‘Everything is going haywire’: top economist Dr Eamonn Butler on why we should worry about the UK economy | Video

World Finance speaks to Dr Eamonn Butler, author of The Economics of Success: 12 Things Politicians Don't Want You to Know, about what caused the global financial crisis and what we can do to avoid another

June 2, 2014

Risky bankers and excessive lending: these were largely seen as the villains behind the global financial crisis. But to what extent were governments to blame? World Finance speaks to Dr Eamonn Butler, economist and author of The Economics of Success: 12 Things Politicians Don’t Want You to Know, to discuss who should take responsibility for the economic downturn, why he thinks Britain should get out of the EU, and whether the Bank of England’s financial predictions for the UK economy are a good sign.

World Finance: Well Dr Butler, maybe we can start with what you think caused the global financial crisis?

Eamonn Butler: Governments and bad regulation! The crisis was caused because we had an enormous boom which was created by cheap interest rates and loose money for a very long and protracted period.

Added to which, you had the government in America, and here in Britain, subsidising housing, encouraging people to take out house loans. So what did you get? You got a huge boom, you got a massive increase in house values and so on. You got an unsustainable spiral. Eventually that all collapsed, and now we are reaping the rewards of that. It’s as if we had a huge party, and this is the hangover. And I’m afraid we just have to go through it.

We’re trying to have another drink in order to get through the pain

World Finance: So government profligacy, this is what you said caused the financial crisis. So do you think the coalition government has made matters worse?

Eamonn Butler: We’re still borrowing hugely. I mean the government borrows one pound for every five pounds it raises in taxation. The national debt is still rising. Public expenditure has hardly declined at all. Households are still borrowing at massive, almost record levels. So I think that… I said it was like a party and you have a hangover; I think we’re actually trying a hair of the dog. We’re trying to have another drink in order to get through the pain. And that actually just makes the whole thing worse.

World Finance: So do you support then a more laissez-faire attitude of governments towards financial regulations?

Eamonn Butler: The regulators really caused this crisis in the first place, certainly in America, because for very good reasons, the American government wanted poorer people to have access to their housing market, and therefore it used the regulatory authorities in order to force banks to lend to people that they didn’t really want to lend to. And so the banks knew that they were lending some very bad business. They diced it and sliced it, and sold it back to us here in London, where it polluted our banks as well.

So the regulators generated this problem in the first place, and then when the crisis actually hit as it inevitably had to do, what do the regulators do? Well they were all standing on each others’ feet! They hadn’t got the faintest idea what to do.

World Finance: Well one of the statistics you quote in your writing is £375bn of virtual money has been created through quantitative easing. So where do you think this is headed? 

Eamonn Butler: At the moment all of that money basically is being used to shore up the government, because it’s going into the bond market. And that’s where it’s stuck.

Eventually it’s got to get out of there and go into the real world somehow. When things pick up, then that is the time that that money will reappear. You can argue that it wasn’t a bad strategy: there was a collapse in the money supply when the banks started calling in loans and so on, and therefore you have to replace that.

But you’ve got to be willing to get that money back out again when things start picking up. And that’s the trouble with central bankers, you know? They love a boom, and they’re very bad – as the former Fed chairman said – at taking away the punchbowl once the party gets a bit riotous. And you have to take away the punchbowl, I’m afraid.

So I fear that there is an inflationary pressure there, baked into the system, and that when business starts to revive, if business starts to revive, then that’s when we’ll see that inflation coming through. And that’s not good either.

I think that Britain can easily manage on its own

World Finance: You suggest that the Bank of England should stop cheap credit, and this should be done before the elections. But realistically, wouldn’t this be political suicide? 

Eamonn Butler: It should be done right now. Obviously the nearer you get to an election, the more difficult it is for the bank to act. The bank has to act, because we are clearly creating another false boom. And that is being created, as before, on housing subsidies and on cheap credit. The bank has already complained about housing subsidies – the government isn’t going to do anything about that – so we’ve got to look at the cheap credit.

And the longer you postpone it, the bigger you have to make the rise. And that will cause real pain for people, because when interest rates are very low, even a small increase is a big bill.

World Finance: Well staying with politics for a moment now. David Cameron recently said the EU is too big and too bossy. So do you think we should step away from Europe?

Eamonn Butler: I think that Britain can easily manage on its own. I think that we would have a free trade agreement with the world, basically. At the moment we are locked into a free trade agreement with Europe, and that means we actually have to impose quite heavy tariff barriers on other countries that we would dearly love to do business with.

And I think also the costs of the regulation have really made the whole thing a negative now.

World Finance: So back to the UK now. If not quantitative easing, what would you say should be the solution?

Eamonn Butler: What you have to do is to let the market do its job. The reason that we have a recession is because we had a fake boom created by cheap credit. People have invested in things that were unsustainable in the long run. Assets and personnel are in the wrong places, doing the wrong things. We have to reassign them to do the right things for the real world, post-apocalypse economy.

The way to do that is really to get out of the way. It is to reduce taxes on business, it is to reduce regulation on business. To get rid of things like minimum wage regulation and other things that stop human and financial and physical resources getting to the right places.

[Taking away the minimum wage] would be entirely beneficial

So: clear the field. Let the market do its job. And then you will come out of the recession very much quicker than you would ever possibly imagine.

World Finance: So taking away regulations, especially the minimum wage. How would this affect people at the grass-roots level?

Eamonn Butler: I think it would be entirely beneficial. We’ve got nearly a million young people in the UK, for example, who can’t get a job. Because they have no skills, they’ve just come out of school or college, they’re not trusted employees, they don’t have references, and no employer will take them, because they’re not worth the minimum wage!

So what you want is people to create starter jobs so that young people in particular can take a job, and then show themselves that they can actually hold down a job and do it properly. And then they’ll get a better job. That is a much better system than the present tax on jobs which just keeps them out of work entirely.

World Finance: Now the Bank of England has predicted that the UK economy will rise 3.8 percent this year. So, should we start celebrating now?

Eamonn Butler: We should start worrying! That is well above trend, I mean how could you ever believe that is going to happen? Okay, we’re starting from a low base, but that is much too fast! That is a sign to me that everything is going haywire, it’s going out of control.

World Finance: So a fake boom, and a worse crash. These are the words you used in your writing. So this isn’t really want we want to hear; where are we headed?

Eamonn Butler: Hopefully people will realise that this is crazy. This is where we were in 2004, 2005, 2006, and that we’d better not do that again. And that hopefully governments will tighten their belts a bit.

I hope that the regulators don’t just keep imposing more and more regulation, particularly on the banks, which is the most regulated industry in discovered space already. And if we can do that, if we can just keep out of it, and let the market sort these things out, then there’s the possibility that we will survive this.

World Finance: Dr Butler, thank you.

Eamonn Butler: You’re welcome.