The global financial crisis

Summary

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Episode Overview

Title: The Global Financial Crisis
Date: October 23, 2008
Podcast: LSE: Public Lectures and Events
Host: Justin Guest (LSE Film and Audio Team)
Guest: Dr. David Woodruff (Lecturer in Comparative Politics, LSE Department of Government)

This episode features an in-depth discussion on the unfolding global financial crisis of 2008. Host Justin Guest interviews Dr. David Woodruff, exploring governmental responses, prospects for global cooperation, historical comparisons, and the evolving role of the state in the financial system. The conversation draws parallels with past crises and considers potential long-term changes to the economic model.

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Key Discussion Points and Insights

1. Effectiveness of Central Bank Responses

• Martin Wolf's Praise: Guest refers to Martin Wolf’s assessment that national banks' responses have been "quite impressive" compared to the Depression and other crises.
  • Dr. Woodruff's Take: "Central banks have not been sitting on their hands... they’ve tried very hard to make a very vigorous response. And in that sense I do think there is something to what he said." (B, 00:48)
• Room for Improvement: Dr. Woodruff highlights missed opportunities, especially in the US.
  • Notable Quote: “They should have earlier tried to get an equity position in the banks they were helping out... That’s the number one thing that they should have realized early on.” (B, 01:17)

2. Necessity (and Limits) of a Global Solution

• Global Action vs. National Focus: The crisis is global, but national governments are the main actors right now.
  • Notable Quote: “I have the feeling that all of the national governments are in a position where they're trying to figure out how to put Humpty Dumpty back together again." (B, 01:54)
  • Dr. Woodruff is skeptical a fully global “Bretton Woods” type solution is possible soon, forecasting long-term state involvement in finance.
  • Insight: “When collapsed banking systems get taken over by the state, they pretty much stay taken over by the state for a long time.” (B, 02:32)

3. Historical Lessons: Risks of Monetary Fragmentation

• Examples from Russia & Argentina: Woodruff warns of possible fragmentation (multiple forms of payment) in a crisis, citing Russia and Argentina.
  • Notable Quote: “One thing that happened both in Russia and in Argentina was a fragmentation of the monetary system, where multiple means of payment emerged...” (B, 03:08)
• Potential for Europe: If banks fail to meet their obligations, parallel monetary systems might arise (e.g., depositors paying taxes with trapped deposits).
  • Memorable Explanation: “That already has created a parallel monetary circuit... where the state is accepting in payment something that is called a euro or a pound or whatever, but is actually very localized to that bank.” (B, 03:50)

4. Government Ownership and Its Consequences

• Ownership Raises Political Questions: With governments acquiring stakes in banks, new debates emerge about the purpose and structure of banking.
  • Notable Quote: "...it may open the space for a broader discussion of the state's role in the economy." (B, 05:41)
• Comparisons with the 1930s: Dr. Woodruff contrasts the 2008 crisis with the 1930s, noting the lack of an immediate ideological alternative to current capitalist models.
  • “Back then there was a live alternative... Now, that has been so out of fashion for so long that there is no immediately live ideological alternative.” (B, 06:24)
• Potential for Enduring State Role: There's skepticism that the state will easily return to a limited role after intervention.

5. Reforms and the Limits of "Fixes"

• Economic Model Has Changed: Regardless of reforms, the old way of banking is already impossible.
  • Notable Quote: “...it's already become impossible for them to live as they were living before. They simply cannot run the same business models that they used to run.” (B, 07:05)
• Manual Control vs. Autopilot: If deeper economic decline continues, governments might find themselves managing finance on a case-by-case basis, marking a fundamental shift.
  • Insightful Analogy: “We might find government sucked into administering finance and debts on a much more case by case basis, which would be a big change in the economic model.” (B, 07:55)

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Notable Quotes & Memorable Moments (with Timestamps)

