America’s sovereign crisis

This is the final box from my recent Fund Strategy cover story

Just as the eurozone crisis is not all about sovereign debt it is wrong to see the Lehman Brothers collapse as just a banking crisis. Too many people see the problems that erupted on Wall Street in 2008 as entirely the fault of greedy bankers.

This is not to argue that bankers played no part in the economic crisis that hit America, and then the rest of the world, after the Lehman collapse. It just means that they were only part of the story. To understand the crisis it is necessary to put it into its wider economic context.

There were at least three ways in which the America state helped create the banking bubble that burst in 2008. First, the relaxation of rules on bank lending that went bank at least as far as the Clinton administration of the 1990s. Second, prolonged periods of low interest rates that meant that credit was often cheap. Finally, high levels of state spending. Together these factors created a strong impetus towards the creation of the American bubble.

But it would be just as wrong to put all the blame on the government as it is to simply target the banks. Ultimately the credit bubble can be seen as an expression of America’s underlying economic weaknesses.

Rather than encourage economic restructuring the American authorities have, since the 1980s, generally preferred to encourage the extension of credit. In effect they have preferred to postpone tackling the lack of dynamic growth by simply throwing money at the problem.

Of course when this set-up went wrong it suited many politicians to put all the blame on Wall Street bankers. But although assigning moral culpability to bankers is widely popular that does not make it true.