And Ridley and his Northern Rock enjoyed huge growth by importing these American practices. And then: bang.
“The only surprise about the economic crisis of 2008 was that it came as a surprise to so many,” Stieglitz argues. “The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that [has] emerged…”
The costs of the deregulated market are almost impossible to understand.
Millions of people around the world have lost their homes while retaining a lifetime of debt; millions more have found themselves out of work. The state-funded bailing out of the banks made austerity and the huge cuts to public services the political order of the day.
Thatcher’s promise never came to pass. Her successor, David Cameron as Tory Prime Minister, cut essential services during a doubling of the national debt and still promises only austerity. The anger created fed a backlash which led directly to Brexit, and the current threat of a no deal recession.
And Ridley? He stood down as chairman of Northern Rock, a job he inherited from his father. But he kept his beautiful country mansion in the family seat of Northumberland and relies, in part, on the income from his own private open cast coal mine.
He failed to see the risk of global economic crisis - millions paid the price. And he returned to his hobby of persuading the rest of us to ignore the risks of climate change despite the warnings of thousands of actual scientists around the world.
Brendan Montague is editor of The Ecologist, founder of Request Initiative and co-author of Impact of Market Forces on Addictive Substances and Behaviours: The web of influence of addictive industries (Oxford University Press). He tweets at @EcoMontague. This article first appeared at Desmog.uk.