Catching up on some political reading after the election, I’ve been reading (or rather listening to) Vince Cable’s The Storm. It’s an enjoyable and easy to follow account of the economic crash, light on jargon but not dumbed down in quality of argument. It does at times feel like it was written rather in a rush (as Vince Cable himself concedes) and partly as a result is more a selection of interesting accounts of different aspects of what’s happened to the economy laid out end-to-end rather than a book with a clear thread of argument running all the way through it.
As with other accounts it suffers rather from pointing out how many people made mistakes that now seem obvious, believing that it wasn’t a bubble that was building. The problem with that is that it doesn’t really help us work out what to do differently in the future. Even for people like Vince who gave warnings ahead of events there is still the question, “how can you be sure you are correctly identifying a bubble rather than a genuine systematic change in how the economy works?”
Such changes do sometimes happen, even if not as often as bubbles. A policy-making approach that views everything as a bubble will also end up making major mistakes. Major shifts in the economy are not always unsustainable or unwelcome. The long-term shift in the UK economy away from agriculture, for example, has been sustainable and policies over the decades, even centuries, based on fears that the country is going to run out of food if it doesn’t grow more have frequently turned out to look rather foolish.
The question of making accurate predictions in future is touched on a little, and referred to in the list of further reading, but in many ways the book is a much better guide to understanding the past than to making future decisions.
Understanding the past does usually help with the future though and the book is broader in its picture of the past than you might expect. It is not just about the credit market crunch; it also covers the changing international balance of economic power, the role of oil, matters of international trade and more.
You can buy the book from Amazon here (and note the audio download option if you prefer listening to a book whilst gardening, leafleting or baking chocolate cakes).
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7 Comments
This is a good book, no question, but I think we have to question how many of the apparent bubbles of the last couple of years really were bubbles. For example, the housing market, particularly in the South East is pretty close to where it was at the height of the so-called bubble. Given that mortgage finance is hard to come by, it looks as though current prices are “equilibrium” prices, not bubble prices, and that the bubble element a couple of years ago was not greater than 10%. Put simply, if you don’t build many houses in the area people want to live (because it has the best job opportunities, particularly for graduates), then the equilibrium price of houses will be very high.
Kate Barker pointed much of this out in her reports on housing and land use, and (among other things) recommended the govt pilot the LD policy of Community Land Auctions to see whether local communities would support more development if given the right incentive.
The Centre for Cities has just released an interesting report that shows that more than 90% of net private sector job creation in the decade to 2008 has been in the southern half of England. (They only cover England). In that context it should not surprise us that the south has had strongly growing house prices.
As Mark says, people cry “bubble” often – but there are far fewer bubbles than sometimes thought. UK bubbles were not a bit part of the economy over the last few years.
Good point about the housing market Tim. It’s not fallen nearly as much as seemed likely at the time Vince wrote the (first edition of the) book.
At the risk of sounding like Vince, some of us said so at the time!
There is an ongoing problem with “conventional wisdom” actually being quite daft. Here is an example. In the early 1990s, actuaries reporting on contributary final salary pension schemes kept saying that they were over-financed. Many companies were glad to reduce their own (and some employee) contributions on this basis. Also some employers were using their pension schemes to finance redundancy. This in spite of the fact that it was already quite clear that people were living to greater ages, which should have given rise to seeking more finance in pension pots, not less.
The last gasp of this thinking was Gordon Brown’s raid on pension schemes in the budget around 2001. This produced a tipping point in which some schemes were in real difficulty and in many other cases the employer starting thinking (as they should have been doing all along) about how much they cost. Now the conventional wisdom is that the risks are too high for employers (shouldn’t they be the financially savvy ones, competent in managing risk?) and should be transferred to individual employees, who are all, of course, well known for their numeracy appreciation of risk and odds and general financial acumen &-)
Tim – not completely convinced by this and I speak as someone who purchased a house near the top of the market. It seems to me that house prices are being sustained by very low interest rates. If those went up, even to 5% (let alone the 15% we once had), I think you would see some pretty sharp falls. Lots of economists are still of the view that house prices are substantially overvalued – we will have to wait a bit longer to see who is right.
On the book itself, I thought it was a bit of curate’s egg – some chapters excellent; other ones already looking out of date.
Inevitably, the point when you find out who is right is also after the point when it’s too late to do anything about it.