28 April 2013

How Do We Fix This Mess?

The Economic Price of Having It All And The Route to Lasting Prosperity

Robert Preston and Laurence Knight
2012, Hodder & Stoughton, 471 pages, £20.00
ISBN 9781444757095

Reviewer: Diane Coyle, Enlightenment Economics

Robert Peston, the BBC’s Business Editor, will be familiar to almost all readers of this journal - probably to almost everybody in the country - as his distinctive tones have guided us through the financial crisis. As he explains in the introduction to this evaluation of the crisis and its consequences, his earlier career had prepared him uniquely well for reporting on the events. He had experienced a brief stint working in the City, covered the banking industry for the Investors Chronicle and The Financial Times, and then turned to political reporting. So he had both the detailed knowledge of the financial sector and the political and official contacts that enabled him to act as such an authoritative guide to the nation.

The book does tackle head-on the criticism made at the time, that his reporting was in fact exacerbating events. Peston writes: “Actually, there were two charges: first, that the collapse of Northern Rock was my fault; second, that in some sense it was my public duty not to report bad economic and financial news.”

The first charge is obviously silly, when you consider the extent to which Northern Rock had grown aggressively on the basis of raising wholesale funding. The second only takes a moment’s thought to be revealed as equally silly: the financial crisis did not occur because it was reported. And, as the author goes on to say, the more serious charge to levy against financial journalism is that insufficient attention was paid earlier to the mounting tensions in the world economy and financial markets: “The media was too infected with the popular enthusiasm for borrowing as much as you could to buy a house,” he writes. Nobody paid attention to the complicated new instruments being created by the banks, or challenged the prevailing orthodoxy that those innovations were spreading risk rather than concentrating it.

How Do We Fix This Mess? is as entertaining a read as you might expect from such a knowledgeable and distinguished journalist. Although co-authored with a colleague, it sounds like an extended bulletin delivered with Mr Peston’s distinctive tone and turn of phrase. There is plenty of interesting and intriguing detail about the events in this largely UK-focused book.

The book reminds us of a number of the key issues as they were discussed before the crisis, and does not simply blind us with hindsight. For example, he reminds us that many people strongly supported using securitised credit to support home-purchase by low-income borrowers. It was thought to be a social good. Similarly, that the founding fathers of the euro always knew the single currency would require greater political integration, but never expected that it would need to take place so quickly or under conditions of such acute urgency. They were paternalistic, and perhaps complacent, but not stupid.

One chapter also addresses the question of the immediate crisis response, and whether the Bank of England and specifically its Governor, Mervyn King, under-reacted in the early stages. Interestingly, Peston thinks the Bank’s mistakes came earlier, in not acting against what its own senior people believed was clearly a massive asset price bubble. He quotes an anonymous executive director as admitting this as early as 2003. So while for many critics of the Bank, the focus is its emphasis on avoiding moral hazard rather than stopping the markets closing in the very early days of the crisis, the book criticises inaction in the earlier period: “Sir Mervyn King seemed to feel there was no reason to apologise for the Bank’s performance in the years when credit was consistently under-priced and asset prices rose dangerously.”

Still, as policymakers continue to debate how to react, I think it is important to remember how misleading the vantage point of hindsight can be - as the section on the growth in mortgage borrowing acknowledges.

The book ends on quite an optimistic tone, and some readers may well disagree with the assessment. “We can fix this mess and build a better life,” it concludes. It does not offer a comprehensive to-do list for policy makers, although there are some general, and surely uncontroversial, suggestions, such as the importance of investing in human capital. There is a final, add-on chapter on the Libor scandal. No doubt future editions will have further updated material. After all, we are unfortunately still in the middle of this crisis. But at least we will have Robert Peston to give us that famous ‘first draft of history’ provided by excellent reporting.