I’ve been trying to follow a nagging thought through to its conclusion. We know to expect that flooding risk will extend to an ever increasing proportion of the UK housing stock. But in the context of financialisation, mortgages underpin bank lending, and by extension the wider financial system. And a majority of households depend on their house as a savings vehicle. So what happens when physical climate impacts destroy the real assets that households and the financial system are relying upon?
This is part 5. Trapped in a Debt Economy.
The events leading up to the 2008 Global Financial Crisis exposed the fragile balancing act of using finance-led growth to manage a rapidly growing private debt stock with stagnating income flows.
In response to the crisis central banks engaged in Quantitative Easing (QE) at an unprecedented scale – around 20% of GDP in bond purchases – partly because interest rates were too low to be used effectively as a policy lever. As Mervyn King, former Bank of England Governor, says, “The very sector that had espoused the merits of market discipline was allowed to carry on only by dint of taxpayer money”.
The need for such a response did not lead to the reckoning that should have followed. Yes, the repackaging of subprime mortgages was a cause of the crisis, but this was only the immediate cause. John Kay uses the analogy of tailgating:
“Many people and organisations find it difficult to manage situations with low probabilities of large loss. I drive frequently on French autoroutes, where tailgating is a common driving strategy. Drivers, travelling at high speed, position themselves on your rear bumper, flashing their lights to demand you give way… Tailgating offers repeated modest gains, punctuated by infrequent disasters. The tailgater persuades himself, and perhaps others, that his success is the result of his skilful driving. Crashes occur… But an element of cognitive dissonance creeps into accounts of the crash. The accident victim blames someone else for his misfortune: usually with some justification. The accidents that result from tailgating are triggered by some other immediate cause – an obstruction on the road, a mistake by another driver. The same cognitive dissonance enabled many bankers to persuade themselves – and some others – that the global financial crisis was not caused by their imprudent behaviour.” (p102, Other People’s Money)
Subprime mortgages may have taken the blame in 2008, but the real lesson was the imprudence of finance-led growth. Lessons have not been learned: in the time since, interest rates have been held at very low levels, and asset prices have continued to rise. Debt remains an essential feature of the financial sector.
Why has this happened? After the 2008 crisis, policymakers faced a dilemma: the financial system had proven unsustainable, but the economy had become so dependent on debt-driven growth that they feared the consequences of allowing a complete reset. Their response was to maintain exceptionally low interest rates, essentially trying to prevent the debt bubble from fully deflating. This policy choice was presented as temporary crisis management, but it has become a seemingly permanent feature of the financial landscape. The reasoning is straightforward but troubling: with such high levels of existing debt in the system, any significant rise in interest rates would trigger widespread defaults and another financial crisis.
This policy of low interest rates has had predictable effects on asset markets. When the returns on traditional savings vehicles like bonds and bank deposits are minimal, investors search for higher yields elsewhere. This drives money into real estate and stock markets, pushing asset prices ever higher. These rising asset prices then serve as collateral for more borrowing, creating a new cycle of debt-fuelled asset inflation. The process appears to create wealth, but it’s largely illusory – asset prices are high primarily because money is cheap, not because of fundamental economic value creation.
Debt remains central to the financial sector because the entire system has been built around it – not just as a tool for financing investment, but as the primary engine of economic growth. Banks create money through lending, financial institutions generate profits through securitization and trading of debt instruments, and both consumers and businesses rely on continuous access to credit to maintain their spending and investment patterns. Moreover, with wages remaining stagnant for many workers, debt has become the primary mechanism for maintaining living standards. This represents a profound failure to learn from 2008: rather than addressing the fundamental instability of finance-led growth, policymakers have chosen to extend and pretend, setting the stage for potentially even larger problems in the future.
thejoyofrachel 
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