The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [43]
Why did the banks need rescuing on such a large scale? In mid-September 2008, the bankruptcy of Lehman Brothers set off a chain reaction affecting the whole global financial industry. Lehmans had massive, complicated, and extensive transactions outstanding with lots of other banks and insurers, and they in turn with others, and nobody knew which of these would be honored as a result of its collapse. Banks overnight stopped trusting each other and ceased pretty much all lending and borrowing within the financial system.3 A downward spiral began, as the uncertainty about the value of some assets reduced the value of others linked to them. It seemed possible that the collapse would extend to the everyday movement of money and the settlement of checks and direct debits around the domestic banking system.
This would have been catastrophic. Economies are built on the security of money, and money in a modern economy mostly takes the ephemeral and intangible form of electronic transfers. The zeroes and ones zipping between banks’ computer systems, the marks they make against the accounts of businesses and individuals, make possible all the transactions of everyday life—buying the groceries, paying the electricity bill, making payments to suppliers, receiving a salary. If the electronic payments systems were not functioning, workers wouldn’t get paid, supermarkets wouldn’t be able to restock with goods, shoppers wouldn’t be able to buy, cars couldn’t refill with gasoline. All the economic transactions of modern life are mediated through money, and without a functioning banking system the whole sophisticated structure of the economy would crumble leaving us scrabbling to survive.
An exaggeration? Not at all. Look at the social corrosion caused by hyperinflation, the extreme debasement of the value of money by rising prices. Whether in Weimar Germany of the 1930s, many Latin American countries in the 1980s, or Zimbabwe in recent years, a nonfunctional monetary system has caused misery and political turmoil. The next chapter will return to the wider issue of trust and economic sustainability. In this chapter I concentrate on the long-term fallout of the government debts created by the banking crisis on top of a preexisting but slow and largely silent debt crisis due to welfare systems. Government funded by future tax revenues that can’t be collected has been steadily undermining the fundamental consent required for a society to function. In almost all developed economies, recent generations have promised themselves a comfortable income if they become unemployed or fall ill, and also when they retire. They have built health systems that spend a large proportion of tax revenues, and will spend more in years to come.
Demographic change is intensifying this financial unsustainability. Longevity has increased a lot in most countries in the world, albeit with important exceptions. People have been having fewer than the number of children needed to keep the population constant. Indeed, there are many countries now where the population is declining and getting older. The demographic structure of the developed world and some developing countries including China has altered radically in the past generation.
These two seemingly unrelated debt burdens, one created by the immorality of bankers, the other by the frailty of politicians, both reflect societies (or rather governments) that have mortgaged their future. Future taxpayers will have to work harder and consume less if the accumulated public debts are going to be repaid. Today’s debts will cast a long shadow into the future. Social tensions are bound to rise as younger citizens realize they will not enjoy the same welfare benefits or pensions as their parents and will also pay higher taxes to repay the debts incurred on past benefits. The risks are very different from