Storm, The
Vince Cable is Member of Parliament for Twickenham and has been the Liberal Democrats’ chief economic spokesperson since 2003,
having previously served as Chief Economist for Shell from 1995 to 1997. He was elected as Deputy Leader of the Liberal Democrats
in March 2006 and was acting leader of the party prior to the election of Nick Clegg.
‘In a recession that has scorched the reputations of so many British politicians, one has grown in stature… This could easily
have been an “I told you so” account, but Cable largely resists the temptation. Instead he offers a entertaining guide through
the “Alice in Wonderland” financial world that evolved in the early years of the twenty-first century, and gives warning of
the dangers that lie ahead if politicians draw the wrong conclusions.’ George Parker,
Financial Times
‘Cable’s the star of
Newsnight
’s credit-crunch discussions, the go-to guy for a sagacious economics quote for broadsheets’ front pages, the man whom Tory
Alan Duncan described as “the holy grail of economic comment these days”.’ Stuart Jeffries,
Guardian
‘The pre-eminent domestic political voice on the financial crisis… Cable is excellent in distinguishing among policy responses
to these imbalances, arguing that international action is needed to correct an international problem, and that the worst possible
response would be a
resort to protectionism and economic nationalism. He is exactly right.’ Oliver Kamm,
The Times
‘Vince Cable is the parliamentarian who has been consistently the most prescient and thoughtful in his analysis of the credit
crunch.’ John Kay,
Financial Times
‘Everything a politician should be and everything most politicians are not.’ Jeff Prestridge,
Mail on Sunday
‘Vince Cable is the only politician to emerge from the credit crunch a star… [
The Storm
] is a lucid guide to the present mess.’ Simon Jenkins,
Sunday Times
‘Vince Cable is a phenomenon of our troubled times. By some measure, Mr Cable… is the most popular politician in Britain.
In any putative government of national unity, he would be the default choice to be chancellor of the exchequer. What is all
the more remarkable about Mr Cable’s improbable standing is that he is admired in almost equal measure by other politicians
and a cynical public… A lone voice in a sea of complacency.’
Economist
‘Vince Cable has ideal qualifications for explaining the mess we’re in… Sane, compellingly justified… There has been a minor
boom in credit crunch books since the recession but Cable’s provides one of the clearest explanations you’re likely to find
of its causes… It’s Cable’s sense of history… as well as his prescience which makes his warnings about the future compelling…
Commendably lucid and convincing.’ Caroline McGinn,
Time Out
‘A study in moderation… Cable has always been ahead of the curve…
The Storm
covers the credit crisis in full, explaining what went wrong and sketching out possible remedies.’ Tim Harford,
Management Today
‘The man who gives politicians a good name.’ Rory Bremner
Published in hardback and trade paperback in Great Britain in 2009 by Atlantic Books, an imprint of Grove Atlantic Ltd.
This fully revised and updated paperback edition published in 2010 by Atlantic Books.
Copyright © Vincent Cable, 2009, 2010
The moral right of Vincent Cable to be identified as the author of this work has been asserted by him in accordance with the
Copyright, Designs and Patents Acts of 1988.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form
or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission of both the copyright
owner and the above publisher of this book.
Every effort has been made to trace or contact all copyright holders. The publishers will be pleased to make good any omissions
or rectify any mistakes brought to their attention at the earliest opportunity.
Atlantic Books
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First eBook Edition: January 2010
ISBN: 978-1-84887-058-1
Contents
Chapter 1 - Trouble on the Tyne
Chapter 2 - The Great Credit Contraction
Chapter 3 - The Latest, or Last, Oil Shock?
Chapter 4 - The Resurrection of Malthus
Chapter 5 - The Awkward Newcomers
Chapter 6 - The Reaction, the Reactionaries and the Response
Chapter 7 - The Future: A Road Map
For the best part of sixty years the world has enjoyed a remarkable period of apparently ever expanding production, rising
living standards and integration across frontiers. The clichés surrounding globalization are tediously predictable. The End
of History. The End of Geography. Booming trade and foreign investment. A technological revolution resulting in cross-border
communications of unprecedented speed. Financial markets able to transmit vast sums of money across national frontiers at
the click of a switch. Industrial growth reaching new records. Mass tourism and migration. Rapidly emerging markets.
In the wake of the international banking crisis and the recession that has followed it, the inexorable suddenly looks uncertain.
Hubris has given way to nemesis. Panic and the collapse of apparently secure financial institutions have reawakened long-dormant
fears about the stability and sustainability of what seemed to be unstop pable, foolproof, historical forces of economic expansion.
History teaches us, moreover, that individual and collective stupidity, greed and complacency act as powerful countervailing
forces to what seems like unstoppable progress.
The late nineteenth century offered – at least for those parts of the world experiencing economic and technological take-off
– a comparable period of growth and successful ‘globalization’. And then, things went horribly wrong. War, inflation, financial
collapse, deflation, protectionism and another global war. Two
generations later, we reassure ourselves that lessons have been learned, that the same mistakes will not be repeated, and
that peaceful international economic integration will not again be destroyed by government incompetence and atavistic nationalism.
We hope.
