The credit crunch and the real economy

When I was made redundant I told my friends that I was “a victim of the credit crunch”.

In a way that was to make me feel that I was a part of the great unfolding economic drama rather than just someone without a job, but I think it was also true. I worked for a company that relied on massive borrowing from the banks, and which was scared that it might no longer be able to raise the credit it needed. At its simplest, credit is just a way of doing today those things that we’d otherwise have to wait until tomorrow to do. Or in the case of the company I worked for, what we’d have to wait 20 years to do. Unfortunately, credit has come a long way from its simplest. The opaque packaging of debt to be sold on in ever more, literally, fantastic ways is generally reckoned to be at the heart of the crisis.

Ironically, the solution seems to have turned out to be the suspension of one kind of disbelief, and its replacement with another. Suddenly the old disbelief that these packages of debt might actually be worth something to the suckers who’d paid for them could be suspended no longer. Instead, we are now expected to suspend our disbelief in “quantitative easing”, and pretend we haven’t noticed that it’s simply making money up. The banks’ bad debts were made-up money that was exposed as just that. The new made-up money is different in this respect, however: the con-men who made up the old stuff have largely got away with it, whilst the new stuff has got to be paid for eventually by all the rest of us through higher taxes and drastically curtailed public services. Meanwhile the real economy of making things continues as before, with the slight hiccup of depressed demand and massive unemployment.

Reflecting on the anniversary of Lehman’s collapse a couple of weeks ago, the Archbishop of Canterbury said on Newsnight that if we’ve learnt nothing else in the last year we’ve learnt that economics is far too important to be left to economists. Whilst it’s probably not a good idea to leave it to theologians instead, Dr Williams’ criticism that we’ve been “projecting reality and substance onto things that don’t have them” seems a pretty fair one to me.


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