• “Central banks have not been sitting on their hands... they’ve tried very hard to make a very vigorous response.”
  — Dr. David Woodruff (00:48)
• “They should have earlier tried to get an equity position in the banks...”
  — Dr. David Woodruff (01:17)
• “All of the national governments are in a position where they're trying to figure out how to put Humpty Dumpty back together again.”
  — Dr. David Woodruff (01:54)
• “When collapsed banking systems get taken over by the state, they pretty much stay taken over by the state for a long time.”
  — Dr. David Woodruff (02:32)
• “...fragmentation of the monetary system, where multiple means of payment emerged...”
  — Dr. David Woodruff (03:08)
• “...created a parallel monetary circuit where the state is accepting in payment something that is called a euro or a pound or whatever, but is actually very localized to that bank.”
  — Dr. David Woodruff (03:50)
• “It may open the space for a broader discussion of the state's role in the economy.”
  — Dr. David Woodruff (05:41)
• “...it's already become impossible for them to live as they were living before. They simply cannot run the same business models that they used to run.”
  — Dr. David Woodruff (07:05)
• “We might find government sucked into administering finance and debts on a much more case by case basis, which would be a big change in the economic model.”
  — Dr. David Woodruff (07:55)

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Timeline of Highlights

| Timestamp | Segment | Summary | |-----------|------------------------------------------------------|---------------------------------------------------------------------------------------------------------| | 00:00 | Introduction & Martin Wolf’s Assessment | Framing the central bank response as “impressive” post-Depression and during the crisis. | | 01:17 | Critique of US Bank Interventions | Call for earlier, explicit equity stakes in troubled banks. | | 01:54 | Need for Global Solutions/National Focus | Skepticism about achieving a new Bretton Woods; long-term state involvement anticipated. | | 03:08 | Dangers of Monetary Fragmentation | Lessons from Argentina and Russia; parallel payment circuits as a real risk in deflationary downturns. | | 05:04 | Political and Ideological Questions in Ownership | Ownership means opening up new, sometimes uncomfortable, political debates about banking’s social role. | | 07:05 | Limits of Reform; Changing Business Models | Banks unable to return to previous risky models; governments may assume direct, manual financial control.|

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Tone and Style

The discussion is analytical yet accessible, with Dr. Woodruff using analogies (like “Humpty Dumpty”) and historical references. His tone is cautious, academic, and sometimes skeptical, especially regarding easy fixes or returns to pre-crisis norms.

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Conclusion

Dr. Woodruff warns that government intervention in the financial system may not be easily reversed and that the crisis could fundamentally reshape the roles and institutions of capitalism. He draws on historical crises to caution about risks of monetary fragmentation and stresses that, while crisis management has been ambitious, the path forward is politically and economically uncertain.

Recommended for:
Listeners seeking to understand the immediate and long-term challenges of the 2008 financial crisis, particularly the tensions between national responses and the need for global coordination, and the potential evolution of the Western financial system.

Transcript

[A]

A perfect storm of bad credit, soaring debt and rising prices has swirled to leave Britain and the world in a global financial crisis. Now even the strongest, the most powerful of companies have been brought to their knees as the markets are utterly destabilized. National governments have since tried to rescue their banks and credit institutions, intervening where they were once unwelcome. Hi, I'm Justin Guest. Welcome to the LSE Hot Seat. With us this week is Dr. David Woodruff from the Department of Government. He's a lecturer in comparative politics with. Welcome and thank you for being here. Well, let's get started. At an event here at LSE earlier this week, Martin Wolf from the Financial Times stated that in light of the 1930s depression and the financial crises in Japan and Scandinavia, the response of the national banks this time around has been, quote, unquote, quite impressive. Do you agree?

[B]

Well, I certainly think that it's true that the central banks have not been sitting on their hands and one could argue about details of what has been done, but it's certainly the case that they've tried very hard to make a very vigorous response. And in that sense I do think there is something to what he said. I don't agree with all of the details of what has been done, but nevertheless, I think that the general picture is right.

[A]

So how did you change what's been done?

[B]

Well, especially in the United States, I think that they should have earlier tried to get an equity position in the banks they were helping out. That's the number one thing that they should have realized early on that they were going to need to do that and to do that in a more explicit way. That being said, it's an extremely hard, difficult, fast moving situation. And the fact that as much has been done, as much as has been done has been done is pretty impressive.

[A]

Do you think there must be a global solution to what seems to be a global problem right now? Are there any prospects for global action?

