Andreas Whittam Smith: A crash that has changed the world? Far from it

Related Topics

The new conventional thinking conjured up straight after the Wall Street crash last week is that life will never be the same again. But hang on. There would have been no opportunity for a vast financial bubble to develop and then burst had there not been enormous volumes of foreign-owned funds parked in the United States and Britain. This will not change.

The cash that has been flooding into Wall Street and the City for the past decade has come from the unspent savings of fast-growing Asian economies, China in the lead. These countries may slow down a bit now, but they will go on piling up funds for which there is a lack of investment opportunities within their own borders. Their sovereign wealth funds will still go hunting in Western markets.

In turn, the Asian appetite for oil and raw materials and for foodstuffs to improve the diets of their citizens will not suddenly be switched off because of what happened last week. Oil-exporting countries and other raw material suppliers, in satisfying these needs, will also themselves continue to build up billions of unspendable dollars and euros that will be placed with Western financial institutions or put directly into Western markets. The owners of these riches will be more cautious but the money will still be there.

Nor would the great credit splurge have taken place had not permanent low inflation brought with it low interest rates. This won't change, either. For some years to come, globalisation will exert a downward pressure on the prices of goods and services. More industrial processes will be switched from expensive Western factories to the workshops of Asia.

The outsourcing of back-office functions to English-speaking India, for example, is not likely to come to a halt any day soon. And if inflation stays low, then interest rates will also be subdued. As a result, financial institutions will continue to feel the temptation to add cheap borrowed funds to their own capital in the investments that they make.

When we have finished wringing our hands as conventional wisdom instructs, let us note that until very recently we had been beneficiaries on a grand scale of these conditions. We enjoyed a long period of economic growth. Employment rose to high levels. Many families were able to buy their own homes whose parents had had no such chance. In the United States, the land of sub-prime mortgages, levels of home ownership shot up.

Of course part of the explanation for what happened last week is closer to home – the deregulation of financial markets. This was begun in the 1980s by President Reagan and Mrs Thatcher and has proceeded very far.

In the United States, commercial banks and investment banks had been penned into narrow spheres of operation and these limits were removed. In London, the distinction between principal and agent was blurred, fixed commission rates were abolished, and building societies, all once safe, sound and dull, were allowed to become glamorous banks quoted on the stock exchange.

Northern Rock had been a building society for 150 years before it gave up its mutual status in 1997, and the Halifax for even longer before it yoked itself to the insignificant Bank of Scotland in 2001. And while the prudential regulation of banks wasn't abolished, it became, shall we say, minimalist.

It is now accepted that financial deregulation was badly done in Britain as well as in the United States, and indeed it was. But let us again pause and consider. It was part of a broader movement that is going to continue – the development of the "enabling" or the "market" state.

The objective is to maximise opportunities for individual citizens – hence, to take one example, the British emphasis on helping single mothers back to work. The enabling state privatises or semi-privatises activities that were hitherto the sole responsibility of government. It is in this spirit, for instance, that New Labour has given individual hospitals more scope to manage their own affairs as "Foundation Trusts".

The enabling or market state also tries to make representative government more responsible to consumers and so we get the emphasis by successive prime ministers on "delivery". I don't see the chaos on Wall Street and in the City as bringing this trend to an end. Financial regulations may well become tough, but in due course the notion of "enabling" will again exert its influence even in the City.

High finance has been humiliated. Its power and influence will shrink for the time being. But otherwise life will go on much as it was doing the week before last.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Finance Team Leader

£23000 - £27000 per annum: Recruitment Genius: Do you want to work for a Compa...

Recruitment Genius: Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: Do you want to work for a Compa...

Recruitment Genius: HR Advisor

Negotiable: Recruitment Genius: This is an opportunity to join an innovative a...

Recruitment Genius: Production Technician

Negotiable: Recruitment Genius: A Production Technician is required to join a ...

Day In a Page

Read Next
Matisse: The Cut-Outs exhibition attracted 562,000 visitors to the Tate Modern from April to September  

Let’s face it, our free museums subsidise tourists

David Lister
Madonna about to take a tumble at the Brit Awards 2015  

Making fun of Madonna for daring to look good in middle age merely shows how envious we are

Janet Street-Porter
HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower