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EVERYONE I know of a certain age is trying to remember how it was the last time, in 1991. The consensus appears to be that it wasn't as bad as this.
In 2008, as we enter recession, we've seen banks nationalised or allowed to go under completely, the FTSE 100 plummet and house prices slip. We've had the Bank of England governor talking in apocalyptic terms of only just avoiding a total financial meltdown.
Nerves are shot to pieces. Everyone is in a state of shock and the recession has not even officially started (that comes in January, when government figures should confirm a second consecutive quarter of falling national income).
Put like that, it's hardly surprising people feel the way they do. And yet, in truth, we are in better shape than we were last time around. It's hard to imagine now, after the spending craze we've just been through, but in the late 1980s, the boom was less extended but sharper.
Consumer spending was increasing at eight per cent a year. Inflation was also out of control, reaching more than eight per cent (it's now five per cent and falling). To try to apply a brake, interest rates doubled, in only 18 months, to 15 per cent (they're now 4.5 per cent).
Then we found ourselves stuck in the Exchange Rate Mechanism. The pound stayed high, crippling manufacturers. Interest rates, too, did not budge. And in 1990, when GDP registered its first quarterly fall, the drop was 1.2 per cent. On Friday, the news that we'd been waiting for was a slippage of less than half that 0.5 per cent.
This Government seems squared up to the task in a way others were not in the past. Gordon Brown has turned over the Whitehall machine to fighting the recession. He say he's going to spend his way out of the crisis, raising borrowing to pay for it. Interest rates will be brought down. On the currency markets, the pound is falling, providing a boost to UK exports.
It's stirring stuff, the like of which, frankly, we never saw in the old boom and bust cycles, when a downturn was pretty much regarded as the price to be paid for the enjoyment of the good times.
This Prime Minister, having said those days of peaks and troughs were over, is now on a personal mission to make the dip as short and as shallow as possible. For that, there is reason to be grateful, to suppose that we're not taking this lying down, even if it is a policy that is fraught with risk: it comes without any guarantee of success.
Still, much is different this time around. The FTSE 100's plunge is not so bad on closer inspection. Yes, it makes for gripping headlines but the leading share index these days is in no way a barometer of our economic health. It's made up of companies that do little business here, miners and commodities suppliers. Gone is the time when it was comprised of major UK manufacturers.
Of course, the falling FTSE 100 wrecks our pensions but unless you're about to retire, that isn't an immediate concern. It has not affected day-to-day living. Neither, as well, has the slump in property values negative equity is not a problem for most people so long as they're staying put.
House prices have come down in the past 12 months as much as they did in the entire last recession. But unlike then, so far we've not seen wholesale repossessions. The reason is that prices rose so much in the period before they fell and were unjustifiably high and rates today are that much lower.
Neither have we seen many corporate wipe-outs. It's early days and there are those who predict they will come. Equally, there are those who say that having enjoyed a golden few years, many firms are well-placed to weather the storm.
Lastly, unemployment is rising but it seems inconceivable the level could reach the three million figure of the last recession. There is an argument that says it could, if those on incapacity benefit were included in which case, the true unemployment has anyway been higher all along.
So why the deep gloom? The difference between now and 1991 is twofold. We didn't have the banking collapses, and we weren't so tied in to the global economy.
There was no credit crunch, sparked by bankers' excessive behaviour, leading up to the last recession. We've seen the banks run up losses of $2.8 trillion. Now there's talk of insurance companies and hedge funds being next.
At the moment, City confidence is non-existent. The demise of Lehman Brothers especially knocked the stuffing out of the Square Mile. Northern Rock they could take. But not the mighty Lehman. Its disappearance, followed by the sight of bankers going cap in hand to governments to avoid the same fate, has struck a critical blow.
Until banks start believing in each other again and the rate at which they lend to one another, Libor, is reduced, the mood will not lift. The lack of liquidity is the one great unknown hanging over the economy, that makes this recession unlike any other in recent times. It's changed everything.
