mass unemployment, economies shrinking for years rather than mere quarters, protectionism which provokes serious geopolitical turmoil – the possibilities are so horrific it is painful even to write them.
But let’s take a step back – or rather forward. Up in my mountain hideaway in the Alps I’ve been trying to think about what the world will look like a little bit further down the line.
Let’s imagine for a moment that the Federal Reserve and Bank of England will be able to prevent that worst-case scenario and that all we face is a period of recession much like the early 1990s. It will be painful, and many will lose their jobs and their homes, but this is to be expected after so massive a housing boom and so excessive a debt binge.
Nevertheless, even now, a number of major shifts in the political and economic firmament have begun (though they had been evident from the economic runes for some time).
1. The world is about to take a major leftwards lurch. Welcome to the 21st century’s first bout of soft-socialism. The last time there was a comparable period of economic and financial turmoil, coupled with record inequality both within and between nations was – well, that was the 1930s again – but the fact is this is classical social democratic territory. This big shift is still in its nascent stage, but when the recession takes hold over the next year or so I suspect parties of all hues will be shuffling swiftly away from the free market and towards the side of greater state intervention and more wealth redistribution. The interesting question is whether this plays into the hands of the Labour party. I can see its electoral chances being reinvigorated under a new leader provided he (or she) shifts leftwards. Incidentally, I take no pleasure whatsoever in this. I believe profoundly in free markets. Although we hardly want to return to the recent kind of "financial excesses" (the fashionable euphemism) I fear the knee jerk reaction in the other direction will go too far.
2. Coupled with this, the return of major re-regulation for the first time in decades. After all, there has to be a quid pro quo for the billions of dollars/pounds of taxpayer’s money put at risk in order to shore up or save those financial institutions that are salvageable. A ban on short-selling is only the start of it. The financial sector will be more heavily regulated than it has been since the Big Bang sounded the modern City revolution 22 years ago.
3. The City will no longer be the most attractive destination for Britain’s brightest graduates. This is a serious about-turn. When I was at university at the turn of the millennium, careers in corporate law, management consultancy, investment banking, private equity and hedge funds (more or less in ascending order) were the target for many of the smartest graduates. There will, of course, still be extremely lucrative positions in the City, but with regulation clamping down hard, with investors more tentative than ever and – most importantly – with far less capital sloshing around over the next five years or so, those jobs will be far scarcer.
This is good news. Britain is home to some of the world’s most intelligent people, but until recently they had been holed up in the City working on spreadsheets and financial weapons of mass destruction. Many other industries will soon see their talent deficit reversed. Those particle physicists who were working on complex derivatives for a hefty sum may return to science. I wonder if the phones at the Large Hadron Collider are already ringing. Perhaps some will beat a path towards financial journalism, though I imagine that might be that little bit too much of a remuneration shock.
4. The return of real meaty, controversial economics. Economics has been in something of an ideological rut in the decade and a half since the collapse of communism. The demise of the Soviet Union, the defeat of the monetarists, the apparent success of inflation targeting: all of this seemed to signal not just the end of history but the end of macroeconomic debate. Although there has been lively economic dialogue in academic spheres it has mainly been over the more arcane end of microeconomics. This is about to change. The current consensual model, best embodied in Gordon Brown’s claim about having laid to rest the "boom and bust" of previous generations, has been exposed as hubristic in the extreme. Its high priest, former Federal Reserve Chairman Alan Greenspan has already suffered the most painful fall form grace since Enron. The real debate about how we shape the world economy for the next 20 years is about to begin, and it promises to be a compelling one.
5. China’s rise will continue, but not after some major economic – and perhaps political – turmoil. Though most of our attention is on the financial markets, there are growing worrying signs that China and the rest of the emerging markets are heading for a major slump. I will look at this in a later blog, but clearly this will pose some danger to those assumptions firstly that the emerging market would help support the rest of the world through the coming slump – in fact it might make it worse – and secondly that China’s rise to greatness and world economic domination would be fast and smooth.
Of course, the list will be far longer and more radical if the world does slip into a once-in-a-century depression as some people (level-headed, intelligent people, I should add) expect. What concerns me is that we are clearly no smarter than our forebears, so what makes us smart enough to avoid what the clever policymakers in the 1930s couldn’t avoid, or the even smarter Japanese policymakers couldn’t avoid in the 1990s? There are still lively debates raging now about what really went wrong in the Depression and in Japan, decades after the event. We may look back with some disdain on them for making self-evident mistakes, but remember how much adulation Alan Greenspan inspired all the way up to the financial collapse last August. No-one knows – genuinely no-one – the easy route out of this. No-one even knows if there is one at all. The chances are that there is, so let’s pray that somehow we muddle our way out.
PS On the bright side, clearly we must be pretty close to what Sir John Templeton called the moment of "maximum pessimism" when it becomes a good time for the brave investor to plunge back into the market. As they say out here, apres vous…