NYPD scuffle with members of the Occupy Wall Street (Spencer Platt/Getty Images)

This year’s banking crisis was never going to be 2008 redux — more like 2008, the sequel. And while the immediate crisis initially seemed to pass, as JP Morgan CEO Jamie Dimon said in his annual letter to shareholders, the deeper turmoil “is not yet over” and “there will be repercussions from it for years to come”.
In one respect, the collapse of both Silicon Valley Bank and Credit Suisse were isolated, one-off events that have now been contained. Both were badly-run banks ripe for a fall: Credit Suisse because it had squandered investors’ faith; SVB because regulators had let problems fester for a long time. Quick and aggressive actions by both the Swiss and American authorities rapidly staved off crisis. Nevertheless, the runs on these banks are better seen as symptoms of an underlying disease that continues to fester.
Only yesterday, a spooked IMF correctly interpreted SVB and Credit Suisse’s fate as the sign of things to come: the edge of a coming economic storm whipped up by a decade of geopolitical fragmentation and cheap money. Now, the overdue attempt to reverse this course has slowed the global economy, possibly to the point of recession.
Unlike the 2008 crash, this does not follow an era of prosperity, but rather 15 years of monetary chaos. Before 2008, the West had experienced a long period that came to be called The Great Moderation. The neoliberal model, so widely adopted in the post-Cold War era, had substituted fiscal for monetary policy as the prime lever of economic management, diminishing the role of politicians in favour of central banks. Over three decades, a mix of steady growth, short and shallow recessions, rising wealth and tame inflation was lionised by economists as their profession’s triumph; the Nobel Laureate Robert Lucas declared in 2003 that “the central problem of depression-prevention has been solved”.
Yet ordinary people always saw there was something fishy in this triumphalism. The steady inflation underpinning it actually owed less to clever macroeconomic management than to the return of China and the deeper integration of developing countries into the world economy. Coinciding with this globalisation was the biggest migration in human history, as literally billions of people left their farms for the burgeoning cities of the developing world. This swelled the global labour pool by several orders of magnitude, luring a tide of investment away from the developed countries as firms sought cheap labour. In Western countries, profits boomed but the job market did not.
So when the crash happened in 2008, there was a moment when it seemed the model might come in for profound change. But cheap labour meant cheap money. With inflation kept low by repressed labour costs, central banks were free to flood the markets with money, inflating asset values and thereby creating a wealth effect that boosted demand sufficiently to bring the economy out of recession. Depression was averted, the economy was back on its feet, and the authorities celebrated their triumph.
However, a model in which the rich got richer and everyone else got by was obviously bad for social cohesion, and the decade which followed the crash produced an upsurge of protest, populism and anti-establishment politics on both Right and Left. This political revolt had its financial analogue in Bitcoin, which exploited cheap money policies to produce assets which, by having their supply fixed, could only rise in value. The grassroots financial innovation exposed the central bankers’ strategy as little more than old-fashioned currency debasement.
Not that any of this bothered central banks. For a start, political stability wasn’t in their mandates, so they looked on the wave of protests and violent rhetoric with equanimity. One would have thought that asset-price inflation might at least have come onto their radars since it was baking inflationary pressures into the economy. With the rising cost of assets falling heavily on workers who were trying to buy houses, or businesses that had to pay rising rents, anything which restored the bargaining power of labour would release that pent-up demand. But again, central bankers waved off these concerns.
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