Storm, The (28 page)

The notion that national (or broader) identities might spill over
into conflicts about the international order are described in particularly apocalyptic terms in Samuel P. Huntington’s
The Clash of Civilizations
(Simon and Schuster, 1997), and more subtly in Michel Albert,
Capitalism versus Capitalism
(Whurr, 1995). Concern that such competition might result in an exclusive, discriminatory form of regional integration are
expressed by Jagdish Bhagwati,
Termites in the Trading System: How Preferential Agreements Undermine Free Trade
(Council for Foreign Relations, 2008), and in Vincent Cable and David Henderson,
Trade Blocs: The Future of Regional Integration
(Royal Institute of International Affairs, 1994). The uses and abuses of the concept of ‘economic security’ are discussed
in my
International Affairs
article ‘What is Economic Security?’ (April 1995).

The debate around what kind of capitalism should emerge from the experiences of the recent past has been touched on in the
debate on Greenspan’s legacy (see notes to
Chapter 2
). Those who consistently argued for a less permissive approach to financial
markets include Joseph Stiglitz,
The Roaring Nineties: Why We’re Paying the Price for the Greediest Decade in History
(Allen Lane, 2003), and George Soros,
The New Paradigm for Financial Markets
(Public Affairs, 2008). The case against Greenspan’s fatalistic approach to the regulation of financial markets is best described
in a series of exchanges in the
Financial Times
: Martin Wolf, ‘Why financial regulation is both difficult and essential’ (15 April 2008); Henry Kaufmann, ‘The principles
of sound regulation’ (5 August 2008); also his
On Money and Markets: A Wall Street Memoir
(McGraw-Hill, 2000).

Chapter 7
refers to the extremes of inequality. There is often a confusing (sometimes deliberately confusing) distinction between stock
of assets (wealth) and flow of income. The main contemporary sources on global wealth and income are helpfully pulled together
in Stephen Haseler’s
Meltdown: How the Masters
of the Universe Destroyed the West’s Power and Prosperity
(Forum Press, 2008).

Underlying the policy debate in
Chapter 7
about what can and should now sensibly be done is a theoretical argument. Until
the current crisis, there was a wide belief in the academic world that financial markets were best explained by the ‘efficient
market hypothesis’ – part of a broader neoclassical approach that assumes rational behaviour by companies and consumers. Markets
do not, on this view, ‘misbehave’, but correctly factor in all the available information. It follows that asset prices are
always ‘correct’ and do not manifest themselves as ‘bubbles’. There are many recent sources explaining why this approach has
proved to be dangerously wrong, among them George Cooper’s
The Origin of Financial Crises
(Harriman House, 2008), John Calverley’s
Bubbles and How to Survive Them
(Nicholas Brearley, 2004), and also George Soros (see
p. 164
). The definitive explanation of why markets do not work when
there is a collapse of trust is provided in George Akerlof, ‘The Market for Lemons: Quality, Uncertainty and the Market Mechanism’,
Quarterly Journal of Economics
, 84 (3) (1970), 488–500.

The arguments for aggressive monetary policy in the face of a severe credit contraction are dealt with in the classic monetarist
text: Milton Friedman and Anna Schwarz,
A Monetary History of the United States 1867–1960
(Princeton University Press, 1963). The various policy initiatives to improve monetary policy – taking account of asset markets
– are discussed in detail in my 2008 annual lecture to the Institute of Fiscal Studies, and are set out in C. Goodhart and
A. Persaud, ‘A proposal for how to avoid the next crash’,
Financial Times
, 31 January 2008, who describe counter cyclical adequacy rules; see also
Making Macroprudential Concerns Operational
(IMF, 2004). The idea that measures of inflation should include asset prices was originally mooted in Irving Fisher,
The Purchasing Power of Money
(Macmillan, 1911), and has been updated as in Sushil Wadhwani, ‘Should Monetary Policy
Respond to Asset Price Bubbles? Revisiting the Debate’,
National Institute Economic Review
, 206 (1) (2008), 25–34.

A good discussion on how to reform bonuses is in R. Rajan, ‘Bankers’ pay is deeply flawed’,
Financial Times
, 9 January 2008. The broader question of how to reconcile the necessity for maintaining a commitment to an open, globalized
economy with a sense of fairness and equity is addressed in,
inter alia
, Joseph Stiglitz,
Making Globalization Work
(W. W. Norton, 2006).

This book was written in some haste in the gaps left in a very busy few months in the summer and autumn of 2008, as the storm
was raging. Because of the speed involved I have been unable to rely on the comments and advice of colleagues and friends
to the extent that I normally do, and any errors of fact and interpretation are mine alone.

I have benefited in terms of ideas from the community of British financial and economic journalists and columnists who provided
regular, understandable commentary on the crisis. Several, like Alex Brummer, Martin Wolf, Larry Elliott, Will Hutton, Gillian
Tett, Roger Bootle and Anatole Kaletsky, have published their own analyses separately, in varying degrees of detail, on particular
aspects of the crisis.

