I have just finished reading an absolutely brilliant exposition of the banking crisis by John Lanchester in the London Review of Books (hat-tip George Monbiot).

Lanchester’s explanation of how the disaster happened is clear and brilliant, though it need concentration and a nice cup of tea. These are his conclusions, with which I generally agree:

It’s for this reason that the thing the governments least want to do ?” take over the banks ?” is something that needs to happen, not just for economic reasons, but for ethical ones too. There needs to be a general acceptance that the current model has failed. The brakes-off, deregulate or die, privatise or stagnate, lunch is for wimps, greed is good, what’s good for the financial sector is good for the economy model; the sack the bottom 10 per cent, bonus-driven, if you can’t measure it, it isn’t real model; the model that spread from the City to government and from there through the whole culture, in which the idea of value has gradually faded to be replaced by the idea of price. Thatcher began, and Labour continued, the switch towards an economy which was reliant on financial services at the expense of other areas of society. What was equally damaging for Britain was the hegemony of economic, or quasi-economic, thinking. The economic metaphor came to be applied to every aspect of modern life, especially the areas where it simply didn’t belong. In fields such as education, equality of opportunity, health, employees’ rights, the social contract and culture, the first conversation to happen should be about values; then you have the conversation about costs. In Britain in the last 20 to 30 years that has all been the wrong way round. There was a reverse takeover, in which City values came to dominate the whole of British life.

It’s becoming traditional at this point to argue that perhaps the financial crisis will be good for us, because it will cause people to rediscover other sources of value. I suspect this is wishful thinking, or thinking about something which is quite a long way away, because it doesn’t consider just how angry people are going to get when they realise the extent of the costs we are going to carry for the next few decades. I think we will end up nationalising at least some of our big banks because the electorate will be too angry to do anything that looks in the smallest degree like letting them get away with it. Banks can’t change their behaviour, so we have to do it for them, and the only way to do it is to take them over. We can’t afford any more TBTF.

I get the strong impression, talking to people, that the penny hasn’t fully dropped. As the ultra-bleak condition of our finances becomes more and more apparent people are going to ask increasingly angry questions about how we got into this predicament. The drop in sterling, for instance, means that prices for all sorts of goods will go up just as oil and gas prices have spiked downwards. Combined with job losses ?” a million people are forecast to lose their jobs this year, taking unemployment back to Thatcherite levels ?” and tax rises, and inflation, and the increasing realisation that the cost of the financial crisis is going to be paid not over a few years but over a generation, we have a perfect formula for a deep and growing anger. Expectations have risen a lot, over the last three decades; that’s going to have a big impact on how furious people feel about the hard years ahead. The level of future public spending cuts implied in Darling’s recent budget ?” which included the laughably optimistic idea that the economy will grow by 1.25 per cent next year ?” is greater than the level of cuts implemented by Thatcher. Remember, that’s the optimistic version. If we’re lucky, it won’t be any worse than Thatcherism.

But it is the forensic examination of RBS before this which is most enlightening. I understood most of the principles, but to have the detail set out so clearly is very useful.

http://www.lrb.co.uk/v31/n10/lanc01_.html