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Winter came early, and I am not referring to the climate. The first frost was detectable by the end of the summer term. Even before the House rose for August, the economic mood was changing, with icicles hanging by the Treasury wall.

Until then, most politicians had been operating on more favourable assumptions. Obviously, the next few months would be bloody. People were already complaining about the cuts, before they had been implemented. What would happen when they actually began to bite? But this was a government with a whole-Parliament majority. Some of those who could have been formidable critics were handcuffed to the economic strategy. So there was time for electoral recovery, assuming that we were in a V-shaped recession. By late next year, we should be ready to start climbing up the far side of the V. Shortly after that, the binoculars would be able to pick out the sunlit uplands, comfortably before a 2015 election. It is now clear, however, that we are not dealing with a V-shape, but a V-sign. This not the standard recession which we have grown used to, with an excessive build-up of stocks, general over-heating and the need for sharp rises in interest rates to curb inflation. This is more like Japan circa 1990, when almost all the banks were technically bust, their balance-sheets infested by toxic assets. Does that sound similar? It is. Does it sound frightening? It ought to, because Japan has still not fully recovered.


Some commentators had been discussing the Japanese precedent for quite a while. Yet until the change of mood, there was an element of warning naughty children that the bogey-man would get them. The grown-ups reassured themselves that there was no bogey-man. Economics is based on culture, and we are not the same as the Japanese. They were overcome by sophisticated, plangent, oriental pessimism and spent two decades writing haikus. We would be rescued by our rough Western animal spirits. But there is a limit to the ability of animal spirits to defy economic reality. It may be that there is a bogey-man after all.

"Economic reality" almost invites T.S.Eliot's retort: "humankind cannot bear very much reality". If that were not true, none of this should have happened. Humankind had no excuse for not knowing better. In the late Eighties, people would say: "Isn't it remarkable? Nippon Telecom is worth more than the state of California". There should have been only one answer to that. "Remarkable – what are you talking about? It is't remarkable: it is lunacy. The stock market must have been taken over by Bedlam". So it had been. One would have thought that the painful lessons would have been scarred into the collective memory: evidently not.

When I was a small boy, I often bought envelopes full of unsorted postage stamps. It was great fun working out what they were and one's hopes were buoyed up by the claim in the brochure that in 1951, someone had found a Penny Black. One of the pleasures of British boyhood, a bridging phase between Winnie-the-Pooh and Wisden, it was a harmless way for schoolboy philatelists to spend their pocket money. It was not an example to be followed by the world's fund-managers. Many of them did.

A single mother would go into a bank in St. Louis, asking for a mortgage. She would make a declaration of earnings. No-one would verify the details. Unless her demeanour was extremely odd, the mortgage would be granted. Admitedly, the American banks had difficulties, often linked to race. Bank managers feared that if they turned away three or four minority applicants during one morning, Jesse Jackson would be picketing the branch before close of play. Congress had reinforced Mr Jackson by legislating to make it hard for banks to examine poor people's circumstances. In most cases, this was pure vote-buying, but there was also an element of idealism. Home-ownership was the first step on the ladder towards the American dream, so why not help people to move from a trailer-park to a proper home? Nor were the banks innocent. The more mortgages, the better for balance sheets – and bonuses. Like almost everyone else, the bankers assumed that the economy would go on growing indefinitely. "Sub-prime" was the term used to describe the resulting mortgages. Although that is now indelibly associated with toxicity, it started out as an apparently harmless euphemism: sub-prime; just below prime. "Wing and a prayer" would have been more accurate. The whole affair was a lethal coalition of naivete, opportunism, idealism and greed.

But the guilt spread beyond America. In a lot of banks, nine-year old stamp collectors had taken over the boardroom. The banks would buy bundles of unsorted mortgages, which would be graded as triple-a assets. Frequently, they would be sold on to pension funds. When the banking crisis began, many Europeans gloated over the Anglo-Saxons' problems. (It is curious that "schadenfreude" is a German word. The French are the masters of that art-form.) But European banks were complicit, for their elementary failure in basic due diligence. There was no reason for them to buy American sub-prime mortgages.

Bankers do not seem to be good at reading history or learning lessons. Early in 1995, the news of Nick Leeson's rogue trading broke on a Sunday morning. He had broken Baring's. I remember thinking that he would also have ruined a fair few bank chairmen's Sunday lunches. They would have been unable to relax into the bloody beef and the blood-red wine, because they would have been wondering if any of their young men might have been gambling the ranch. On that Sunday, I was absolutely certain on one point. Within days if not hours, the banks would have mechanisms in place to make any recurrence impossible. More fool me. "Swiss bank" used to be a synonym for reliability. UBS has almost turned it into an oxymoron. If the Hadron Collider eventually reveals that Heisenberg's uncertainty principle is not so uncertain after all, those who like a bit of piquant unpredictability to spice up their natural phenomena could console themselves with UBS's internal controls.

All that said, the bankers are not the guiltiest party. They did not invent the Euro. One can understand why George Osborne is sternly avoiding schadenfreude. If your neighbour's house catches fire, you do not warm your hands on the flames. You call the fire brigade. The rest of us need not be so responsible. The idea that Salonika could use the same currency as Stuttgart, Cork as Copenhagen, Messina as Maastricht: we need a strong word for lunacy. The callous cartoonists of the late-Hanoverian era used to enjoy depicting the unfortunates who were chained to the walls of Bedlam. Few if any of them deserved their fate. Were it now to be inflicted upon those responsible for the Euro, they would have no legitimate grounds for complaint. As Einstein is in the news, perhaps we should revisit his famous formula and apply it to Europe. E (the Euro) equals MC (madness plus craziness) squared.

It is important that the rest of us should indulge in intellectual hot pursuit, and not only because it is fun. The Euro-fanatics' evil-doing is not confined to macro-economics. The Social Chapter is nothing less than an attempt to impose broken societies throughout the EU. By discouraging employers from hiring workers, it has already contributed to the hideously high levels of youth unemployment in Southern Europe. The Eurozone is forcing countries to use a currency which undermines their productivity and prevents them from growing, while treating potential employers as criminals. If the aim had been the creation of a common European unemployment policy, it would make sense. If not, we are confronted by another group of escaped lunatics.

So how do we escape from this mess? Assuming that the Eurozone does not decide to form a political union, the Euro cannot survive in its present form. There are a number of alternatives, including a garlic Euro in Southern Europe and a wurst one in the North. The Irish become the Guinness wing of the garlic Euro. But the practical problems of unscrambling the Euro are daunting (apropos of scrambling, it might be easier to turn omelettes back into eggs).

On a macro, global scale, we have to find a way of identifying and segregating the toxic assets while re-capitalising the banks. The aim would be to protect the real world, in which people work and spend and save and invest, from the Bedlam world of bad banking and worse currencies. But that has obvious moral hazards. It would also insulate those who who made the wrong decisions from the consequences of their misdeeds. A bit of fatted calf is one thing, but the Prodigal bankers and the Eurodigal fantasists have squandered hundreds of billions. As I wrote last week, they may also have created a problem which is beyond the power of the human mind to solve. We are in deep midwinter.

7 comments for: Bruce Anderson: Don’t be fooled by the weather. This is the deep mid-winter.

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