The UK remains mired in the fall-out from the unprecedented and devastating financial crisis which began in 2007/08 and continues to beset our financial system and economy. That much is recognised but what we have perhaps not faced up to is just how economically severe and socially damaging the aftermath of the crisis could be in the long term unless we pull together to develop policies to meet the critical economic and financial needs of UK households.
The seeds of the current crisis were sown long before the actual financial crisis appeared to hit us out of the blue. Moreover, a crisis of this severity would have had a huge impact on the economy and society even at the best of economic times. But what makes this crisis so damaging for UK households is that we entered the crisis in such a vulnerable and unprepared financial state with record levels of household debt driven largely by the crazy distorting effects of the UK property market, record low savings ratios and pension provision, rising bills for the cost of health and social care, huge disparities in wealth and income between households, the regions, and the generations. In other words, our national financial resilience was extremely low. As ever, the national picture conceals wide variations with disadvantaged households and communities most vulnerable to external shocks.
The challenge now in the age of austerity is to develop credible economic and financial policies to help UK households: i) urgently build financial resilience and in the long term, ii)create secure financial futures, and iii) meet their housing needs. There is no question that these are major economic and financial challenges in themselves. But we are optimistic that the actual policy challenges can be overcome. The UK is still a prosperous nation with plenty of untapped potential financial and human resources – even if the resources are in in the wrong place or not being used productively. However, the real problem in the age of austerity is the emergence of a nasty strain of the politics of envy, blame and resentment which makes the necessary collective, consensus long term decisions harder to reach.
From financial crisis to social crisis: the three phases of the financial crisis
We set out our stall on the impact of the financial crisis some years ago. We explained to anyone who would listen that the crisis would unfold in three phases: i) a financial crisis – the crisis in the arcane financial markets which was rapidly transmitting into ii) an economic crisis in the ‘real’ economy; and iii) a social crisis as society picked up the bill for the unprecedented, massive market failure in the financial markets and painful deleveraging of debt.
But, we also warned that the ‘age of austerity’ following the great deleveraging would be governed by the ’politics of envy, blame and resentment’. This works both ways: people who have lost out in the lottery of life resenting people who have been lucky enough to acquire financial security or massive wealth and assets; and vice versa – people who have ended up with wealth and assets through hard work, inspiration, and, of course, mostly luck (for example through the transmission mechanism of the property market or retiring at the right time) resenting the idea of having to ‘support’ people who are less successful and diligent, ‘irresponsible’, or just plain unfortunate.
The social and economic fault lines
This is not a new phenomenon, of course, but the forces exerted by the recent financial crisis really did expose the social, economic and financial fault lines in our society – which have sadly been exploited to the maximum by some vested interests through selective or misleading use of ‘evidence’, or downright scaremongering.
Reaching this rather misanthropic view didn’t take any great insight on our part – sometimes events just follow a particular, inexorable path. The emergence of the politics of envy, blame and resentment should not be a great surprise when you consider the economic, financial and social trends and attitudes affecting different groups in society. For example:
- Massive intra/ inter- generational transfers of wealth and assets driven by our crazy distorted property market, with many people who borrowed huge amounts of money to finance dreams of property ownership left with negative equity (if you think negative equity is a thing of the past then look at our report Debt and the Regions commission by CCCS which shows the proportion of households in negative equity in various UK regions). This has tied policymakers’ hands on interest rates.
- Frankly unbelievable levels of overindebtedness amongst many households. This is improving but primarily for better off households who can afford to pay down debts. Meanwhile poor or struggling households are left with a legacy of personal debt or squeezed incomes – now at risk of being targeted by aggressive, predatory subprime lenders who extract value from vulnerable households and communities and undermine prospects of creating financial resilience.
- Record low savings ratios – especially compared to our main economic rivals. This is also improving but again primarily for better off households who can afford to save – the poorest/ struggling households face a real struggle to build up a decent level of savings to create financial resilience.
- Growing disparities in underlying household incomes and living standards concealed by welfare transfers and growth in debt. Similarly, growing disparities in economic performance and living standards amongst communities and the regions of the UK.
- Increased fear and insecurity felt by growing numbers of households losing the security of long term, ‘predictable’ employment patterns and prospect of decent pensions.
- The anger felt by poor/ struggling households and taxpayers at the sometimes obscene level of bonuses paid in the ‘City’ for illusory profits and financial activities that seemed to damage rather than enhance the national economic and financial interest – in other words, the rewards were privatised while the risks and losses were ‘socalised’. We estimated that at one stage the bonuses alone paid in the City were greater than the combined incomes of all the households in the London boroughs of Hackney, Tower Hamlets, and Newham – three of the most deprived boroughs in the country surrounding our major financial districts. The City and Canary Wharf really are ‘islands of prosperity in a sea of poverty’.