I also want to acknowledge the role of my political colleagues who have been generous with their time, helping me to understand
the issues and their political significance, including Matthew Oakeshott, Chris Huhne and our party leader, Nick Clegg. And
I still owe a lot to my former colleagues at Shell who taught me about ‘think the unthinkable’ and ‘the art of the long view’.

I am grateful to my P A, Joan Bennett, and my Westminster staff, Sally Duncan and Paul Scaping, for typing parts of the manuscript
in their spare time. My biggest debt is to my wife, Rachel, who typed most of the manuscript, as well as providing constant
encouragement and, on her farm, a haven of peace in which to write.

Finally, I am grateful too to my literary agent, Georgina Capel, of Capel and Land, for encouragement to write – and complete
– the book, and to the extremely professional publishing team at Atlantic Books.

Abbey National building society

Adelmen, Morris

Africa

agriculture

AIG

Alaska

Alliance & Leicester

aluminium

Ambac

Anglo-Irish Bank

Angola

Applegarth, Adam

Arctic

Argentina

Asian financial crisis

asset prices

Asset Protection Scheme

Atkinson, Dan

Australia

Austria

Austrian school of economics

Bagehot, Walter

Bangladesh

Bank for International Settlements

Bank of America

Bank of England

and house prices

and interest rates

and Northern Rock

banking system

bank lending

bank shares and dividends

capital reserves

depositor protection

Icelandic banks

Irish banks

Japanese banks

lending practices

nationalization

recapitalization

reform and regulation

remuneration and incentives

‘shadow banking system’

Spanish banks

state-controlled banking

Swedish banks

US banks

see also
central banks; investment banks

bankruptcy

laws on

Barclays

Barings Bank

Barker, Kate

Basle rules

BBC

Bear Stearns

Becker, Gary

Belarus

Belgium

benefits system

Bengal

Berlusconi, Silvio

Bernanke, Ben

Bernstein, William

Bihar

billionaires

biofuels

BNP–Paribas

boom and bust cycles

Bradford & Bingley

Branson, Richard

Brazil

and oil

and trade

Bretton Woods institutions

British Empire

British Union of Fascists

Brown, Gordon

Buffet, Warren

building societies, demutualization of

Bush, George W.

Bush administration

calico

California

Canada

and oil

capital gains

capitalism

‘state capitalism’

car industry

car loans

car tyres

cars

central banks

Channel Islands

China

cars in

and climate change

currency

economic growth

fiscal policy

and food

foreign exchange reserves

and oil

population and GDP

power generation

state-ownership

and trade

and ‘vendor finance’

Chinese Communist Party

Chomsky, Noam

Citicorp

Citigroup

City of London

climate change (global warming)

Club of Rome

coal

coffee

Cold War

collateralized debt obligations (CDOs)

Commerzbank

Conservative Party

and building society demutualization

construction industry

see also
house building

Continental Illinois Bank

Copenhagen climate change conference

Council of Mortgage Lenders

Cramer, Jim

credit cards

credit default swaps

Credit Suisse

Crimean War

Czechoslovakia, former

Daily Express

Data Monitor

debt

personal and household

public

deflation

Deng Xiaoping

derivatives

development agenda

Diamond, Bob

Dillon Read

dot.com shares

Dunfermline Building Society

Dutch East India company

‘dynamic provisioning’

education

Egypt

Elliott, Larry

energy

conservation

security

environmentalism

Equatorial Guinea

European Central Bank

European Common Market

European ‘identity’

European Monetary Union

European Union

Common Agricultural Policy

and trade

eurozone

exchange rates

export credits

Federal Deposit Insurance Corporation

Federal Home Loan Mortgage Corporation (Freddie Mac)

Federal National Mortgage Corporation (Fannie Mae)

financial services sector

deregulation

regulation

financial ‘recycling’

Financial Services Authority (FSA)

First Republic Bank of Dallas

First World War

fiscal policy

fish stocks

Fisher, Irving

food

prices

security

Fool’s Gold
(Tett)

France

and bank bonuses

gas imports

house prices

and ‘state capitalism’

Friedman, Milton

G20 countries

G7 countries

G8 countries

Gabon

Gaddafi, Muammar al

gas

Gates, Bill

Gazprom

General Agreement of Tariffs and Trade (GATT),
see
WTO

General Motors

General Theory of Employment, Interest and Money
(Keynes)

Georgia

Germany

and bank bonuses

and fiscal policy

gas imports

and housing

Kipper- und Wipperzeit
speculation

and oil

pre-war

Ghawar oil field

Glass–Steagall legislation

Global Attitudes Survey

global warming,
see
climate change

globalization

Goldman Sachs

Goldsmith, Sir James

Goodhart, Charles

Goodwin, Sir Fred

Gray, John

Great Crash

Great Depression

Greece

Green, Stephen

Greenspan, Alan

Grewal, David Singh

Gulf of Mexico

Gulf States

Gulf War

Haiti

Halifax building society

Halifax–Bank of Scotland (HBOS)

Harrison, Fred

healthcare

Heathrow Airport

hedge funds

Hindutva

Hitler, Adolf

Holland

homelessness

Hoover, Herbert

Horn of Africa

house building

housing

buy-to-let

first-time buyers

negative equity

repossessions

‘right to buy’ policy

second homes

social housing

housing markets