The Legacy of the Financial Crisis

Abstract

The reputation of liberal democracy has fallen not only internationally but even within the UK and the US, which on current policies risk a decline in living standards and an even worse outcome should more to populist policies be implemented. Weak growth followed the financial crisis but was not caused by it. Holding otherwise is an example of the ‘post hoc fallacy’. Weak growth was caused solely by adverse changes in demography and poor productivity. Addressing both economists and the wider audience of those concerned with our economic and political future, this chapter shows that the adverse changes in demography and productivity have causes which predate the financial crisis by many years. The financial crisis was due to poor theory which led central banks to ignore the risks of high asset prices and excess debt. Poor theory today inhibits policy makers from recognizing that bonus culture policy has stifled growth.