To see what I mean consider the following example. In the old world before the arrival of “hyper-finance”, if a family wanted a £100,000 mortgage, they would simply go to the Halifax and borrow £100,000. Now consider what happens in the new financial world. The family would borrow £100,000 from Northern Rock, which would sell £100,000 of bonds to hedge funds, which buy these with £100,000 borrowed from Bear Stearns, their prime broker, which would raise this money by selling £100,000 of commercial paper to Citibank, which would then borrow £100,000 through the inter-bank market from Halifax.
So now the original £100,000 mortgage transaction has created £500,000 of new debts.
In principle, this entire chain of transactions could be squeezed, like a concertina, back to the original £100,000 transaction between the householder and Halifax, reducing the total amount of credit in the banking system by 80 per cent. This huge reduction in credit would do no great harm either to the homeowner or the ultimate lender, but eliminating all those intermediate transactions would devastate jobs and profits within the banks.
The upshot is that the main people suffering pay cuts and job losses in the present crisis are bankers, rather than industrial workers as in previous slowdowns.
The FT carries a story that foreign investment in London is booming, creating thousands of new jobs, though few of them are in the financial sectors. The FT also reports on the phenomenal growth of a global middle class:
It always seems the real answers are counter-intuitive, much to the astonishment of Guardian readers. Welfare causes poverty. Globalisation creates wealth amongst the world's poorest. You can't trust bankers with money.
It is also evident that poverty is dropping dramatically around the world. According to our calculations, the number of people living on incomes of less than $1,000 dollars a year ($2.75 a day) has already dropped significantly from about 50 per cent of the world’s population in the 1970s to 17 per cent by 2000. According to our numbers, it could be as low as 6 per cent by 2015. On the more familiar World Bank definition of one dollar a day, the same dramatic shift is evident. Probably no more than 5 per cent of the world’s population now suffers this indignity. Of course, this is too much, but as long as the forces of globalisation continue we expect it to drop further.
It is important for everyone in the so-called developed world to be constantly aware that these powerful shifts in global wealth are good not only for the developing world, but for them too. If you take a look at a chart of recent US export growth, you may well think you are looking at the wrong data series. But you are not. US exports are indeed growing at close to 20 per cent and it is this that is stopping the housing and credit crunch from driving the US into a deep recession. Aspects of the same phenomenon can be seen in Japan, Germany and even the UK.
The new middle-class explosion is going to remain the market opportunity for us all, or certainly for those of us who are prepared to respond to the new realities.
And next time you get an irritating call from a Mumbai call centre, remember the young graduate on the other end will de-stress at the end of the day in their apartment with a bottle of Johnny Walker on their Laura Ashley sofa watching a Richard Curtis RomCom on dvd. When the last banker has hanged himself with the intestines of the last hedge fund manager, the world's new middle classes will still have a healthy appetite for the products of the world's most middle class nation - ours.