The 2008 Crisis Is Not Over
European Straits #49
Dear all,
The more I reflect on the current paradigm shift, the more I nurture the idea that the 2008 financial crisis was the defining moment of our time—and that moment is far from over.
When the crisis unfolded I was a young inspecteur des finances working at the French ministry of finance. I can’t say I was part of the action, as my department (an interdepartemental auditing and supervisory body) was not involved in day-to-day crisis management. Yet I was close enough, physically and socially, to gather an insider’s view of what was going on.
Essentially, the self-satisfaction of the elite dominated: capitalism had once again been saved! Sure we had a few rough years ahead of us, but the worst had been averted and we could all sleep well. Should I mention that the more revolutionary among us would have preferred a bit more disruption, which in turn would have called for radical change instead of more of the same? The more we looked at it, the more the 2008 crisis seemed a missed opportunity: it was so well managed by those in power!
But it was all an illusion. Almost ten years later, we can all see how the crisis radically turned the tide and changed the direction of the global economy. Like economists often point out, when a crisis unfolds we tend to overestimate its short-term impact while we underestimate its consequences over the long term. And here’s all that the crisis triggered:
Households have been going through quite a hard time. In countries such as the US, where the safety net is minimal and it’s easy to fire workers, the crisis had a massive impact on real wages and thus on purchasing power. In other countries, the labor market proved more resilient (real wages even rose in France!), but there was a price to pay in the form of higher unemployment. Overall, the shock on household income led many away from traditional segments of the labor market and accelerated the trend of diversifying income streams. Airbnb wouldn’t have succeeded if it weren’t for the need to pay the rent in a time of crisis. And Uber and Lyft wouldn’t have succeeded if it weren’t for the massive reserve army of workers willing to consider the new “gig economy” as a valid option. From a household’s point of view, the crisis had a lasting impact on purchasing power and radically changed the structure of the job market.
Businesses went through their set of problems, too. In countries where institutions protect workers against the overt consequences of crisis, wages were maintained at the expense of operating margins, which made it difficult for businesses to keep afloat. Many old, traditional companies did manage to resist during the harder times of 2009 and 2010, only to break down in the following years when they finally decided to fire many workers and restructure their value chains. The crisis also led corporate managers to get more interested in technology. Friends of mine in the consulting industry tell me that their clients started to order “digital transformation” work from 2012 onwards: customers had new expectations in terms of price and quality, tech-driven entrants triggered a new kind of competition, and firms were under a renewed pressure to implement innovation while achieving operational effectiveness.
Global institutions have been undergoing fresh scrutiny because of the crisis. One example is corporate taxation. In 2010, economic hardships and the difficulties encountered by governments trying to balance their budgets prompted a new line of questioning: did multinational corporations pay their fair share? A thundering Bloomberg article triggered a global conversation on corporate tax planning and the particularly low rate of taxation of large tech companies. The G20 and the OECD started working on countering aggressive corporate tax planning. American states sought ways to force online merchants to collect sales tax, fueling a controversy around the so-called “Amazon Tax”. The financial crisis brought about irreversible change in other fields such as trade (with unprecedented difficulties to negotiate treaties), energy (with mounting interest in new sources of energy), and obviously the financial system.
Politics is an area in which the consequences of the crisis have been unfolding over the long term. In the UK, the crisis basically destroyed what was left of New Labour’s credibility, a trend that left the conservatives unchecked in their mass hysteria leading up to Brexit. As the UK is on its way out, the European Union appears badly damaged, with Germany entering a looming political crisis, Southern member states in very bad shape, and several governments in Eastern Europe making a clearly authoritarian turn. In the US, the Tea Party was born in reaction to the government rescuing the banking system with taxpayer money. It effectively led to increased polarization, the rise of Donald Trump, the historical break with the American liberal tradition—and ultimately what can be deemed the Fall of the American Empire, an event that could trigger the unraveling of the Western liberal international order.
China is the last piece of the puzzle. As I’ve written in the past weeks, it’s currently emerging as the core of the global digital economy and the dominant power of the 21st century—and this, too, is rooted in the 2008 financial crisis. For the Chinese, the crisis came as an unpleasant surprise: they thought that we Westerners were firmly in control, yet the events of 2008 proved we didn’t have a clue on how to manage the global economy in a sustainable way. The Chinese financial system proved much more resistant than did that of the West, precipitating the dramatic power shift we’ve been witnessing ever since. In that regard, the 2008 crisis very much looks like a recurrence of the Great Depression, with China replacing the US as the emerging power: they have the stability that has now deserted both the US and Europe, and they’re more advanced when it comes to growing the new businesses of the day and building the new institutions that the new techno-economic paradigm calls for.
Here are a few readings to better grasp the irreversible change brought about by the 2008 crisis:
Technological Roots and Structural Implications of the Double Bubble at the Turn of the Century, by Carlota Perez (2009)—A remarkable research paper that discusses the link between the technology bubble that burst in 2000 and the financial crisis that unfolded 8 years later.
Doom! Our Economic Nightmare Is Just Beginning, by John B. Judis (2011)—A prescient article, indeed the very first that made me realize that we were undergoing a radical paradigm shift rather than a passing crisis.
The beginning of a new world order, by Martin Jacques (2012)—An overview of Jacques’s compelling thesis that the 2008 financial crisis has triggered a shift toward a new order dominated by China instead of the US.
Maybe This Global Slowdown Is Different, by Justin Fox (2015)—Facts and figures that suggest how much population and consumption patterns are undergoing a major shift, which could explain the persistence of the crisis to this day.
Fool’s Gold, by Gillian Tett (2012)—The best book I’ve read about the crisis itself. Its main quality is nuance, as it is both an uncompromising portrait of those in charge of our economic and financial system and a sincere tribute to innovators in the financial services industry.
Warm regards (from Normandy, France—and Happy New Year!
Nicolas