Back in August, I wrote a blog piece on the coming crash headed "Ouch! This is going to hurt". I observed how "many Westminster politicians and pundits I speak to don't yet appear to grasp the scale of what is happening. Even some of the more thoughtful talk in terms of this being a short-lived correction."Eight weeks later, even the most economically illiterate seem aware that something very serious is up.
Yet still playing catch up, I've yet to hear many politicians - in Westminster, Washington or Europe - with a compelling explanation as to why we're in this mess.
Look at the facts; Hank Paulson and co are in the process of nationalising vast amounts of bad private debt. Yet it's not stopped a haemorrhage on Wall Street. The UK government has given our banks something like £200 billion in extra liquidity over the past year. Yet our banks look weaker today than ever. Ireland and Greece have removed the need for their banks to find collateral. Even if that doesn't cause a stampede of capital, its not going to make for sounder lending.
Look, too, at how pressure is mounting on the Bank of England to cut interest rates this week. Even John Redwood, whom I respect enormously as one of the few people to see this crisis coming – and therefore someone I think we need to listen to very carefully - thinks we need lower rates.
Of course it would be nice if interest rates were lower. But with very little money to lend, and lots of people wanting to borrow, the price of borrowing - real interest rates – I think will go up. No matter what the Bank of England does, the cost of borrowing is not going south.
Listening to Vince Cable demanding a two percent cut in rates, he sounded like a man demanding that it be made to rain. Can the Bank of England really have much say over the rate at which banks lend money to each other? Can government really control the price of money?
The fact that politicians are demanding lower interest rates, as though that will solve the problem, suggests that they've barely begun to understand why we're in this mess to start with.
For years, interest rates across the West have been set very low. That meant that the price of borrowing money was very low. As a result, many governments and people borrowed excessively.
Worse, with an asset bubble and lots of debt being traded, new financial instruments were created. Some of these instruments literally made money out of nothing - and I don't just mean the mortgage-backed ones - there's worse out there to come....
During all those years of cheap money and debt, the Western economies came to depend ever more on consumers. It was the consumer - and his household debt - that supposedly drove our economy. Savers, who might favour higher rates, scarcely got a look in. If we are going to tackle this financial crisis, someone somewhere is going to have to be very brave, and start to spell out a few home truths:
1. We are in this mess because as a society of consumers, we have lived beyond our means. Governments and households have borrowed far more than is healthy. Note how both the US and Europe owe China and the East, many $ billions in treasury bills and IOUs.
2. Restoring health will be difficult. It's going to mean that asset prices (think houses) will come down. Yet politicians still talk of action to restore the housing market.
3. We need to ensure that the interests of savers are balanced with those of consumers. The default assumption that very low interest rates is always and everywhere good needs rethinking. Yet politicians seem to have little idea of how to encourage healthier savings ratios.
4. Above all, we need to recognise that government is going to have to cost less. That means not just cutting waste, but challenging the post-War consensus that government must run things for us from the centre.
Politicians sometimes have to choose between being popular and being respected. In this crisis, let's hope our leaders are willing to choose the latter and do the right thing.
