The 2008 financial crisis upturned politics – and it’s not done yet
It's been ten years since the start of the global financial crisis. John Stepek looks at how that's affected the economy, politics and the social contract today.
This month marks ten years since Lehman Brothers collapsed, and the global financial crisis exploded into most people's consciousness.
All next week, we'll be looking at various aspects of the crisis and thinking about what we can learn from it as investors.
But today I want to look at what it meant for the social contract.
What happens when the losers outnumber the winners
The most commonly-used reference point for the great financial crisis is the Great Depression of the 1930s. I put together a short series on what happened during the Great Depression which we reprinted last month. (You can read them here.)
The parallels aren't perfect they never are. But there are enough points in common to make it a useful period to draw some lessons from. And that extends as far as the political picture.
When we talk about the Great Depression, we're really talking about the US. Almost everyone else had a pretty miserable time for most of the 1920s, and then of course, the 1930s were preoccupied with other matters.
(I recommend reading The Dark Valley by Piers Brendon for a very readable but detailed account of what happened in the world's most important economies between the two world wars.)
The US enjoyed a huge economic boom in the 1920s. It was the only country left with any money after World War I. It was on the up and up. There was a booming middle class, plenty of credit, and lots of new consumer goods to spend it on.
However, what is often not fully appreciated about the roaring 20s is that there were plenty of people even in the US for whom they were anything but. If you worked in farming, or in mining, then you were experiencing a Great Depression for most of that decade.
Commodity prices of all kinds collapsed after World War I had ended, and Europe no longer needed to ship in all its goods from the US. Farmers spent most of the decade fending off foreclosure, because they had over-expanded massively during the boom times.
In other words, there were plenty of losers in 1920s America. The 1929 crash simply marked the point at which the losers began to outnumber the winners. That led to a massive political shake-up in the US. President Herbert Hoover (who was in fact, far from being the "do-nothing" president of myth) was kicked out, making way for Franklin D Roosevelt.
At the time, there was much soul-searching about whether our systems of democracy were really such a good idea. Authoritarian "strong men" were looked at with envy by many voters (and politicians). They seemed to be capable of "getting things done". As it turned out, of course, democracy turned out to be the better system. Thankfully.
But that's at least in part because much of FDR's presidency focused on the "New Deal" whereby innocent victims of a financial system hijacked by bankers and industrialists would get their fair share.
Or as FDR put it: "The moneychangers have fled from their high seats in the temple of civilisation. We may now restore that temple to the ancient truths."
In other words, he promised to rewrite the social contract. The old deal where it didn't matter if you got a pay rise or not, because your stock portfolio was rocketing and you could buy a car and a washing machine on credit wasn't working anymore.
And I think you can view our era in a similar way.
Populism didn't start in 2008, but 2008 was definitely the tipping point
I've seen a few columns in the papers in recent days arguing that 2008 didn't give birth to "populism" (which these days, simply means any political outcome that doesn't reflect the pre-2007 consensus).
I'd argue that this is self-evident. Of course 2008 didn't give birth to populism. There are always people who are fed up with the status quo, and that number was only increasing in the run-up to 2008.
The era of globalisation created plenty of winners. Workers in poor countries got better jobs. Companies got cheaper employees. There was (for a period of time) a peace dividend as the Cold War (briefly) ended.
But globalisation created plenty of losers too. People who lost their jobs, or ended up working in call centres rather than factories (and then saw the call centres shut down too, and shipped out to cheaper suppliers overseas). People who felt unhappy about their communities changing around them as a result of mass immigration or gentrification or both.
But there was enough money flying around so that most people still bought into the system. Here's a grossly simplified, but (I feel) broadly truthful description of the social contract in the UK prior to the financial crisis.
The people at the top, mainly in the City, got to pay themselves ludicrous sums of money in exchange for generating large tax revenues. The people in the middle got their share in the form of a never-ending housing market elevator if you couldn't run a hedge fund, you could become a property entrepreneur. You never got much of a pay rise but it didn't matter because your house earned way more in a year than you ever did.
Meanwhile, the people at the bottom (and also in the middle), got tax credits to offset the fact that if you made money primarily from the sweat of your brow, rather than from the ever rising value of whatever assets you owned, then you were onto a losing deal.
Now, in the run up to the financial crisis, there was a sense of unease. The epic screw-up of the Iraq war had destroyed the (again, brief) sense of post-Cold War moral authority enjoyed by "the West". And all through 2006 and 2007, it was pretty clear that things were going wrong on the economic front too.
But in the immortal words of Citigroup CEO Chuck Prince, the music was still playing, so everyone kept dancing.
And then, when Lehman blew up in 2008, the needle came off the record, and the dancing stopped.
If you worked in finance, or were anywhere near the financial sector, then you saw it coming. You didn't know how bad the blow-up was going to be. But you knew something was up.
But for most "normal" people, the Lehman moment was definitely when they realised that the system wasn't working for them anymore.
Remember when we used to moan about how bland our politicians were?
People voted for change almost immediately.
Prior to the financial crisis, there was lots of vague handwringing about how all of our politicians were the same. People spent lots of time complaining about how electorates were disengaged and how ostensibly left and right-wing parties were in fact espousing virtually the same policies.
Ah, be careful what you wish for.
America voted for Barack Obama, whose slogan was "hope and change". And when Britain got its opportunity to kick out Gordon Brown, we voted in the first coalition government that the country had seen in decades. Political lobby reporters had to dust off their history books to figure out what had happened.
Trouble is, neither Obama or David Cameron delivered sufficient "change". In effect, they wanted to go back to the way things were before the crash, rather than dealing with the issues that led to it.
And no wonder. Because they probably barely understood what was going on and who wanted to mess with the banking sector when a total disaster had apparently only narrowly been averted in 2008?
But that's how we've got to where we are today. Voters are demanding that the social contract be rewritten, and if the professional politicians of the 1990s and 2000s aren't fit to do it, then they'll vote for the wildcards and the tough guys and they'll tick the "I don't care, as long as it enrages the establishment" box on referendums.
I'm not saying we need a specific sort of "new deal" (I might talk about what we do need next week, but I've run out of space today). But for now, there's a sense that the average person is getting a raw deal. That needs to change.
And from an investment point of view, whatever else happens, I reckon that the fundamental building block of the new social contract has to involve measures that boost the power of labour relative to the power of capital. In other words, higher wages and lower asset prices (in real terms, if not nominal).
That in turn as we've discussed before has vast implications for the long-term, both in terms of inflation and corporate profits.
We'll be talking a lot more about this next week and also in next week's issue of MoneyWeek magazine. Subscribe here if you haven't already.
And I'd be interested to get your own views on this topic email us at email@example.com with your feedback.