The downside of Thatcherism
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Consumer credit came into the world as a simple act of kindness: “Don’t worry, Mrs McMurphy, you can pay me next week.”
But consumer credit grew up and debt grew mean. Until 1980, total credit market debt in America had never exceeded 130% of GDP. Now, it is more than 330%. (What happened in 1980? More about that below.) Derivative contracts, based on credit, have grown even faster. There are now $45trn worth of credit default swaps – up ninefold in the past three years.
So heavy is the burden of this debt that householders at the bottom of the financial pyramid are being crushed like Egyptian slaves. “Mortgage Meltdown” is easily the most popular headline in the US financial press. Under its banner, the Chicago Sun Times reports that there is about one house in foreclosure on every block of the Windy City. Well-heeled areas are affected, too – with foreclosures running 100% ahead of last year in one middle-class neighbourhood, and up 193% in an area thought to be wealthy.
What has happened? Credit, it turns out, soon reaches the point of diminishing returns. Up until 1980, it took about $1.40 of extra credit to produce one extra dollar of GDP. Since then, the ratio has deteriorated. Now as much as $7 is needed per additional buck of output.
And now we seem to have passed the top of the credit cycle – with the credit industry unwilling to pony up more cash, and output falling. Columnist John Crudele, perhaps jumping the gun, says the US may already be in recession.
Who is the culprit? You could blame central bankers, or the City, or Gordon Brown and George W Bush. Or you could blame the entire human race. Man cannot leave well enough alone. He gets hold of an idea and cannot help himself. He takes it up clumsily, as he would a new wrench. Then he begins twisting it, hammering it, stretching it, sharpening it – until he can use it to cut his own throat. Every innovation turns against him. His TV brings him reality shows. His cars lead him into traffic jams. And scarcely a generation after he invented them, his airplanes are dropping bombs on London.
These credit mushrooms were no exception. They grew in a hothouse – nurtured by extraordinary popular delusions, fertilised by the rich manure of politics, and abundantly watered by liquidity from central banks. People ate them; their debts grew as large as their hallucinations.
Forget about the central banks; their role is obvious. But think about the New Era that came in the 1980s – thanks to the revolutions wrought by Mrs Thatcher and Mr Reagan. They brought in a fresh idea – that capitalism could be unleashed and that it would serve man as obediently as a cocker spaniel. We don’t dispute that there was some truth in it. But it wasn’t quite as true as people came to believe. Especially in its grotesque new form.
Where in capitalism is the idea that you can spend more than you earn? Where in the vision of Adam Smith is the idea that foreigners will subsidise your standard of living – indefinitely? Where in laissez-faire is the notion that central bankers will prevent corrections by controlling the price of money?
The new capitalists offered creation without destruction – resurrection without crucifixion! They offered to revive booms before they ever expired and to cut short corrections before anything has been corrected. This was not the old capitalism of our grandfathers. The old-timers had been wary of it. They knew that the free market was dangerous and unpredictable. The old capitalism was a jungle, red in tooth and claw. You had to watch your back. This new capitalism was a zoo: all the dangerous beasts were supposed to be behind bars. It was almost too wonderful.
The culture of zoo-capitalism spread to all levels of society. At the top, such was the faith in this new doctrine that tax rates were cut in the belief that more capitalism would enlarge the tax base (unfortunately, spending increased faster). But don’t worry, “deficits don’t matter”, said Dick Cheney; our dynamic capitalistic economy will grow itself out of any problems.
At the bottom, people fell victim to the same delusion. Householders borrowed and spent money they hadn’t made. Why not? Their houses, their stocks and incomes would always go up, wouldn’t they? And who needs savings when you live in the strongest, most flexible, most globalised, most technology-enhanced, most tax-enlightened economy in history?
That is the trouble with man. First, he does. Then he overdoes. His progress takes him backwards. Every blessing evolves into a curse – and every revolution leaves him mounting the scaffold.
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