Asad Alex Yawar is a

Asad Alex Yawar is a highly-regarded London-based lawyer and writer
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London-based lawyer and writer who I first met in the mid-1990s when we were both journalists on a socio-cultural news magazine. One of the most acute commentators I have had the honour of crossing paths with, his writing has often been antithetical to the ‘received wisdom’ of the time but proven to be prescient time and time again.

While investors, economists, politicians and journalists bestowed their expertise on how the supposed Anglo-Saxon boom would go on forever, Yawar has often commented over the last decade on how the fiscal and monetary policies and binge spending culture in countries like the UK and USA was going to lead to a "spectacular crash-landing" and "the biggest bust since that of Lolo Ferrari". In the following piece, Yawar analyses the impact of the credit crunch on London and the imprudence that was behind the city’s current economic woes.

As a result of trying a different, purportedly more efficient route – almost never the wisest idea in London, a city of a thousand transportation delays and alterations – I am running late for a hairdressing appointment. As I haphazardly dash through the streets around Brick Lane, an über-funky neighbourhood to the east of London’s financial quarter, my mind races with a thousand excuses to explain away my poor timing.

Yet as I step through the door of the salon, I am astonished to see that it is all but empty. The hairdresser, with whom I have booked the appointment, an amiable Catalan, is sitting casually on a small sofa, giving the aura of a man with all the time in the world. He does not let me apologise. At the end of the session an hour later, the salon is still almost completely empty, and the receptionist – for the first time in the three years that I have been going here – asks me if I want to book my next appointment right there and then. I politely decline.

As I leave the salon and head back onto Brick Lane, I notice that two retail units that were flourishing as recently as the timing of my last haircut at the beginning of August are no longer in business. One of them was a cafe; as I peer into the windows of the other, the black paint of its facade peeling off in such a way as to obscure its name, I cannot even make out what the previous purpose of the building was. Proceeding towards Bethnal Green, I see empty shisha bars, shuttered shops, and a sudden flowering of letting signs. Commercial activity is scarce.

This is the reality of London in the era of the credit crunch. While macroeconomic events – the failure of major banks, the meltdown of the housing market, and the lurching of a broken financial system towards the point of no return – have, perhaps understandably, dominated headlines in recent months, the interface of these phenomena with events at the microeconomic level, and the consequences of this interaction, has generally not been raised in anything other than prognostic, abstract terms.

But the consequences have already started to arrive in London: failing businesses, stagnant high streets and house prices in freefall. Evidence of these can be seen virtually everywhere across the city, not just in historically deprived east London. In Fulham, a trendy part of west London which has been partially gentrified in the last 25 years, the North End Road, which connects the neighbourhood to wealthy Kensington, is eerily awash with signs indicating that commercial and residential space is up for letting and sale; stores are discounting stock drastically, but there are very few takers [see pictures below].

The streets between Holborn and Tottenham Court Road, including the normally bustling New Oxford Street, contain a number of businesses which have ceased trading: a newsagent, an electronics store and two cafes are the most visible of these. The interest in taking up the leases on these premises appears to be quite minimal, despite their location in the very centre of the city. The volume of human traffic in this area, at times overwhelming during the past few years, has dwindled.

Picking up almost any London property publication provides yet further illustration of a metropolis on a steep economic slide. While GBP £250,000.00 / US $440,000 would have bought you a house only in the most dangerous and least desirable neighbourhoods this time last year, it will now cover the cost of a decent-sized semi-detached property in much of suburbia. Exactly how messily the housing market bubble will burst remains to be seen.

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Most if not all the signs are, therefore, that London – and the wider UK economy – are heading towards imminent and painful recession, both at the macroeconomic and microeconomic levels. However, this raises a number of uncomfortable questions which, again, have yet to be addressed by virtually all commentators on this issue.

1. Was the economic boom of the last decade or so effectively a fiction?

The economy of the UK expanded for sixty-three consecutive quarters from the second quarter of 1992 to the second quarter of 2008. Ostensibly, this was a stunning achievement for any economy, but especially so for an economically-developed country. The trappings of mass affluence – gargantuan, ultra-slim televisions, exotic holidays, country retreats, brand new convertibles – could barely be escaped as people trumped each other with outlandish purchases and brazen luxuriating. Aside from a brief blip around 11 September, 2001, people partied like it was 1999 for the best part of a decade.

However, it has been readily apparent for a long time that this boom was underpinned by credit. According to auditing behemoth PricewaterhouseCoopers UK, between 1994 and 2002, the number of active credit card balances surged from approximately 13 million to nearly 30 million; the outstanding balances on credit cards rose by a stunning 18 percent per annum from the first quarter of 1995 to the first quarter of 2004, from £12/$21 billion to £54/$95.5 billion. Outstanding balances on personal loans increased by 34 percent in the three years to April 2004; the amount due to banks on overdrafts also grew by 30 percent over the same period.

