BOOK OF THE DAY: PASCHAL DONOHOE reviews The Storm: The World Economics Crisis and What It Meansby Vince Cable Atlantic 181pp, £14.99
TO BE nationally recognised as a ballroom dancer and an economist is a unique combination. To accomplish both while also acting as a leading opposition politician is a little miracle. This set of achievements belongs to Vince Cable, the British Liberal Democrat Treasury spokesman. The envy of his colleagues will be further roused when they read his new book The Storm: The World Economic Crisis and What it Means.
This book accessibly analyses the roots of the current crisis and what needs to be done to lead the world and Britain to more prosperous days.
A cautionary tale of over-reliance on large banks and rising house prices is extremely relevant to our own domestic difficulties.
It should also give Irish politicians food for thought. Why do our own politicians not publish books like this? Cable is a former chief economist of the Shell Oil company. This lack of hinterland and diversity in our own political system explains the lack of such works. More worryingly, it is a cause of our difficulties. Too many politicians, particularly those insulated through high office, do not understand what is happening in the global economic world because they do not have the experience to do so.
Cable’s book contains the best description of the causes of the economic melt down that I have yet read. “While cheap manufactures created the conditions for lower inflation and low short-term interest rates, the vast accumulation of – mainly – Chinese foreign exchange earnings manifested itself in the purchase of US government bonds, keeping down long-term interest rates. This liquidity and cheaper capital provided the fuel for a credit boom and the massive expansion of financial markets, and drove up asset prices, especially in housing, to unsustainable levels: hence, in due course, the crash, and the storm.”
The book fleshes out this analysis. Of more interest is how we can emerge from this crisis.
He supports the recapitalisation of large banks, the need for a “bad bank” and a far greater role for the state in the banking industry. Cable argues that banks could resemble utility companies, like a power supplier. They would be very closely regulated, serving the country in return for protection from the borrower of last resort.
These banks would be forbidden from entering into more risky activity, such as large loans to developers or derivatives trading. This structure would build a barrier between the so-called real economy and financial trading or speculation by banks. Cable refreshingly defends globalisation and modern finance. However, the deep links now created between financial markets have been exposed as an Achilles’ heel. The financial markets valued, in 2007, at $516 trillion are 10 times the size of the very global economy that supports this activity.
As we now know, the loss of confidence in even a fraction of this market is disastrous.
Cable’s analysis of what recovery will consist of poses the greatest challenge to politicians and leaders responsible for the welfare of Ireland. Huge quantities of cheap foreign money will no longer be available. This will increase interest rates and reduce personal consumption. This could be accompanied by rising levels of taxation as governments struggle to bring their deficits under control. He concludes that “there is a long period of austerity ahead”.
To ensure Ireland prospers and remains secure during this profound global change will be, I believe, the new national question. This book, deftly and cogently, offers ideas as to how we can achieve this.
Paschal Donohoe is a Fine Gael member of Seanad Éireann and the former commercial director of Procter Gamble Ireland