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Janette:
Evan, let’s talk about the recession. We’re in the middle of a recession, everybody accepts that, it’s a global recession, lots of countries are suffering. Is there something special about this recession that’s different from say the ones that everybody’s talking about, the 1930s, the 1970s, the 1980s?

Evan:
Well, there is something special about this recession, and it’s called a banking crisis, and that makes it different from the one in the 1980/90s, for example; different from the one in the early 1980s, but very similar to the one in the 1930s, and some similarities to the early 1970s.

The point about a banking crisis is that banks are so central to the functioning of an economy that when the recession is deep enough, big enough to kill the banks you are in a lot of trouble and it’s much harder to get out of it, and that’s why it is a deeper one than most recessions that we get, and it’s why it is a more, it is one that involves a bigger adjustment in public finances and other things for example, and most other recessions, and why I suspect it will persist a bit longer then most recessions that we’re used to.

It’s because one big arm of the economy has been lopped off, or at least been bandaged up and put in a splint for the next little while, and there’s a lot of evidence that when you go back and look at banking crises. And a wonderful paper Carmen Rheinhardt and Ken Rogoff have written about banking crises, of which happen surprisingly often.

Janette:
Surprisingly often, yes they do.

Evan:
But what happens is they’re painful to get out of. Now what is truly special about the ‘30s and this one is not that it was just a banking crisis, you know, Japan had a banking crisis in the ‘90s, Scandinavian countries had banking crisis in the early ‘90s, Spain had a banking crisis in the 1970s, what is truly special about this banking crisis is that it is synchronised, and so you not only have taken out one arm of the economy, you know, which is put into a splint because it’s bust the bank but you’ve taken out all the legs of the global economy as well because there’s no, no one spending anywhere because no banking sector is unscathed by it.

Janette:
Isn’t that always going to be true of banking crisis then?

Evan:
No, the Japan, think back to the Japanese banking crisis in the 1980s, 1990s. True, the Japanese economy imploded, the banking system imploded, but what was going on in the rest of the world was a dotcom boom.

Janette:
Yeah.

Evan:
I mean that was, that was if you like, at least giving the Japanese export sector somewhere to go and somewhere to sell. So what we, what really makes this one special is that it comes with a banking crisis and synchronised banking crisis around the world, which makes it much harder to get out of because we can’t export our way out of this, as we would like, because everybody’s suffering because their banks are in problems too.

Janette:
But what’s odd is that you’ve got some countries like the UK and the US, who are clearly sort of in the guilty sector.

Evan:
Yeah.

Janette:
Because they had these banking sectors that were bigger than anybody else’s and caused the crash, and then you have sort of slightly goody countries like Germany and Japan who are exporting, and yet they seem to be suffering even more than us.

Evan:
Yeah.

Janette:
Isn’t that odd?

Evan:
It’s extremely odd. It’s one of the big paradoxes of the recession is the way it’s hit. Now we, I don’t think it was that our banks were worse than their banks, remember that their banks were absolutely caught up there as well.

Janette:
In their own world.

Evan:
So let's not put it as goodie and baddie in that sense. The goodie and the baddie aspect was we were borrowing, we as a nation had chosen to, you know, spend unsustainably while some other countries were saving unsustainably, and we all thought that when the crash comes, you know, it’ll be those of us who have overspent that will be in most trouble.

But the problem is their business model was every bit as unsustainable as our business model. Our business model was buying things from other countries, unsustainably, that doesn’t work, their business model was selling things to countries who couldn’t afford to buy them, and that doesn’t work either, and so they’ve had to reinvent themselves because you can’t build your economy on the basis of lending people money, which is what they were doing, to buy the things that those people couldn’t afford.

So if we couldn’t afford it, they couldn’t build an economy on selling it to us, and that is why we were totally locked in this together, and if it was unsustainable for us, it's been unsustainable for them. That being said, the correct solution to the recession is for them to spend more domestically and for us to produce more domestically and sell it to them.

Janette:
What, so we reverse roles in some way?

Evan:
So to basically flip roles, yeah. I mean, you know, if we can’t marry the Germans and then just combine our accounts so that we’re all sharing the bills and sharing the income, the next best thing is for them to start spending more and for us to start producing more.

I mean that’s how it ultimately has to end. But, you know, that’s a difficult thing to affect. That change from us spending too much to us producing a bit more and them spending too little and producing too much, to spending more, that switch is very difficult one to execute.

And a pretty good way of viewing this recession is thus this global event, is that's what the worlds trying to do, it’s trying to stop us spending and get them spending, and we just dropped the baton as we try to pass it from one to the other and no one was spending for a period, which is why the world has had such a terrible 2008 and 2009.

Janette:
Isn’t that a peculiar problem for the UK though where, you know, we have no tradition of respecting manufacturing anymore? You know, finance was much more glamorous than manufacturing.

Evan:
Yeah, and a 25% depreciation of the exchange rate is going to do all sorts of things to get us thinking about manufacturing again and such like. We’re never going to go back though.

We’re not going to go back to the cheap manufacturing that is cheaper done in China at any exchange rate. We’re not going to go back into sewing up, making shoes or clothes or coats, you know, as we used, that’s gone and is probably going to stay away.

