Economics, 3rd Edition

782

O

ne of the things that makes economics fascinating is the speed with which things can change. In 

2005 few people were predicting the calamitous events which would take place over the next three 

years. Some commentators had warned that the rise in house prices both in the UK and the US would 

at some point have to suffer a correction but arguments differed about the relative size of that  correction 

and the effects on the economy as a consequence. In a speech in 2004 (http://www.federalreserve 

.gov/newsevents/speech/bernanke20070517a.htm) Ben Bernanke, an acknowledged scholar of the Great 

Depression, said: ‘One of the most striking features of the economic landscape over the past 20 years 

or so has been a substantial decline in macroeconomic volatility.’ He coined this ‘The Great Moderation’. 

Bernanke put down the reduction in volatility to structural change, improved macroeconomic policies, in 

particular the focus on achieving stable and low inflation rates, and good luck!

The government in the UK was typical of many in the West who were confident of continued 

 macroeconomic stability. In what was his last Budget speech on 21 March 2007, the Chancellor and 

soon-to-be Prime Minister, Gordon Brown, said:

In this, my eleventh Budget, my report to the country is of rising employment and rising investment; 

continuing low inflation, and low interest and mortgage rates; and this is a Budget … built on the 

foundation of the longest period of economic stability and sustained growth in our country's history … 

Our forecast and the consensus of independent forecasts agree that looking ahead to 2008 and 2009 

inflation will also be on target… And by holding firm to our commitment to maintain discipline in public 

sector pay, we will not only secure our 2 per cent inflation target but create the conditions for maintain-

ing the low interest and mortgage rates that since 1997 have been half the 11 per cent average of the 

previous 20 years. And we will never return to the old boom and bust.

So Mr Deputy Speaker, with consumption forecast to rise in each of the next two years by 2¼ to 

22¾ per cent, investment and exports by more than 3 per cent, we expect that next year, in 2008, 

alongside North America, our growth will again be the highest in the G7 – between 2

1

⁄

2

 and 3 per cent – 

with the same rate of growth also in 2009 – under this Government, with stability in this as in every 

other Budget the foundation, sustained growth year on year.

Within a few months of that speech, the global economy experienced a crisis that has led to one of 

the deepest and longest-lasting periods of economic downturn and weak growth in history. Given the 

confidence of the UK Chancellor in early 2007, one might ask questions about whether there were signs 

of the problems to come and why did such a change in fortunes for so many countries around the world 

happen so quickly?