The 2008 Financial Crisis Paved the Way for Brexit – Why Don’t We Talk About it Anymore?
A decade ago, the financial crash presented the most pivotal economic, political and social moment since the fall of the Berlin Wall. We need to examine its effects if we are to learn lessons in Brexit Britain.
A year after Britain’s shock vote to Leave the EU, the former Chancellor Alistair Darling pointed the finger squarely at the financial crash which had unfolded nearly a decade earlier.
“I don’t think Brexit would have happened if it hadn’t been for the political and economic events of the preceding 10 years,” he said. “People were disillusioned. They felt badly treated. They felt squeezed.” The 2008 banking crisis and subsequent recession had shaken “people’s faith in structures and authority”, he believed, and “became deeply political”.
Jonathan Portes, Professor of economics and public policy at King’s College London, agrees. “It’s blindingly obvious, I think, that you wouldn’t have had Brexit, you wouldn’t have right-wing populism, you wouldn’t have Farage, you wouldn’t have Johnson, you wouldn’t have Corbyn,” he told me this week. “None of these things would have happened.”
The financial crash signified a paradigm shift, the most significant since the fall of the Berlin Wall 30 years ago in 1989. Back then, the “end of history” was upon us – or so we were told. The fascism which had seen Hitler rise to prominence on the back of a financial crisis he blamed on Jews had been defeated. The communism which followed, and had ruined the lives of so many living behind the Soviet Union’s iron curtain, had been shown to be unworkable.
In its place, a new consensus of inevitability took root – that of social democracies and capitalism as the only alternative.
America, which had created a New Deal for its citizens following the 1929 Wall Street Crash and Great Depression, helped Europe to rebuild; the UK provided the example of a model welfare state.
But, although remaining unchallenged, this consensus started to change in the 1970s and 80s, with the election of Reagan and Thatcher. For them, democracies and free markets went hand-in-hand to the point where the market, rather than governments, was best positioned to decide what people wanted. Politics was replaced with markets.
“A lot of us felt that in the 20 years after the Berlin Wall came down that capitalism was not working badly,” Professor Portes said. “We had relatively stable economic growth in the developed world, relatively successful absorption of ex-communist countries into capitalist systems and very rapid growth in China and other emerging economies and lots of poverty reduction, which also ties in with globalisation. There was a general sense that capitalism and globalisation together were not doing too badly and I think, certainly, in developed economies, it has become much, much harder to make that argument since the crash.”
In 2008, the bubble burst. As dodgy sales of sub-prime mortgages in America triggered a global banking crisis, Lehman Brothers collapsed and people queued outside high street branches of Northern Rock to get their cash.
“We still haven’t got a new post-crash paradigm… the competing paradigms are right-wing populist, nationalist and left-wing populist, anti-capitalist”Professor Jonathan Portes
While the banks were deemed “too big to fail”, the can was carried by ordinary people in the years that followed. The Coalition Government, led by David Cameron, made the political decision to introduce austerity to tackle the country’s deficit while insisting there was no other way. Meanwhile, in America, Obama, introduced stimulus measures designed to prevent a recession.
Years of austerity have taken their toll. As the results came in on the night of 23 June 2016, commentators were quick to diagnose that a significant proportion who had opted to Leave had used the EU Referendum as a protest vote.
Having visited the UK last year, Philip Alston, the UN’s Special Rapporteur on Extreme Poverty and Human Rights, observed that “much of the glue that has held British society together since the Second World War has been deliberately removed and replaced with a harsh and uncaring ethos… British compassion has been replaced by a punitive, mean-spirited and often callous approach apparently designed to impose a rigid order on the lives of those least capable of coping.”
Alongside a dramatic shrinking of the state, the recession had other consequences too. While the rich got richer in the crash’s aftermath, wages for most working people flat-lined. Housing became unattainable and job security a thing of the past.
“We still haven’t recovered what was lost,” Jack Leslie, research and policy analyst at the Resolution Foundation, told me. “Before the crisis, average pay was growing at about 2% in the UK in real terms. Since then, pay growth has been really weak and we’re still not quite back to average pay levels at the time of the crisis. Productivity has also been historically weak since the crisis.”
According to the Gini Coefficient, the measure of a country’s wealth distribution, the level of inequality in the UK has remained more or less the same over the past decade. But, Leslie said, wealth – especially that of the already wealthy – has risen. Falling interest rates have boosted asset prices, meaning that those with financial and property interests have done well out of the crash. “People that were rich before the financial crisis probably have more now,” Leslie said, with the shape of wealth distribution in the UK remaining unchanged.
The bail-out of the banks also had a greater symbolism. As Peter Jukes has written in these pages, the state money that was pumped into financial services was “socialism for the rich”. If governments would step-in to bail-out rogue capitalism, there was an incentive for the wealthy to find ways to get ever closer to governments and co-opt them. That austerity was the price paid for all of this is the profound injustice at the heart of the fall-out felt by so many ordinary people. Just as the post-World War Two construction of the welfare state signified to ordinary people that society cared about them and politics could meet their needs, bailing out the banks and then introducing austerity exposed the opposite.
Although research by the Financial Times last year found that “47 bankers were sentenced to jail time for their role in the financial crisis” – which, in its view, contributed to “dispelling the myth that no one was held personally accountable for the financial sector’s catastrophic failures” – compared to the damage inflicted, this is still a drop in the ocean. More importantly, public perception remains that the sector did not face any real consequences and that business as usual has resumed.
For some disillusioned by the past decade, a narrative that blames falling living standards on EU immigration will have resonated. As Michael Gove said during the 2016 Referendum, “people in this country have had enough of experts” – a statement tapping into the ‘post-truth’ age in which we find ourselves; where cold, hard facts cannot withstand the frustrated march of emotions needing an outlet.
“Populism and Brexit are as much about economics as they are about culture and identity” but “economic grievances tipped the balance in 2016”, according to research published last month by Barry Eichengreen, Professor of economics and political science at the University of California Berkeley.
“Slightly faster productivity growth, slightly less inequality or slightly greater economic security would have been enough to produce a different outcome,” he found. “If authoritarian, xenophobic populism is rooted in cultural, identity concerns, then it is not clear how to address it. If, on the other hand, it is rooted in economics, then we know how to address it… with policies that enhance socio-economic mobility, that reduce income disparities, that increase economic security, and that help left-behind places. The question is whether we possess the political and social cohesion needed to implement them.”
For Professor Portes, the 2008 financial crisis was not recognised by politicians as a pivotal moment requiring new ideas as it should have been – and this is still the problem now.
“There was a broader failure by our politicians to see that things had changed and to understand that we needed solutions,” he said. “Essentially, we still haven’t got a new post-crash paradigm and we have a political system where the competing paradigms are right-wing populist, nationalist and left-wing populist, anti-capitalist. Brexit and Trump are symptoms of that and there is not an obvious alternative.”
what the papers don’t say
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