Debt and Taxes

Over the past two years there has been an orgy of finger-pointing about who’s to blame for the Great Recession. It was the nefarious bankers who piled up excessive leverage on their balance-sheets. It was irresponsible mortgage lenders in the United States who lent to borrowers clearly unable to repay their loans (sub-prime mortgages) – or to the irresponsible borrowers themselves. Regulators have come in for a lashing because they were seen to be asleep at the switch; and politicians for the deregulatory craze that started decades before and led first to the Big Bang in London in 1986 and then the repeal of the 1933 Glass-Steagall Act in the United States under President Clinton. The mortgage firms Fannie Mae and Freddie Mac have been blamed for allowing US mortgage lending standards to decline, and Alan Greenspan, former Chairman of the Fed, has taken a knock for excessively lax monetary policy in the first decade of this century. Even past US presidents (Bill Clinton, George W. Bush) have not been spared for their policies promoting the American Dream of universal home ownership for all households, a dream that we now know was unrealistic. Some people want to sweep even wider in their condemnation. François Hollande, the presidential candidate of the Socialist Party in France, considers that it is the entire world of finance in the widest sense that is to blame ("Mon véritable adversaire c’est le monde de la finance"). The "Occupy Wall Street" movement has channeled legitimate anger about the loss of livelihoods, rise in unemployment and worsening economic conditions in the US into an inchoate anger against the eponymous New York neighborhood. At a time of worsening wealth and income equality, the "one percent" of wealthiest individuals is now considered legitimate prey for public anger. There is no doubt that over the past decade there has been some breathtakingly irresponsible behavior in the economic spheres of the United States and Europe. All of the proximate causes of the Great Recession listed above are to some extent valid. It’s difficult not to feel that the financial sector in its broadest sense has let the world down badly, and we are all paying for their wild partying. And they do not even seem to feel repentant; even during the height of the crisis bankers continued to receive lavish bonuses. M. Hollande is expressing a sentiment widely felt and richly deserved. However, economists are increasingly stepping back and looking at the longer term trends, to try to understand the deep-seated forces at play. More than just bankers’ cupidity seems at work. They have gone back to study former financial crises, and been reviewing the changes that have occurred in the global financial system over past decades. Philip Coggan, a former journalist at both the Financial Times of London and The Economist, has just published an entertaining but sobering review of these changes in a book entitled “Paper Promises’. In particular, he has highlighted the staggering explosion of debt, both private and public, that has occurred over the past forty years. Up until the beginning of the First World War the global financial system had been largely based on the gold standard, and the financial stability that ensued in the latter half of the Nineteenth Century led to stable growth and economic globalization. The First World War put an end to that, and the interwar period was marked by financial and economic turmoil. Attempts to return to the gold standard following the war were met for the most part with disastrous results. In the UK for example, returning to the …