Wolf and Hutton at the LSE

Another visit to the LSE tonight for the Ralph Miliband public discussion on the global financial crisis. Will Hutton (Work Foudnation) and Martin Wolf (Financial Times) in conversation and taking questions from the floor.

Briefly

Martin Wolf

1/ Kitchen sink has been thrown at the financial crisis - the paradox is that if successful, a recovery in the world economy may prevent much needed root and branch reform of the banking system - do not underestimate the political lobbying power of the financial services industry

2/ The fiscal costs of the recession which itself is the result of the crisis are huge - public sector debt will double to 80 per cent of GDP and Britain’s fiscal deficit is easily the worst of any major economy.

3/ Despite the bail outs and asset relief scheme, banks such as Lloyds-HBos and RBS are still being independently run but - beyond the first 10% of losses - most of the future losses will be borne by taxpayers - this creates perverse incentives from a social point of view - indeed these banks have an incentive to drive businesses into administration rather than go through the complex and costly process of restructuring.

4/ Eastern European countries very badly hit by the financial crisis because of their openness to capital flows (e.g. FDI flows from fellow members of the EU) and also their willingness to accept large current account deficits as part of their transition into the EU single market. They encouraged consumers to borrow in Euros and Swiss francs and the result has been catastrophic. But in the future Eastern European countries will n ot allow this to happen again, expect a shift towards savings and current account surpluses especially with fellow EU members such as UK and Germany and France. They will look across to Asian economies as a guide to how to avoid being stuffed again.

Will Hutton

1/ The British economy will be ‘balance sheet constrained’ for years to come. Risk averse bankers, companies desperate for cash flow, mortgage-seekers finding it tough to get any sort of loan. Trend growth will suffer because of this and the steep rise in unemployment

2/ A real economic crisis is unfolding in many African countries (adverse movement in terms of trade as commodity prices fall + drying up of capital flows from developed world) and also in Asia - witness the staggering collapse in Asian manufacturing. Severe risk of a Chinese banking crisis in the next few years.

3/ How can so many bright people in investment banking destroy so much shareholder wealth? What are they being taught?

4/ Hutton would favour an end to the failed oligopoly of British banking - a return to a pluralist system of perhaps 20-30 banks + sundry building societies and other smaller bespoke lenders. Break up the nationalised banks, create a situation where no bank is deemed too big to fail.

5/ There will be a shift in economic throught away from neo-liberalism towards Galbraithian/new Keynesian ian

Overall

Huge externalities (spill-overs) from the financial crisis

Risks for the public purse are enormous

Real dangers of rise of economic nationalism / return to protectionism