Inside Politics – The Policy Exchange newsletter (London), 19 September 2008
In the early 1990s there was a joke and it went something like this: A teacher asks his class “How many countries are there in Europe?” to which one of the students replied “Last hour, there were about 42”. Such was the speed of events in the breakup of Eastern Europe that it was difficult just to keep up with it. But following the events as they were unfolding in front of our eyes made it difficult to grasp the bigger picture: the strategic challenges from the end of the Cold War.
Today, a similar joke could begin with the line “How many big financial institutions have recently failed?” And once again, we can barely keep up with the news of collapses or near-collapses. Bear Sterns, Fannie Mae, Freddie Mac, Lehman Brothers, HBOS, AIG, Northern Rock – the list is long and getting longer by the day. And yet, again it is easy to miss the wood for the trees. As important as each of these corporate stories is, what will be much more crucial in the long run is their joint effect on our attitude towards markets.
Britain became a prosperous country by using the power of markets to create its wealth. It did so throughout large parts of its history, and it certainly did so more recently after Margaret Thatcher liberated the British economy. Britain’s economic performance of the past three decades could not be explained without reference to Mrs Thatcher’s market-based reforms. It was the transformation from an inward looking, regulated economy to a globalised, post-modern version of capitalism which created the country’s wealth. True, one could argue that some of her reforms should have gone even further, but this cannot diminish their achievements.
At a time when even the political left has begun to realise the importance of the Thatcherite market-based revolution, the current crisis in the world’s financial system is threatening to destroy this emerging pro-market consensus. The turmoil in the financial world, the crash of stock markets and the fall of once trusted institutions are undermining the public’s confidence in the market as a problem solving and wealth creating machine. Never mind that the crisis shows at least as much state failure as market failure. Without a loose monetary policy, years of expansionary fiscal policy coupled with insufficient regulatory regimes the current situation would probably not have developed such dimensions.
So the real challenge in the face of widespread financial instability is to keep perspective and not give in to a populist, anti-market sentiment. For that would be the real, long-term damage from our times of economic difficulty.