The UK economy is still in need of urgent reform 10 years after the financial crisis

If a week is a long time in politics, how long is a decade for economics? Not that long at all, it would seem.

Saturday 15 September 2018 will mark 10 years since the collapse of Lehman Brothers, a pivotal moment in the global financial crisis, which saw governments taking unprecedented measures to rescue the entire financial system.

Ten years ago economists spectacularly failed to predict the financial crash, and then failed to have any answers for why it happened and what to do. Thankfully some thinking has changed. Pre-crisis orthodoxy including ‘markets are perfect and therefore regulation is unnecessary’ has been replaced by thinking along the lines of ‘the financial system is risky, and we need to manage that risk’. While this is a step away from the status quo, and therefore welcome, it does not get to the crux of the problem, which is to ask the question: what is finance for?

Unfortunately, the answer that finance should fundamentally be a quite boring utility function is still a radical position to take. Essentially we need a safe, secure, and fair payments system, along with a credit system that allows citizens and business access to credit. But we are far from close to that. The problems that caused the last crisis have not been fixed. Banks are still lending predominantly towards pre-existing assets such as property, which continue to make up roughly 80 per cent of loans in the US and the UK. A mere 10 per cent of new lending goes towards the productive economy, and its proportion has actually decreased since the crash.

As a consequence, economies such as the US and the UK are being kept afloat by an asset-price bubble and high levels of private debt, rather than by productive investment which actually serves to create new wealth. And central banking policies, including quantitative easing (QE), have only compounded this problem. In the UK the top 10 per cent was made more than £350k richer through monetary policy. This has contributed to wealth inequality skyrocketing, threatening social cohesion.

One of the economic puzzles of the past decade has been secular stagnation, with western economies at a standstill due to low demand. But it is not that much of a puzzle when we’ve had a huge lack of investment in the productive economy, as those on top of the wealth pyramid have just sat on their seemingly endlessly inflating assets.

At the same time, with government’s insistence on huge public-sector cuts through austerity coupled with the worst decade for wage growth since the Napoleonic wars, more people are struggling to get to payday without going into debt. This reinforces a vicious cycle, where households are increasingly relying on short-term and high-cost sources of credit in order to pay for everyday essentials. Unsurprisingly, household debt in the UK is at its highest on record, currently more than £1.8 trillion, while unsecured debt is rising at a faster rate than in the run-up to the last crash. If we are going to get out of the debt trap, tinkering around the edges won’t cut it. We need a new vision for our economy, and one that does not rely on gigantic banks and debt mountains.

In the UK, this needs to start with the Bank of England’s switching its primary focus from keeping global financial markets afloat, to focusing on what it can do for our domestic economy. More QE and tiny interest rate rises just won’t cut it. And we can’t double down on our broken economic model through Brexit, as Bank of England governor Mark Carney would like to do when he appeared to welcome the prospect of Britain’s financial sector doubling in the next 25 years. The government must end austerity do more to ensure the economy works for ordinary working people. And it’s clear from recent polling that the public want change, as two thirds of Britons don’t trust banks or believe they work in society’s interests, while 60 per cent back the Bank of England controlling house prices, and only 10 per cent would oppose plans to create a National Investment Bank.

The need to reform should be urgent, not least because we have an unfolding climate crisis, which threatens political, economic, and financial stability. Caveating the above statement that finance should be boring, it actually could, and should, be interesting. But innovation should be focused on how could financial instruments be used to ensure a green and just transition, not how can we securitise a mountain of mortgage debt and crash the economy.

Financial crises should serve as an opportunity to reset a model which has proved unsustainable and to fix the flaws which brought the system down. We are not there yet. But it is important that we use this anniversary as a point of reflection about what is still left to do.

Fran Boait is executive director of Positive Money and a spokesperson for the 10 Years On campaign