Only an economist could think that the problem facing the passengers on the Titanic was that too few of them had learned marine engineering – if only a few of them had learned to fix the hull plates that had been torn apart by a passing iceberg, they might have gone on to live long and fulfilling lives. So the sinking of the Titanic was really the passengers’ fault for not arming themselves with all the knowledge and skills that might be required on a doomed transatlantic voyage.
This, in effect, is what Bank of England Chief Economist Andrew Haldane is arguing this morning… and for similar reasons.
At face value, Haldane’s call for “economic and financial literacy” to be made a core subject in England’s schools is banal. It has the age old ring of ignorant affluent people misunderstanding life on the margins. The belief that the poor are unable to manage money has been proven wrong time and again. Indeed, having to eke out a living on less than £10 per day forces the poor to be among the best money managers in the world. The idea that families take out emergency loans from quasi-loan shark companies out of ignorance is clichéd. The reality is that is that unlike highly-paid economists, the poor tend not to have access to low-interest and no-interest credit deals of the kind that have kept the affluent classes from open revolt since 2008. Nor, despite the media stereotypes, do poor families recklessly engage in credit-based spending sprees (again, that is what the affluent classes do). Rather, for the most part, they turn to credit only as a last resort – for example when a cooker or a refrigerator has to be replaced. And since the state ceased providing emergency loans and the banks no longer provide them to the poor, payday lenders and loan sharks are all that is left.
The two questions that most mainstream journalists forget to ask when a politician or economist makes this kind of announcement are: why this and why now? After all, Haldane is hardly the first person to come up with the idea of teaching financial literacy. Indeed, the Welsh Government incorporated financial literacy into its curriculum two years ago; and as the BBC article makes clear, it is already taught as part of “citizenship, PSHE and maths” in English schools.
Of course, the version of financial and economic literacy – like economics itself – that is being taught bears only a passing resemblance to the real world. It is very much the “magic money tree” household budget version in which nobody bothers to explain where money comes from in the first place; still less question why banks are permitted to charge interest on currency that they spirit into existence – at no cost to them – at the stroke of a computer keypad. Had that kind of economic and financial literacy been widely taught back in the 1970s, we would never have de-mutualised the building societies, and we would have kept commercial and high street banking completely separate… and in 2008 a lot of bankers would have gone to jail. Then again, the rich would not have enjoyed the obscene transfer of wealth that occurred in the 1990s and early 2000s had we known what they were up to.
This brings us back to Haldane’s counterpart on the bridge of the Titanic. Captain Edward J. Smith was under orders from a near bankrupt White Star Line to beat the competition by making the crossing from Southampton to New York in record time. Smith put to sea knowing that there was a potentially life-threatening fire in the boiler room. Despite knowing that there was a high risk of icebergs in the north Atlantic in April, Smith chose (or was ordered) to take a northerly route. And despite radio warnings of icebergs from other ships in the vicinity, Smith chose to maintain full speed right up until his fateful encounter with the iceberg. At which point, some means of blaming the passengers for the disaster would have been advantageous to the ship’s owners.
After pumping billions of pounds of quantitative easing into the coffers of the bankrupt banking system, and despite providing historically low interest rates to the affluent classes, none of the fundamentals behind the 2008 crash have been resolved. Instead, the central banks have pumped up even bigger asset bubbles than the ones that burst in 2007/8. Nor are the banks any more solvent; they have merely generated even more derivative products that provide the illusion of wealth with none of its substance. And we are late in the game.
While asset bubbles are still inflated, the rate of borrowing has fallen and the real economy is beginning to crash. Glance away from the artificially pumped up stock markets, and we see that barely a day goes by when one of the major retailers announces bankruptcy or issues a profit warning that results in hundreds of job losses. And if that wasn’t bad enough, the slowdown has begun to infect the supply chains. Vehicle manufacturing has slumped along with housebuilding. And while some of this may be due to the unseasonably cold weather in March, a larger part is a direct consequence of the large fall in new car sales and new mortgages in the first quarter of 2018 – there is no money to be made from unsold cars or empty houses, so manufacturers adjust their production rates accordingly.
There are other shocks to come too. With oil now trading above $75 per barrel, and with Saudi Arabia talking about $100 per barrel this year, the economy is going to experience a severe contraction. Since bank lending has slowed dramatically, and since government continues to cut public spending, the total supply of currency in the economy is falling. In the absence of any new currency, a rising oil price translates into a further shift in spending away from discretionary items to essentials like food, transport and utilities.
Given this background, the very last thing the economy needs is any kind of self-inflicted additional costs. Nevertheless, out of the perverse belief that they must somehow “normalise” interest rates, the bank of England – along with the ECB, Federal Reserve and Bank of Japan – are determined to raise interest rates into the gathering storm. And some of the economists at the Bank are already experiencing a sense of déjà vu all over again; since this is exactly what happened prior to the 2008 crash.
This is the current economy’s “iceberg moment” – the point where a crash is inevitable. In this light, Haldane’s call for the teaching of financial literacy sounds for all the world like an economist getting his retaliation in first. Why now? Because knowing that the economic ship is doomed, Haldane and his paymasters are going to need a means of avoiding criticism for their actions. Why this? Because what better way of avoiding criticism than taking a leaf out of the Tory playbook and blaming the next – and probably much bigger – banking crash on the poor for having the audacity to take out loans in order to keep their heads above water even as the economic ship sinks beneath them.
As you made it to the end…
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