Why the best response to the financial crisis would have been a recession

When the world's central banks leapt into action to save the global financial industry in 2008 there was not much discussion about whether that was the right thing to do. Some economists observed that the central banks had shown a bizarre level of incompetence in allowing a credit crunch to turn to crisis on their watch so gambling that they were competent enough to fix it seemed a bit nuts. But for most people, the imperative of avoiding meltdown indeed avoiding any real recession at all trumped these concerns.

Today most agree that the final response to the crisis bank bailouts, endless quantitative easing and a dose of fiscal stimulus was the correct one. While the West has endured fairly miserable levels of gross domestic product and wage growth over the past decade, it has seen little real recession.

Still, 12 years on from the start of the financial crisis (I'm dating it from the peak in US property), it has to be time to question this account particularly given the wave of experts now insisting another crisis is just around the corner.

The obvious alternative to bailouts and printing money would have been to accept a very deep but probably quickish recession. That would have brought a nasty fall in asset prices but also kicked off new economic growth. But there were many other ways for the central banks to have done something instead of their great monetary experiment. We won't ever know what would have been best. Cause and effect is just too complicated ever to be certain.

It's been a great decade for some...

What we can do, however, is look at the side effects of the rescue and ask if they were really worth it. Think about what QE and super-low interest rates have done. The idea was that they would prevent corporate and personal bankruptcies but also as explained by the US Federal Reserve and the Bank of England push up asset prices so that the wealth effect (the idea that if you feel richer you spend more) would drive consumption and hence recovery.

Both bits worked pretty well. But in neither case is that a particularly good thing. We might want to gloss over some of the results would any global property developers have survived the natural redistribution effects of a real recession and then gone on to be, say, big in politics? but the net effect has been the redistribution of wealth on a massive scale.

The wealthy, and those in a position to borrow and take risks, have become wealthier. As a simple example, imagine a middle-aged man with a large mortgage in central London in 2008 and an equity portfolio. If he did not lose his job, he has had a brilliant decade. His mortgage costs have collapsed, his disposable income soared and his wealth doubled. If he works in any area that involves helping other people speculating to get yield, things are even better.

...but a terrible one for an awful lot of others

On the other end of the scale, we have those who have spent ten years being punished for thrift. Think of the cash savers who, with interest rates near zero and inflation over 2%, lose money in real terms with every passing day. Think of the pensioners who know that middling levels of wealth are increasingly meaningless if you want an income.

Ten years ago £200,000 was enough to produce an annual income of £10,000; today £500,000 hardly cuts it. And think of course of the many tenants who know they can never save enough for a house deposit. It has gradually become clear to all these people that their future has been re-priced and not in their favour. Add in an overlay of austerity (other people getting rich while your library closes) and stagnant wages and you see the problem.

The key point is that determination to avoid the sharp pain and instant wealth reshuffling of recession has resulted in a decade of slow burn pain for large parts of the population pain coupled with anger at the obvious fact that not everyone is in the same boat. Far from it.

And now we're really paying the price

That matters to politics. As the years go by, increasingly angry voting populations are determined to get this money back from the unjustly enriched. That's why the political conversation these days focuses not, as it surely should, on wealth creation but on long-term wealth redistribution: new property taxes; rises in capital gains taxes; more corporate taxes; workers on boards; the nationalisation of industries in the UK; higher minimum wages; maximum wage ratios; the limiting of the rights of people who are non-resident for tax purposes, and the like.

You hear the result of QE in the UK every time the shadow chancellor John McDonnell opens his mouth demanding a socialist reset and he appears to have the support of about 40% of the British population.

I have a question for those who are sure the solutions found in 2008 were the right ones, and therefore the ones we should use next time. The consequences of those solutions, one of which was to make rich people richer in the hope they would spend more, look like they could end up neutering capitalism the greatest poverty destroying system ever.

Was avoiding a few more years of recessionary misery after 2008 worth that?

This article was first published in the Financial Times