Jill Treanor suggested recently that if the financial crisis forces us all to start living within our means, then a fairer society might eventually emerge. Some short-term pain, however acute, will be worth it for long-term gain. But if some social good is to come from the crisis, it will have to be carefully crafted. Simply tightening our belts will not make for a more inclusive society.
There is an assumption that once things settle down the banking system will continue to operate much as it did before, albeit under different ownership. Whereas previously the pressure on banks to make huge profits came from shareholders and bonus-incentivised senior execs, it will now come from politicians and taxpayers keen to see a massive public investment returned to the exchequer reasonably quickly. The hole in the government's finances has to be filled from somewhere, either through higher taxes, cuts in public spending, or bank profits.
But if bank profits are dependent on over-extending credit, the very activity that brought the economy to its knees in the first place, then we clearly have a problem. The real problem, however, goes far deeper than the banking system.
As primary and manufacturing industries have declined, fewer of us have been economically engaged in producing goods or services of tangible value: things that people want and need. Politicians may argue that more people are in employment than ever before, but what matters is what people are doing at work. Many of these new jobs do not create anything of real worth.
This matters because only things of tangible value can be legitimately exchanged for other things of tangible value using money as the medium of exchange. If workers are not producing sufficient value to exchange, as consumers, for the things they want and need, then additional value in the form of bank-created money (consumer credit) must be provided to fund this consumption.
As a society we have been living way beyond our means, consuming far more than we produce. Only the banks' lending policies have made this possible. We have avoided inflation by importing cheap foreign goods for consumption, but instead we've run up a massive trade deficit which is equally destabilising. And we can't stop spending because if consumption stalls, the economy grinds to a halt. Having put all our eggs in the growth basket, any slowdown is necessarily a disaster.
As well as providing unprecedented amounts of credit for consumption, the banks have also lent vast quantities of "new" money for house purchase. This money does not remain in circulation but drives up house prices, or rather the value of the land upon which homes are built. This in turn gives homeowners a false sense of wealth and encourages them to borrow yet more for consumption. The more money is lent, the greater the demand for borrowing. And no tangible wealth is generated anywhere in the process.
When the markets finally cotton on to the fact that there is so little real wealth in the economy, and savers get wind of fact that the amount of cash in the banks is only a fraction of the total value of their deposits, the system collapses. The cure of endless credit eventually kills the patient.
The (ir)rationale for an economy run on these lines can be summed in a simple, absurd statement: "We will produce less but we will all get richer". Frankly, anyone who defended the way the UK economy has been run must have lost their grip on reality. Instead we were told it was an example to the rest of the world.
Even if the government now uses its stake in the banking system to exert influence over lending policy, it still has to address the problem of a consumption-driven economy that simply isn't producing enough. There's also the problem of people's expectations: as englishhermit commented after Treanor's piece, with the end of easy credit, people "will be torn in two between the relentless psychological pressure to consume and the lack of funds available to do it." Readjusting our psychology may be the biggest challenge of all.
As well as sorting our heads out, we need a more rational approach to the economy. At the very least:
More people need to be employed, and fairly rewarded, in industries that produce goods and services of tangible value.
The quantity of money in circulation needs more accurately to reflect the true value in the economy. That true value includes historically generated economic capital, the value created by current production, and savings; but not money created as debt and used for consumption or to fuel house price inflation.
The accumulation of monetary value in non-productive assets like land must be reduced. I have argued here on several occasions for the social justice benefits of taxing land values. It is an equally useful measure for countering the destabilising effects of the business cycle.
A fairer society could emerge from the very deep hole we have dug for ourselves, but only if we accept that the something-for-nothing economics of the last decade has no place in future plans.