Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Ten Years Later, Younger Workers Still Endure Costs of the Crisis

Posted by hkarner - 11. August 2017

Date: 10-08-2017
Source: The Wall Street Journal By Simon Nixon

Policy makers’ decisions at the time to spare older generations has led to a rise in intergenerational inequality

All of the £2.7 trillion of wealth created in the U.K. since 2007 has been harvested by those over 45, Bank of England chief economist Andrew Haldane said last year. Above, a view of Canary Wharf district in London.

Ten years on from the start of the global financial crisis, it is conventional wisdom that no one saw it coming. But this isn’t quite right.

Everyone saw it coming, or at least saw something coming. Nobody working in—or writing about—finance in the run-up to Aug. 9, 2007, was in any doubt that markets were running red-hot and that a crash seemed imminent.

There had been a series of market tremors in the preceding years that traders feared could be the start of something bigger before fizzling out—prompting Chuck Prince, the then-chief executive of Citigroup Inc., to utter his immortal advice that “while the music is playing, you have to keep dancing.”What people missed was where the crisis would come from. Until that August morning, most assumed that the crisis would strike in the real economy: that the rising interest rates needed to cool an overheating economy would inevitably burst one of the many bubbles that appeared to have inflated across the financial system, in private equity, hedge funds, corporate bonds or house prices. In other words, the crisis was likely to strike the asset side of bank balance sheets.

But what became clear that morning when BNP Paribas was forced to suspend redemptions on three investment funds that it managed was that the crisis facing the financial system was on the liability side of bank balance sheets. The problem that hit the French banking giant that day was a sudden seizure of the asset-backed commercial paper market—until that moment an obscure part of the financial system plumbing. Many of the assets backing this commercial paper—short-term securities issued by banks to help fund their own activities—were subprime U.S. mortgages, and the failure of this market raised doubts about the liquidity of all banks.

From this moment, the overwhelming political imperative was to prevent a collapse of bank funding, thereby turning a liquidity crisis into a solvency crisis. Policy makers did this in three ways: by slashing interest rates, providing abundant cheap central bank funding to banks, and bailing out banks with vast injections of taxpayers’ cash designed to shield bondholders from the costs of bank failures.

This political imperative was justified on the basis that shoring up bank funding was preferable to a 1930s-style financial collapse followed by a deep depression. But underlying this justification lay a deeper political calculation: that the costs of the crisis should be borne by current and future taxpayers, rather than the ultimate owners of bank bonds. Governments agreed that pensioners or those approaching retirement should be shielded from losses because they would have no opportunity to rebuild their savings.

These were understandable but nonetheless momentous distributional decisions with consequences that changed the economic and political landscape in ways that are only now becoming fully clear.

In the early stages of the global financial crisis, policy makers assumed that the shock to the global economy would soon pass, allowing younger generations to quickly rebuild their wealth.

Instead, the greatest legacy of the past 10 years has been a dramatic rise in intergenerational inequality. Not only were older generations spared the costs of the financial crisis, but the value of their assets has been massively inflated by a decade of ultralow interest rates and central bank quantitative easing. Meanwhile those of working age have seen very little increase in their income or wealth, not least because of the costs in the form of higher taxes and pension contributions needed to plug deficits caused by the financial crisis.

Nowhere is this intergenerational divide starker than in the U.K. All of the £2.7 trillion ($3.5 trillion) of wealth created in the U.K. since 2007 has been harvested by those over 45 and two-thirds by those over 65, while the wealth of those age 16-34 has declined by 10%, Bank of England chief economist Andrew Haldane noted in a speech last year. In particular, average U.K. house prices have risen by 42% from their 2009 low, according to the Halifax housing index, putting homeownership beyond the reach of most young people who are faced instead with rising rent bills.

Other government policy choices have sharpened the divide, including the “triple lock” guarantee to boost the value of the state pension while at the same time cutting benefits for working-age families. As a result, the median income for those in the U.K. over 60 has risen by 10% since 2008 while that of those age 22-30 is 4% lower, according to the Institute for Fiscal Studies.

Tackling the distributional consequences of decisions taken during the financial crisis is now the central political challenge facing most advanced economies. But in Britain’s case, the challenge is made harder by Brexit.

Since the referendum, sterling has slumped and growth has slowed, hitting real wages and creating new pressures on the public finances, while looser monetary policy has further boosted asset values, sharpening the intergenerational divide. Yet the June election showed the political difficulty of addressing it: Prime Minister Theresa May’s proposals to require the elderly to contribute more to the cost of their social care and scale back pensioner benefits helped cost the Conservatives their majority and have since been dropped; while Labour captured a large share of younger voters with promises to abandon austerity including unaffordable pledges such as abolishing student tuition fees, also since dropped.

How this legacy of the crisis of 2007 is resolved may ultimately have a greater bearing on the U.K.’s long-term economic prospects than whatever emerges from the Brexit negotiations.

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