Factor in mortgage debt, which spiralled out of control as bankers, many of whom were on lucrative commissions paid per mortgage product "sold", liberally sprayed mortgages on a willing population, and we have arrived at a situation where the total of mortgage, loan and credit card debt stands at £1.44/$2.54 trillion, greater than the total gross domestic product of the UK, which stood at £1.41/$2.5 trillion in August 2008.

Once economic expansion is contingent on unsustainable borrowing to such an extraordinary degree, does it really have any intrinsic value? Or does it instead represent an extension of magical realism from the worlds of art and literature into economics?

2. Can the average job finance people’s basic needs?

Cosseted by credit and mesmerised by celebrity, many UK consumers have spent much of the past ten years attempting to live like David Beckham. Flooding their homes with state of the art electronic equipment, sporting Prada label mobile telephones, and jaunting around the world as if a major soft drinks manufacturer was picking up the tab, they have not had to give too much thought to the question of when it would all eventually be paid for.

Now, however, the days of easy, relatively cheap credit fast are becoming a distant memory. Luxuries are slipping off the agenda, and are being replaced by the more pressing matter of the quite extraordinary recent rises in the cost of many staples, such as energy. In 2005, the average annual energy bill was £676/$1,195, which was at that time thought by most to be excessive, but the equivalent figure for 2009 is estimated to be £1,406/$2,486. The National Housing Federation, which represents 1,300 independent, not-for-profit housing associations in England, has projected that by the end of 2009, around 2.6 million people will be in debt to gas or electricity firms, giving them a stark choice between "heating or eating".

With water companies looking to follow other utility companies in hiking up bills above inflation from 2010, whether the average job can finance people’s basic needs is a question that is likely to be answered increasingly in the negative over the coming years. If this is the case, then a fundamental rethink about the structure of the UK economy, particularly over the private provision of essential services, would appear to be necessary.

 3. Can we ever make the transition back to a savings-based economy?

One of the reasons that the UK, along with the US, is so vulnerable to contractions in the credit supply is that most people no longer save a substantial slice of their net income. They therefore have to finance much of their expenditure via money that is ultimately not their own. While in 1995, the UK household savings rate stood at 10 percent of income, by 2003 that had fallen to a measly 5.7 percent. While the situation is not as critical as in the US – where the household savings rate is currently negative – with US households spending more than their earnings on average – it is still a figure that means the UK economy is contingent on the profusion of large amounts of credit.

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By comparison, the savings rate in China is an astonishing 50 percent; in Japan and South Korea it varies between approximately 25 percent and 35 percent; and in India, it is around 22 percent and expected to rise. Clearly, these nations are not going to be anything like as dependent on credit to fund expenditure on goods and services; moreover, these savings can be utilised towards the capital investment so essential for sustainable, long-term economic growth.

In the UK, a cursory look at any weekend supplement will confirm that we have comprehensively made consumerism into our religion of choice. This is an ideology which excludes almost everything except instant gratification. Yet the future economic, social and spiritual health of the country demands that UK citizens learn to live within their means. Is the nation up to this challenge?

4. Is the UK capable of approaching the economy with intelligence?

From the late 1990s until the autumn of 2007, it was nothing less than a heresy in most circles to suggest that all might not be optimal with an economy where debt was outstripping income, where financial services counted for an absurdly high fraction of gross domestic product, and where people were paying for food with credit cards. Economists queued up to announce the superiority and sound nature of the British economy in comparison with almost any other country, echoing the then Chancellor of the Exchequer Gordon Brown’s words that there would be "no return to boom and bust"; rather, that the alchemic formula of low interest rates and low inflation would ensure a prosperity of the like that our forbears could only dream of.

Now, of course, many of these analysts are positioning themselves for recession. To take one example, Roger Bootle, a former lecturer in economics at Oxford University who is presently the Managing Director of macroeconomic research consultancy Capital Economics, stated in July 2008 that house prices were scheduled to drop by around 35 percent over the next three years. Yet in August 2000, the same economist went so far as to claim that the boom and bust cycle that has historically permeated the UK housing market was "a thing of the past", stating that rapid rises and falls in housing prices were, in effect, of historical interest only. Given that this was the opinion of one of the UK’s more prescient and imaginative economic commentators, it is not hard to imagine the mindless hyperbole that lesser ‘experts’ were espousing.

It will be interesting to see whether in the future British politicians, economists and other luminaries can approach the economy in a sober, realistic and intelligent manner. If they are not, then the consequences for the UK economy as a whole could be even worse than those it is currently facing.

London’s immersion in the credit crunch is becoming more evident with each passing week. But this phenomenon has thrown up at least as many questions as answers. It is the responses to these questions which will determine whether the city, and the UK more generally, can formulate and implement an equitable economic regime that is predicated on something more sustainable than recklessly spending money that never belonged to us in the first place.

First published in OhmyNews. Click here for more of Asad Alex Yawar’s articles.

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