The financial crisis: politicians are the problem by Guy Fraser-Sampson, Senior Fellow, Cass Business School on 25-Sep-2012

There is today a sense of growing unease both at the persistence of the financial crisis and at the escalating pace with which it seems to be hurtling us into the unknown. At the same time, there is an instinctive recognition that somehow the politicians who were supposed to have sorted everything out have actually failed us. Worse, that they may even systematically have deceived us. Here, I discuss how and why these fears are entirely justified and develop the discussion more in my book, The Mess We're In: why politicians can't fix financial crises (see below).

The events of today cannot be properly understood unless we also understand all the yesterdays which piled cause and effect repeatedly on top of each other. Nor can we seek to find the answers solely in the field of finance. Rather, it is necessary to review the chain of economic, social and, above all, political events which have shaped our present situation. Starting with the Attlee administration, successive UK governments preferred their own short term interests to the long term economic interests of the nation, with predictable results. Rather than being discussed and resolved, key strategic issues were repeatedly fudged or deferred, being made steadily more threatening in the process.

The results were sadly predictable as mistaken policies in a number of different areas combined to create the present mess. Reckless spending led to budget deficits and national debt spiralling out of control. A mistaken approach to banking regulation and supervision means that we are likely soon to be revisited by the events of 2007 and 2008. Obsession with economic intervention perpetuates cycles of boom and bust, while monetary excesses stoke the fires of future inflation. Intellectually lazy and ill-informed reforms designed to preserve final salary pension schemes in fact had exactly the opposite effect and actually hastened their demise.

Even today, with the public finances in meltdown, the economy flat-lining, and an impoverished retirement looming for many citizens, government refuses to admit that the approaches they have followed for the last several decades are in any way defective, let alone responsible for the awful mess in which we find ourselves. Yet, in fact, there are some startlingly simple and effective steps which could be taken, not least we the people moving to limit politicians' freedom of action in future. For example, a written constitution eliminating the ability of government to run a budget deficit would by itself resolve many of our problems over time, as would reforming the way in which government is able to issue bonds to borrow money.

Similarly, a simple common-sense approach to banking regulation could see banks being left free to fail without causing any serious damage to their customers or the economy at large. Yet government has instead embarked upon policy which not only makes another financial crisis almost inevitable (particularly if one widens the scope of these to include those which may engulf insurance companies or pension funds), but makes it almost certain that it would deliver the final coup de grace to the British financial system.

Depressing reading, yet necessary. For if anyone is to deal with our problems it cannot be the politicians themselves. The politicians are not the solution, they are the problem.

Guy Fraser-Sampson is a Senior Fellow at Cass Business School in the City of London. A former professional investor, he has written widely on financial topics and has been heard frequently on television and radio discussing the current financial crisis. His trenchant views will already be known to those who have attended any of his speaking engagements. Here is a link to his book: The Mess We're In: why politicians can't fix financial crises which is published by Elliott and Thompson.

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