In this upside down version of events, the fundamental problem was cheap credit fuelling extravagent purchases of houses and consumer goods. Feckless consumers and reckless lenders are the villains in this sordid morality tale.
What this scenario misses is that it is necessary to
produce before you can consume. Production is a logical
pre-condition for consumption and everything that is consumed has to be produced first.
This means that consumption cannot be considered in isolation from production. The myth of the overconsumption binge is hopelessly one-sided.
It would be more accurate to say that the fundamental
problem was one of underproduction. Insufficient real value was being produced in the developed western economies. Often paper wealth – such as bonds and equities – was confused with real productive capacity.
The British housing market provides a prime example of this trend. One reason that British house prices rose so much was the artificial constraint on the supply of new homes by “green belt” legislation. As a result of such archaic rules few new houses were built – with the bulk of the population condemned to live in antiquated dwellings. If house building was easier and more efficient it is doubtful that such a large bubble would have developed.
Of course it is true that credit fuelled economic expansion during the relatively good years. But that was a result of economic weakness rather than its cause. The authorities, most notably the Federal Reserve in America, encouraged cheap credit as a way of offsetting a tendency to economic stagnation. It would have been far better if the American authorities had encouraged real productive investment.
The problem of underproduction was exacerbated by the prevailing bias against production in western societies (see the comment in last week’s quarterly review). Attempts to bolster production were viewed with suspicion or hindered by bureaucratic delays.
In contrast projects that squandered individual’s most valuable resource – their time – were lauded. If the effort used to keep turning lights on and off or stop water
taps running was used more productively, the economy would have benefited. Instead, society got caught up in a wasteful cycle of mind-numbing rationing.