But what we will discover is we’re a much more attractive place for doing a lot of higher end manufacturing than we had thought, locating all sorts of things here that are currently not here. I think we will be fine. We will find companies saying it’s quite cheap to buy land in the UK, it’s quite cheap to employ staff in the UK, and they’ll start moving here.

Janette:
But I think you’ll have to change the university sector because it's stopped people doing English Literature and History and start doing Engineering. I think you’ll find there are very few UK students actually studying Engineering in British universities.

Evan:
And it might well be that it’s engineering, important, and it might well be that we have to, as some have suggested, I don’t have a view on it, but it might well, it’s a question that needs to be asked is whether we don’t want so many people going to university.

We need a bigger cadre of people at the below university level at the sort of what might have been called technical colleges and people who are learning.

Janette:
Presentation one.

Evan:
People who are learning useful skills that are not just designing the latest thing but are actually, if you like, they’re sort of shop floor skills that are about running a shop floor and making a manufacturing process work. I mean I think we are probably in all honesty a bit short on all of that stuff.

Janette:
Yeah. Going back to the recession, I mean one of the interesting things about this recession is we’re being absolutely bombarded with news about it. Every day we wake up we get told where the, what the state of play is, how GDP has collapsed, how unemployment has rocketed, etc. Do you think the fact that we have got all this news on the recession, which I don’t imagine being the case in the 1930s, has changed the very nature of the recession itself?

Evan:
Well, I think quite a lot about this as someone has perpetrated news on these things over the last ten years. I mean I think the, I think real time data and the amount of it can throw noise into the understanding as well as into, as well as clarity.

So I mean one would like to think that the excellent data we have and the volume of it would mean people stay calm, that they make better judgements about things, and that they are, you know, less prone to panic or to be unduly euphoric about booms and busts because they know more about what’s going on.

The truth is though that I think the way report things and the way data comes out and the volume of data and the repeated amounts of data you get more or less telling you the same thing can lead, this is a sort of a behavioural point rather than an economic point, but it can lead people to, it can accentuate the upsides and, you know, accentuate the downsides, it can be pro-cyclical.

I’ll give you a very specific example which I’ve often worried about actually, which is if you’re reporting house price data, if you have one measure a month you learn what’s going on in house prices.

If you then get two measures of house prices published each month, or now we have about five measures or six measures of house prices published each month, what can happen is you tell people the data the first time it comes out, you repeat the same data the second time it comes out, and the third and the fourth and the fifth, and people are however brilliant they are and however deep their understanding, instead of thinking house prices went up by 1% last month, they’re thinking every time the data comes out they’ve gone up by 1% and by another 1% and another 1%.

Janette:
Oh I see.

Evan:
And you can get a very slight momentum effect I think going, and I think that might have, that might have to some extent happened.

Janette:
So too much information is bad.

Evan:
Too much information can drive things up and then drive them down. I don’t fundamentally think it creates the boom and the bust. I don’t think it causes a bust. I mean, you know, the idea that press reporting has made people miserable and caused the recession I don’t think is true, but I think it can slightly swing things too far on the upside and then again down on the downside.

Janette:
And one last question about the recession, do you think that there’s, because we’ve suffered particularly in the West as you said that there’s going to be a sort of permanent shift in power or in wealth to the East, to the countries that really weren’t involved in the way that we were?

Evan:
I don’t think the recession is going to cause the transfer of wealth, but is there going to be a transfer of sort of economic power? Yes. And in some ways it’s not the recession causing it, I think it’s more the other way around, that a very big way, if you know, if you were to stand back and look at this episode, but not bad way of thinking about it, is as the world trying to digest China’s engagement, and it just going a little bit awry.

I mean really China came onto the scene in 1980 when it decided to abandon Mao communism and all of that and start moving towards market reforms.

It started becoming seriously industrial in the ‘90s, and that started becoming a serious part of the global economy really this decade, and absorbing that hundreds of millions of extra workers in the global economy engaged with products that most of us are buying and consuming, that is a complicated thing for a world system to do, and it led to disinflation and a falling price of manufactured goods.

It led to huge increases in the prices of commodities and raw materials and oil and energy and is leading to a huge flow of savings into the world that no one had anticipated and a very low interest rates. These are big things for the world economy to absorb.

So China’s arrival on the scene effectively has been a big thing. It has been part of the thing that led to the boom, part of the thing that led to the crash. It’s probably a good thing for the world that millions of people are taking out of, coming out of poverty into Chinese emerging economy standards of living, but it’s a big thing for the world economy to absorb, and to some extent we should see the recession as just one piece of this blooming great thing we’d bitten off which is called China.

Janette:
So it’s more a breathing space before we move on to the next.

Evan:
It’s, well yeah but I mean, you know, China’s just back where it always should have been. You know, I mean China was always 20 or 25% of the global economy until the industrial revolution, and then we took off went ahead, China disappeared as a serious global player for much of the post war period, and whoosh, it’s just coming back, and that was always going to be a kind of somewhat disruptive and interestingly complicated and sometimes painful process, and that’s what the recession is about.

So I don’t quite see it as the recession means they’ll suddenly be bigger and better; it’s that they’re bigger and better and part of that understanding and that process has meant this really pretty disrupting period for us.

Janette:
Unpleasant. Thank you very much Evan. Thank you for talking to the Open University.

Evan:
Pleasure.