[B]

I certainly think that there needs to be some sort of global solution and there is some sort of prospect for the next Bretton woods, as it were. That being said, right now I have the feeling that all of the national governments are in a position where they're trying to figure out how to put Humpty Dumpty back together again. And then they're thinking, well, once we've got him back together again, we'll figure out how we should regulate him, and so on and so forth. And I actually am very skeptical that that will be possible to reconstruct something like what happened before. I think that states may find themselves intimately involved in the financial system for a very long time. That's been a historical pattern that when collapsed banking systems get taken over by the state, they pretty much stay taken over by the state for a long time. So I think that right now, the prospects for there needs to be some sort of international solution. But that being said, a lot of the center of gravity is going to be inevitably on the national ground, because the key decisions are being made there.

[A]

Now. You studied financial crises in Russia and Argentina previously. What dangers are there here?

[B]

One thing that happened both in Russia and in Argentina was a fragmentation of the monetary system, where multiple means of payment emerged in the course of their financial difficulties. And that could happen here. The situation would be something like the. Imagine a European bank that finds that it can no longer pay its depositors, and as a result of that freeze on withdrawing deposits from the that bank, the depositors are going to be angry, they're going to be upset, and they're going to owe people money that they need from the bank. Among the people they will owe money is the government, the state, and they will say, could we possibly pay our taxes with the deposits in this bank? And the state will be under tremendous pressure to accept that in payment and then to sort of say, well, how could we spend this money that's locked up in this bank and find people that they owe money to that will accept deposits in the bank? So that already has created a parallel monetary circuit. That sort of development has created a parallel monetary circuit where the state is accepting in payment something that is called a euro or a pound or whatever, but is actually very localized to that bank. You can multiply those sorts of examples to all sorts of other things. Firms that have assets that they can't unload, that try to unload them on the government, and the government takes them as payment in taxes. Those are real prospects. If things continue to get worse in a deflationary environment, which is quite possible that we're going into, what happens is that firms can't pay their debts and they start trying to find other ways to pay their debts. If they do that, you could get a fragmentation of the monetary system, which would have great consequences, among other things, for the euro.

[A]

So now that the government owns these banks and credit institutions, what should they do with them?

[B]

Well, I think that right now there's still a feeling that the government will take preferred stock. It will more or less be deferring to the private management of the banks. And in time, they will back out and will be back to the situation we were before. But it's already clear how politically difficult that will be. And all of the stories about the bonuses and will the different financial executives have to have their pay reined in. In addition, once the government has ownership, they will start to open questions that were not open before, that maybe should have been open before, but that were not open before about what is the social purpose of banking? Is it appropriate that the compensation for bankers is so high? Is there a lot of value added in the sort of instruments that they've been doing? And I think that those questions will be sucked into the political system. And as a result, I think that it may open the space for a broader discussion of the state's role in the economy. One of the things that's unique about this crisis or different about this crisis that than, say, the crisis of the 1930s is that back then there was a live alternative. There were several live alternatives to the way that capitalism was organized in the rich countries. Not just communism, but moving towards some more statist form of economic governance. Now, that has been so out of fashion for so long that there is no immediately live ideological alternative. That's why they want to put Humpty Dumpty back together again. But by virtue of all of these assets now being in state hands, discussion about what the economic model should be will come back to the forefront.

[A]

So we're stuck with Humpty Dumpty, but can he fall again? How much has the government actually done to reform these institutions?

[B]

Well, the government in some sense doesn't have to reform the institutions because it's already become impossible for them to live as they were living before. They simply cannot run the same business models that they used to run. So in that sense, there has been a big change. What I think a lot of reasonable people are worried about is that if it turns out to be true, even if it turns out to be true, that the banking system has stopped its spiral down, a broader economic spiral down could become extremely severe. And that could lead to the sort of deflationary environment where we would have the financial system more or less running on manual control. It ordinarily runs more or less on autopilot. The Federal Reserve or the central bank injects money into the economy, takes it out. We might find government sucked into administering finance and debts on a much more case by case basis, which would be a big change in the economic model.

[A]

All right, we'll leave it there. Dr. David Woodruff, you are off the hot seat. Thanks very much for joining us. And thank you for joining us. And please look back next month when we'll have another edition of the Hot Seat.