- But this blanket criticism of the City has had other adverse consequences too as the good, productive parts of our financial markets are wrongly and unfairly lumped in with the malefactors – this affects the reputation and perceived integrity of the productive parts of the financial services industry critical to the success of the UK economy. Reckless critics need to remember the contribution the City makes to our economic well-being.
- Younger generations coming to terms with the prospect that they could be the first post-war generation to have lower overall living standards than their parents, having to take on debts at even earlier ages, facing exorbitant rents in some parts of the country, and seeing the property ladder pulled up (unless they are lucky enough to have parents or grandparents well off enough to cross subsidise home ownership).
- Older households who had saved a lifetime seeing interest on savings dwindle to near as damn it nothing, retiring just at the wrong time facing the prospect of poor pensions as a result of volatile stockmarkets and low annuity rates, facing unexpected often huge bills for long term care.
- Health, social care and pensions systems seriously underfunded and inefficiently funded to deal with socio-demographic trends – nor can we ignore the unsung, largely invisible army of heroines who make a massive in-kind economic contribution to society by caring for relatives.
- It’s also important to remember that there are major differences in the level of influence exercised by different groups on the policymaking process – in our view, younger generations and the poorest/ working poor are notably under-represented and lack the powerful champions and advocates that other single issue groups have.
Looking at the above list, it is very hard not to be dispirited [mixed metaphor alert!]. Economic and social tensions threaten to rent the fabric of society and fragmentation and pursuit of selfish interests threaten to tear apart the social contract that holds society together unless we can get people working together to face the future challenges confronting the UK.
The great challenges
So what are these future challenges? As well as specific financial services issues – payday loans, regulation etc – we think there are three great economic and financial policy challenges facing the UK:
– how do we promote sustainable economic development?
– how do we share the proceeds of economic activity, act fairly and balance competing intra and intergenerational interests?
– how do we meet the core financial and housing needs of UK households – especially the most vulnerable – in light of demographic, socio-economic, pressures outlined above?
We’ll leave the first challenge to the economists. As to the second challenge, that’s as much as about morality and ethics and best left to politicians, campaigners and public debate – regardless of how successful an economy is there is always a finite amount of resources to share. For what it’s worth, we think younger generations and the working poor are losing out as they are poorly represented in the policy making process. But we must avoid at all costs attempts to set one group of people against another.
The Centre has most to contribute on the third challenge – meeting the core financial and housing needs of UK households. This can in turn be broken down into:
– building financial resilience and promoting financial inclusion;
– unwinding the toxic debt legacy, protecting households from predatory lenders, while at the same time increasing access to fair, affordable credit;
– promoting access to affordable housing;
– creating secure financial futures through asset building and the prospect of decent pensions;
– funding decent and sustainable healthcare, long term and social care;
– developing affordable social security/insurance to protect us in the event of the shocks that life throws at us and give people the confidence to save; and
– providing access to the right independent information and advice to help households make the right financial decisions.
The role of the UK’s financial services industry will, of course, be critical to the success of meeting these challenges. Restoring and maintaining confidence and trust in the financial services industry is a prerequisite if households are expected to use financial services to meet their financial needs. But the financial industry also faces major economic challenges of its own. We‘ve outlined before the ‘new economic reality’ facing the financial services industry and its customers – lower economic growth, lower financial returns on assets, financial repression, asset value volatility and destruction, demand for products and services affected by squeezed household incomes and low levels of trust and confidence and so on.
Many financial institutions in the major sectors (banking, insurance, and asset management) with inefficient legacy business models will find it difficult to provide real value and sell products and services fairly in this far more challenging economic climate. Financial market reform is needed. This requires a new regulatory paradigm, enhanced corporate governance and business ethics, and more efficient competition and market forces. We will return to this in a forthcoming essay on making financial markets work.
Those are the challenges we face if we want to deal with the legacy of the financial crisis. We can argue over who is most to blame for the current state of the nation. But that’s not very productive. Challenges are there to be faced and we don’t need to remind people that the UK has overcome even greater challenges in the past. To misuse Gramsci’s famous quote, it’s a question of the ‘pessimism of the intellect, and the optimism of the will.’ What we need now are: well thought out policies, coordinated actions, and determination to make a difference. The question now is: where is the leadership coming from?