Bill Emmott - International Author & Adviser


I wasn´t right. But that´s OK
The Guardian - January 3rd 2009

“What, pray, is all the fuss about?” asked a sage columnist in these pages on the first anniversary of the credit crunch (“Crisis, what crisis?”, Guardian August 12th 2008). In response to claims that this was a great crisis of capitalism he even deployed the word “phooey”. That sage columnist was of course yours truly, and it is safe to say that that article will not be pasted into my scrapbook entitled “Most Prescient Pieces”.

            My argument was, of course, correct in so far as it looked in the rear-view mirror rather than at the road ahead. The striking thing about the credit crunch’s first year, both in Britain and globally, was how little impact it had had on the wider economy, beyond the banks, the City and Wall Street.

Nor, indeed, does any impact that has yet been seen make the current economic situation worse than the recession of the early 1990s, nor especially that of the early 1980s, when unemployment was nearly double today’s level. Nevertheless, it is no longer possible to be as sanguine as I was in August. We are still far from being in a “worst since the 1930s” situation, but there is no doubt that during the past three months all the developed economies, and many developing economies, have suddenly frozen up. How bad might it get? Let’s be honest: we don’t know, because we can’t know.

            It is worth, however, dwelling for a moment (as I have been doing for many moments, especially since mid-September) on why I was proved so wrong. There are, I think, two reasons beyond simple idiocy or complacency.

One is that I may have spent too much time thinking about Japan. That country really did have the rich world’s worst financial crisis since 1929, when after 1990 its stockmarket fell by 75% and property prices by 70%. But it never had a severe recession: more a slow, prolonged squeeze that ended up, from 1997 onwards, in a deflationary stagnation. A slump was prevented by a huge Keynesian public spending programme; financial meltdown was, eventually, prevented by using public funds to rescue the banks.

The collapse of our financial pyramid scheme could, therefore, be absorbed, I thought, thanks to the happy fact that we could learn from Japan’s example and, if necessary, improve upon it. That is exactly what Gordon “saviour of the world” Brown did by recapitalising Britain’s banks just 14 months into the crisis, rather than waiting eight years, as Japan had; and it is reflected too in the fiscal expansion announced in Alastair Darling’s pre-budget report in November and in the huge spending programme being prepared  by President-elect Barack Obama.

However, our drama now feels worse than Japan’s was, because it is international. Japan’s economy was propped up by healthy global growth, whereas now we are all slowing or receding together. It is also worse because of the second factor that I misjudged in August: psychology.

The position I took was, in effect, an attempt to argue that we risked talking ourselves into recession, through media scare-mongering and through remarks such as Mr Darling’s subsequent Guardian interview on August 29th when he warned that Britain faced the worst economic times for 60 years, with more “profound and long-lasting” effects than people were expecting. He no doubt now thinks he has been proved correct, while I still hope that he won’t be (on the profound and long-lasting bit) and feel he may have contributed to the panic that followed (even though it would be implausible to argue that he caused it).

Now, fear has plainly taken over. Companies, households and naturally banks have all decided that cash must be king, that to be in debt is to risk death, and that new commitments are best avoided, for now. Individually, this is perfectly rational. Collectively, it is disastrous. Or, rather, to avoid being a scare-monger myself, it brings about the very thing we are afraid of: a nasty recession.

We cannot predict how deep the recession will be nor how long it will last, because it all depends on psychology. Economics is not about numbers and models and mathematics; it is about human behaviour, about our reactions to opportunities, risks and fears.

Messrs Brown and Darling are right to be trying hard to counter that deflationary psychology by throwing away the old fiscal rules, by cutting VAT and by expanding public borrowing. Like in Japan during the 1990s, this will help to mitigate the slump. But whether it can actually bring it to an end will depend on whether companies, households and banks that hold cash become convinced that it is time to start spending it again, because they have become sufficiently less afraid of an impending apocalypse and sufficiently convinced that opportunities to invest, to buy and to lend have become sufficiently attractive.

Meanwhile, note, this is not—yet—a true “crisis of capitalism”. That would arise if confidence never seems likely to return, if unemployment has soared and if hope seems truly to have been destroyed. It cannot be ruled out altogether. But let us, as America’s new president said in his book title, have the audacity to hope that it will not happen, and the good sense not to announce it until and unless it does.


Bill Emmott is the author of “Rivals—How the Power Struggle between China, India and Japan will Shape our Next Decade” (

Allen Lane
, April 2008)



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