Beware the Next Global Financial Crisis
Mainstream economists didn't foresee the Global Financial Crisis 20 years ago and they aren't seeing the next today. Economics needs a paradigm shift - that could start with a few questions.
“We have intentionally blown the biggest government bond bubble in history”
—
Bank of England Executive Director for Financial Stability, then Chief Economist, Andy Haldane, 2013
Being 55 is scary: I realised over the weekend as I read Liam Halligan in the Telegraph that I recall the events of 20 years ago in the run-up to the Global Financial Crisis (GFC) as if they were only recent. Lehman Brothers, where I worked1, boasted record quarter after record quarter. Then it all went pop.
As we grind forward with chronic fiscal and economic challenges, I view our situation with mounting dread. As I set out in a short book, we are in the biggest bubble in history: a bigger bubble, when it bursts, will have worse consequences than the GFC.
Famously, economists as a profession had not seen it coming. HM the late Queen asked the question why when visiting the LSE. Under the auspices of The British Academy, some luminaries attempted to answer the question: hubris, wishful thinking, the “savings glut” myth, “a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole”.
The response deserves a read, particularly as it sets out how good the boom felt:
Households benefited from low unemployment, cheap consumer goods and ready credit. Businesses benefited from lower borrowing costs. Bankers were earning bumper bonuses and expanding their business around the world. The government benefited from high tax revenues enabling them to increase public spending on schools and hospitals. This was bound to create a psychology of denial. It was a cycle fuelled, in significant measure, not by virtue but by delusion.
Circumstances today are rather different. The western world is in relative stagnation, not apparently-endless boom. Housing is hopelessly unaffordable, and the job market is daunting. There is war in Europe.
Unfortunately, because a policy of easy money has been sustained and then expanded with QE, then as now, an unwelcome explanation is to be found in the monetary theory of the trade cycle: to understand the pattern of events in the economy, it is not enough to look at movements in the general price level, but instead we ought to consider the deviations of particular prices caused by monetary factors.
It is a refusal to do this which prevented economists as a whole from seeing the GFC coming and which is preventing them from foreseeing the next crisis. Those who did look at the distortions created by new money saw it coming.
This article asks questions which politicians, policy makers and economists might reasonably ask if we are to avoid another GFC and the looming chronic default of the welfare state. If we could solve the puzzle of why productivity growth detached from trend and stagnated after the GFC, as shown in the 2025 Budget Red Book, meeting the welfare state’s obligations would be more plausible.
Has the biggest bond market bubble in history deflated since 2013?
The then Bank of England Executive Director for Financial Stability and subsequently Chief Economist, Andy Haldane, was being admirably plain-speaking and honest when in 2013 he told us, “We have intentionally blown the biggest government bond bubble in history”. Does anyone think that bubble has since deflated?
My answer is an emphatic no. This analysis presents the data to show we are now in the biggest bubble in history. I wrote it with The Cobden Centre’s Max Rangeley, with support from Harry Richer, now the Director of this project. It has not been refuted.
We recently presented it at the Institute of Economic Affairs. There was no shortage of experts in the room. Our analysis stood.
