"At that moment fear was a sign that you were awake and intelligent. Anyone who wasn't scared had no idea how close we were to the abyss. It looked like the whole system was going to collapse"
Hank Poulson his predecessor at the Treasury was so nervous that he had to leave several meetings to go to the bathroom to throw up:
"Everyone is looking to me and I don't have the answer. I'm really scared." (On the Brink, p216)
It was a pretty rational reaction. For several weeks the entire capitalist system teetered on the edge of collapse and one thing emerges very clearly when you read the accounts - world leaders didn't have the necessary tools to manage and guide a world economy in crisis and were making it up as they went along.
Fortunately some of the most unexpected people did some very clever things to stave off disaster. One of them was George Bush. Not a man I usually admire, given the stupidity of his wars and the fact that his policies did a great deal to create the chaotic failure of the banking system in the first place. But in the last six months of his rule, when he knew he was about to be replaced by Obama he went against the policy prejudices of his own party and determined that whatever it took to get out of the crisis he was prepared to do it. He correctly worked out that he either had to ditch right wing free market economics or allow the system to go totally bust. He chose to allow the printing a great deal of money and used it to make sure no more banks went out of business and they could start lending money again. Obama then followed much the same policy.
The result is that the USA economy is growing fast and unemployment there is back to pre crisis levels. Those people in work are paying taxes and do not need benefits and the growing US economy means that its national debt now looks sustainable. There are still plenty of major problems - particularly the huge US balance of payments gap and an asset price bubble. Nevertheless the US government has followed a rational strategy of very low interest rates, loose monetary policy and allowing budget deficits and these three strategies combined has worked to dig the country out of a really serious hole. At the bottom of the slump the US automotive industry was going out of business and looked like it might never be profitable again. Free market economics would have let it go to the wall. The US government propped up that industry and a modernisation programme combined with a planned economic expansion brought it back from the brink and saved hundreds of thousands of US jobs.
Compare this with the policies of the EU. There the inspiration has not been economic pragmatism and sensible Keynsian counter cyclical policy. The drivers of EU policy have been right wing German economic theories. One of the pet ideas of the people running the EU has been that if a country is in debt then it needs to cut its costs very quickly and get its budget back into balance. This is an excellent theory apart from one small problem. It doesn't work in practice. When one small country cuts back on its government spending then it just might help it to get out of difficultly. But when a large part of a continent cuts back on government spending at the same time it has the inevitable consequence of putting people out of work. Unemployment in Greece is therefore 26%. In Spain things are much better because they have followed austerity more dutifully. Unemployment there is only 24%.
And of course when you put people out of work they don't pay taxes and they do claim benefits. So the public finances haven't improved in many European countries. They have got worse. Before 2008 the Greek national budget was almost in balance and the national debts was under 100% of GNP. Now it is so large and the economy has shrunk so much that the IMF is saying it will never be paid back.
The US strategy has worked. The EU strategy has failed. The really sad thing is that even those EU politicians who are insisting on austerity are suffering as a result of insisting on implementing a flawed economic policy. The Germans don't gain by demanding others get out of their financial crisis by cutting spending. The EU wide drag on economic growth that this produces results in desperately slow economic growth in Germany. The EU wide debt crisis that slow growth has produced has resulted in Germans owning a lot of debts that can never be paid. Put simply they've lost their money and are at risk of losing even more. Instead of railing about feckless Greeks failing to implement austerity with sufficient ruthlessness the Germans should have looked to the US. Feckless printing of money works - provided the circumstances are right. 2,350,000,000,000 of dollars were created out of thin air and used to rescue the system.
The UK, as so often has positioned itself in between the US and the EU. What it has done is to print money not quite as rapidly as the US - £370 billion of it - and as a result the UK is emerging from the worst of austerity. At the same time as printing this huge quantity of money in order to get the system back to growth the government has preached austerity. So the election was won on the tale that we were getting out of austerity by being economically responsible whilst what was actually happening was that we were getting out of it by printing money rapidly. They were choosing to spend it rescuing banks whilst cutting welfare.
We are now at a very interesting stage. Will the Conservatives implement the flawed right wing German economic policy that they have been preaching? Result: rising unemployment, slow growth need for even more cuts. Or will they implement the Keynsian policy of printing money in a downturn which they and the Americans have actually been practicing? Result: growth and emergence from worst of crisis.
If the budget is any indication then it is pretty clear which way they are going. They seem determined to turn their back on an approach which worked in the US and to a lesser extent here. Instead they are bravely going for stupidity. £12bn of cuts and even more to come. Raising of interest rates. Stopping quantitative easing. Perhaps they do have that long term economic plan that they keep talking about. Unfortunately it looks very like the one that has been forced on the EU by Germany and has completely and utterly failed.