The signs are encouraging Libor is dipping but it needs to carry on falling. Only when the banks begin trusting themselves will they extend that faith to businesses and the individual consumer.
If Lehman was the earthquake, tremors still abound. Each one sets the process back. So we had Iceland; now we've got fears over the emerging European markets of Hungary, Romania, Ukraine, Bulgaria, Turkey and the Baltic states. At the weekend, companies in China and India took a hammering as evidence was produced of their economies tumbling.
Each shock brings news of further horrors, of vulnerable, exposed positions and losses. It will take time for the ripples to work their way through. Before they do, there is little prospect of the anxiety lifting and the credit squeeze relaxing.
The result is that we've been deluged with negativity. For over a year since the advent of the credit crunch coupled with a spiralling oil price we've been subjected to uncertainty. We're war- weary. But once Libor falls and liquidity starts to return to the system, we will be better off than we were the last time. It may not seem like it now but we will be honest.
Reader views (4)
Only time will tell if this optimism will prove correct, but credit should be given to the current Government, despite all of their many faults, for keeping an all in this together spirit going for the country. I can recall the deplorable, condescending hang-dog attitude of the two conservative chancellors in the recessions of the 1980s and 1990s who let the public hang in the interest of the City. That was the prevailing view then of what a mature, economically sound chancellor had to do. For that, they took their party into the wilderness for what has proved to be a very long time indeed. I just wonder whether they are tempted to go back to that sort of attitude.
- Blackstone Coke, London, 31/10/2008 10:42
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During final years of the boom, nearly every economist and analyst justified why growth would continue unabated. They didn't see the writing on the wall. And now, these same people are telling us how bad it's going to be? Let's face it: they have no idea. And are probably wrong. We can troop out a line of reasons why it will be bad. But... only the psychology of the masses will determine how bad it will be. We are now a very entrepreunerial country. And we are much, much wiser as a people, than the last recession.
I for one have faith in the people. And I certainly won't place any value on what the "experts" tell us. They never get it right. Even the governor of the bank of England could not see that inflation was not the problem. And like the arrogant fool he is, kept them high when they should have been slashed. So forget the experts. Their opinions are nothing but predictions. And last time I checked, those who predict the future most always get it wrong!
- James, London, 30/10/2008 20:14
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reply to George, London
Oh dear, George, we are living in denial aren't we? Or is it cloud cuckoo land?!
This recession will be like nothing we've seen before due to the fact that we are the most indebted nation in the developed world, both privately and publicly (This is in contradiction to what Brown says, but he is lying; ask any economist).
In 1991, there weren't as many people with mortgages and the rise in house prices wasn't as great, therefore the fall wasn't as severe.
You also say that currently we are all much richer than 1991.....you really do believe the govt. propaganda don't you? Most of this wealth is in debt, so in reality (when you take into account negative equity etc) we are not much richer; we are just more in debt.
House prices will NOT rise in the next few years as the propagandists and optimists tell us......the days of boom and bust are supposedly over! Despite this the days of runaway house prices and cheap money are over. Perhaps 10 to 20 years may be a reasonable time for recovery, but of course the govt, spin machine won't tell you this. And if Brown borrows another £100 billion....well, there's no hope! The guy's an idiot and is only interested in saving his own reputation and not that of the country.
- David, London, 28/10/2008 12:13
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A well written article, thank you.
I was 'there' in 1991, and made the fortuitous decision to buy the biggest house I could afford with my meagre salary. I never looked back.
At the time, I was young, and could afford to take risks. But I do remember the last recession being long and drawn out, and it did affect a lot of things. Currently, we're all much richer, and I don't really see retail spending collapsing like it did last time.
Sadly, the banks are going to profit at the expense of those who bought houses in the last couple of years by keeping them on high variable rate mortgages for as long as possible, and it is these people who will pay the price (not necessarily their fault) but I think it will be fairly short lived. But the headline writers are doing what they love to do which is to exaggerate the problems and spook the public.
- George, London, 28/10/2008 10:22
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