That hope has rested on confidence that the past has been remembered and properly understood. Yet there is, in the present
febrile atmosphere of financial and wider economic crisis, in other countries as well as our own, a collective amnesia, a
preoccupation with the immediate future and frantic efforts to stave off the next disaster. So far at least, governments have
shown a proper sense of urgency and a recognition that if they do not hang together they will hang separately. The two G20
meetings in 2009 showed an impressive degree of commitment to common solutions: maintaining monetary and fiscal stimulus,
and improving financial regulation. But there are still influential voices, as in the 1930s, urging a retreat behind protective
barricades and disowning the liberal economic system, which is the only one that we know actually works.
The three disastrous decades from 1914 to 1945 have provided, for succeeding generations of policy makers, a set of lessons
on what to avoid. These lessons were embedded in the process of post-war reconstruction under the political leadership of
the USA and the intellectual leadership of Maynard Keynes and his disciples. Pre-eminent among them is a set of rules and
institutions to prevent conflict, economic as well as political. The GATT (later the WTO), the Bretton Woods institutions
and, in Europe, the Common Market, all had the objective of preventing a destructive cycle of ‘beggar my neighbour’ economics,
and a commitment to liberalizing trade and capital flows within a set of agreed rules. The emergence later of new collective
problems, such as global environmental threats, has reinforced this sense of cooperation as a public good.
A second and related aim was to ensure that, unlike pre-war Japan and Germany, emerging economic powers could achieve their
aspirations for development through assimilation into
democratic and market-based economic arrangements. The EU has been successful in relation to southern and then eastern Europe,
and the United States has taken the lead in embracing the newly industrializing countries of east and south-east Asia as well
as Latin America. But the European Union is struggling with the bigger challenges of Turkey and the former Soviet Union. Russia
is retreating from the limited degree of integration achieved through the G8. India played a leading role in the collapse
of the WTO negotiations. And the rapid emergence and only partial acceptance of China as an economic and political superpower
lie at the heart of current global financial instability. Over the last year there has been a tacit acceptance that China
is indeed the second superpower and that the other major emerging economies have to be at the top table. But there are serious
potential tensions.
A further set of lessons arising from the post-war settlement related to the respective roles of the state and the market
in successful modern economies.
There has, of course, been vigorous debate about the size and scope of the public sector. But it has been a central tenet
of post-war economic policy, at least in the West and increasingly in emerging-market economies, that it is the job of government
to facilitate the workings of open, capitalist economies: countering cycles of inflation and unemployment through macroeconomic
management; providing safety nets through welfare states of varying generosity; and regulating markets where there are egregious
failures.
In the last two decades the pendulum swung, particularly in the Anglo-Saxon world, towards deregulation. This appeared to
have borne fruit in accelerating growth and widening opportunities for hundreds of millions of people in the rich and poor
worlds. Yet the proclamation in the 1990s of ‘the end of history’, though rightly acknowledging the triumph of liberal systems,
was hubristic and premature. It prejudged that governments would avoid or, at the very least, deal successfully with challenges
such as the present combination of a systemic crisis in the financial system,
price shocks, cyclical downturn and painful structural adjustment: The Storm.
The response of governments has so far been decisive and pragmatic. The right-wing Bush administration swallowed its ideological
scruples and nationalized key financial institutions. Fiscally conservative governments, like the Germans, accepted the case
for deficit financing. In an emergency, only governments had the range of powers to prevent a catastrophe. What is not yet
clear is whether there will now be a fundamental rethinking of the respective roles of the state and markets, particularly
financial markets, or whether the storm will simply be seen as an alarming, but temporary, interruption of ‘business as usual’.
The main focus of attention has been on a financial crisis centring on the banking system, the worst in scale and scope since
the inter-war period. But there have been other, inter acting forces of instability. One of the currents feeding the storm
has been a severe price shock: a sharp increase – partially reversed, at least for a while – in the prices of energy, raw
materials and food. Much of the recent commentary has been cast in apocalyptic terms. The End of Oil. Malthusian Famine. Or,
more generally, a reassertion of the ‘Limits to Growth’ thinking that flowered briefly in the 1970s. The collapse in commodity
prices of late 2008 made these hyperbolic assertions look very dated, even ridiculous. But we are reminded nonetheless of
the high level of instability in markets for commodities as well as financial products. And the reversal of the price collapse
in mid-2009, with crude oil prices in particular rising again strongly with the prospect of renewed growth, especially in
Asia, is a salutary reminder of the potential for further shocks ahead.
Arguably, the latest shock is the sixth since the Napoleonic Wars, when a period of economic expansion and disrupted trade
and production sent the prices of food and industrial raw materials through the roof. There were similar episodes in the 1850s,
coinciding with the Crimean War; at the turn of the nineteenth century; and in the early 1970s, when we experienced the first
oil
shock. Each of these episodes was, of course, unique, complex and painful in different ways. But we now know from experience
what happens when world economic growth outstrips natural resource capacity. Prices explode and then subside as a new balance
is established. Experience shows that governments can take sensible steps to mitigate the impact of commodity price shocks,
but these do not include a retreat into autarky, even the mild Gallic version that manifests itself as farm protection. There
is a risk that recent talk of ‘food security’ or ‘energy security’ presages precisely such a retreat.