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The chapter makes the case for framing the crisis as an elite debacle. The first section focuses on the informal pre-2007 elite story about the benefits of financial innovation, told in the period of what we call the Great Complacence when central bankers, regulators, and senior economists repeated the same reassuring but ill-founded stories about the benefits of financial innovation and the ‘Great Moderation’. The second section justifies the term debacle by presenting some political arithmetic about the form and nature of the catastrophe after 2008 and the wider consequences of the crisis and bail out. The chapter argues that we need a new and different politico-cultural approach to present-day capitalism if we are to understand the origins of the debacle in the operations of unregulated finance and the subsequent frustration of reform.

The chapter describes the historical process as well as the analytical and empirical factors that, at the end of the twentieth century, led to the dominance, in advanced economies, of a central bank model based on an independent institution devoted to price stability as its overriding objective. The central bank pre-crisis model was elegant, performing, and efficient. However, it could not easily accommodate the pursuit of a traditionally important central bank objective: financial stability. Indeed, since central banks have, in essence, just one tool, that is, the interest rate, the pursuit of a financial stability objective in addition to a price stability objective could create dilemma situations. In the two decades between the mid-1980s and the mid-2000s, the economies of advanced economies were very stable, and this period was thus identified as Great Moderation. However, subsequent experience showed that, in this period, the crisis was incubating.

This chapter examines how global economic imbalances and the accumulation of debt contributed to the financial crisis of 2008. It begins by considering the ‘Great Moderation’, a phrase coined by Ben Bernanke in 2004 to describe the ‘remarkable decline’ of inflation and output volatility in the United States and other developed economies (with the exception of Japan at the time) over the previous two decades. It then turns to a discussion of global economic imbalances that reflected forces at work over very long stretches of time, including the shift of global production towards countries with much lower labour costs, with an ever-growing share of income going to the owners of capital. It also discusses the relationship between China and the United States and the role of very low, real, long-term interest rates in the financial crash, along with the growth of debt and the underpricing of risk.

This chapter provides an overview of the macroeconomic environment since 2000. The era is broken down into three periods: 2000–2006, 2007–2010, and 2011–present. Warnings of an imminent crisis were present before 2007, but generally they were ignored by self-satisfied policymakers. Pre-crisis, inflation control was the once rising and, seemingly, preeminent monetary policy strategy. A review, both pre- and post-GFC, of a wide variety of macroeconomic and financial indicators is included, with discussion of lesser known variables such as proxies for central bank communication and balance sheet indicators. These clearly enable us to identify interventions by central banks while also highlighting areas of continuing concern. In some respects (e.g. concerns about financial stability), everything has changed post-crisis, but in other respects (e.g. monetary policy strategy) fewer changes are apparent. The chapter concludes by arguing that there are reasons to be apprehensive about the current state of monetary policy and central banking.

The Celtic Tiger’s fall occurred against the background of significant changes in prevailing global economic ideologies that emphasized financial deregulation and the arrival of the ‘Great Moderation’. These ideologies greatly influenced policymakers as to the role of monetary policy, financial regulation, and the financial architecture of the ECB. The ideologies inherent in the New Classical Macroeconomics and the Efficient Markets Hypothesis encouraged the view that people were rational and that markets could successfully self-regulate, thereby downplaying the risks to financial stability. The Maastricht Treaty charged the ECB with a single macroeconomic objective — control of inflation — leaving other important goals to politicians and/or economic forces. Supervisory responsibilities of the national central banks remained vested at the national level. The ECB had no direct role in promoting or overseeing a pan-European financial regulatory system. The problem of the sovereignization of a country’s banking debts in order to prevent contagion and the systemic failure of the financial system was not considered.

Chapter 11 assesses the growth prospects of the world economy. The history of global economic doomsaying is traced briefly, a frequently reasonable position that has not done well with the facts for the past hundred years. Capitalism has been adept at escaping from the pit and pendulum. A set of global imbalances is then reviewed that are seen as posing a severe threat to global economic stability and certainly to the prospects for sustainable and equitable growth. The Great Recession following the Crash of 2007–8 might be “different this time.” Historical and contemporary fears of “secular stagnation” are discussed but the speculative nature of stagnationist assessments is acknowledged.