Episode 1 The Party's Over: How the West Went Bust

The world today faces a fundamental shift in the balance of power

from west to east.

The global economy is on the edge of a precipice.

'Mayhem on the markets.

'Fears of contagion in the eurozone sends stocks tumbling.'

'The Dow fell as much as 705 points,

'as traders watched in disbelief.'

'Anxiety over the Greek debt crisis spooked markets

'in Europe and Asia again today.'

Since the crash of 2008

Western banks, and now governments, have lurched

from catastrophe to crisis.

This is the most serious financial crisis we have seen,

at least since the 1930s, if not ever.

We still haven't had the full consequences of this crisis.

In this series I investigate how globalisation went badly wrong,

and what we can do to mend our economy.

Unless we fix our tax system, financial system,

Social Security system,

it's game over.

Years of borrowing by banks, households, companies

and governments have left many of us in the West hopelessly in debt.

What we've been doing is funding an unsustainable lifestyle.

We used to talk about debt being a developing country problem.

It's now a developed country problem.

Now countries like China are in the driving seat.

PRESIDENT OBAMA: We are facing an economic crisis that has left millions of our neighbours jobless.

-DAVID CAMERON:

-Some people say that to succeed in this world,

we need to be more like China.

This is the story of how we kidded ourselves that we had found

the secret of ever rising prosperity.

In truth, our long boom was founded on a dangerous lie.

The financial sector was saying house prices are never going to fall across the board,

"Don't even worry about it, it hasn't happened since the Great Depression."

-Well, it did happen.

-And that's when the party came to an end.

Shanghai, the fastest-growing city in the world,

home to 23 million people.

It's China's capital of commerce,

and the city has helped China accumulate reserves in excess of 3 trillion.

So, if you want to find out why we seem to be losing

the global economic battle, we first need to meet the winners.

TRANSLATION: My parents wanted me to do an easy job as a sales girl,

working in a retail store.

But I felt I would be a salesgirl for my whole life

if I took that job.

So I chose to be a worker at a factory.

Though the job was hard, it would give me a better future.

'Rena Li works for NVC, a lighting company based in Shanghai.

'She's worked hard to reach her position as purchasing manager.'

TRANSLATION: My dream was to go to university.

It took me two and a half years working in a factory to get there.

It was a tough time for me.

I had to work all day, and even nights sometimes,

and I had to study in my time off.

But finally, I managed to enrol at university.

She began work at NVC in 2007.

In less than 13 years, it's come from nowhere

to be the world's second largest lighting company.

It's part of the new global order,

where China and the other developing economies

make much of what the richer countries, like ours, need.

At its heart, there's a simple formula.

TRANSLATION: In terms of my salary,

I'm paid £15,000 to £20,000 a year.

Rena is one of China's rapidly growing middle classes.

She's paid more than her parents and grandparents ever thought possible.

But it's far less than what she would be paid in the UK.

The differences are even starker on the factory floor.

-TRANSLATION:

-I earn about £250 a month.

That's if I work about 30 to 40 hours overtime.

-TRANSLATION:

-As a woman, I would not be able to earn more than £200 a month

if I worked in the countryside - it's just not possible.

This job is good experience.

One day, I plan to go back to my hometown

and set up a small business. I won't do this job all my life.

Here it is - the whirring and clicking,

assembling and manufacturing manifestation of globalisation,

which lifted hundreds of millions of people in Asia and here in China

away from the breadline through the creation of jobs. In the rich West,

we got the things that we wanted and needed much, much cheaper.

Everybody seemed to be a winner,

except that the economic system which developed

contained a lethal flaw.

The flaw was that we bought vast quantities of consumer goods

from countries like China with borrowed money.

We haven't been working hard or smart enough

against the challenge from China and the other developing economies.

Households, you and I, borrowed too much.

Banks that lent to us also became too indebted.

Now we're concerned that our governments too have borrowed

more than they - we - can afford.

We're struggling to pay the money back

and are beginning to recognise - painfully -

that we face years of low growth,

or what we're beginning to think of as a new age of austerity.

So, how did we get into this mess?

One clue may be found in Longbridge in Birmingham.

Rena's company, NVC, exports all over the world.

And it has a branch in what was once Britain's industrial heartland.

In the UK, at the moment,

we are largely an importing and distribution operation.

We have a large warehouse.

Product comes straight in from the Far East

and, for the most part, it goes straight out again.

This is the higher rated LED version...

'I'm the marketing and product manager for NVC Lighting. Which means that I'm responsible

'for marketing activities here in the UK, plus a bit overseas as well.'

And I'm also responsible for what's in our product range,

what are the next products we develop.

'I'm paid between mid-40s to mid-50s thousand pounds a year.

'It's not a lavish salary, but it's probably the going rate

'for somebody with my responsibilities in the manufacturing sector.'

James Hunter Johnston is at the same mid-management level in the company

as Rena is in Shanghai.

But he earns three times as much as she does.

The pay differences are sharp on the shop floor as well,

which is where Trevor Foster works.

I'm a production operative at NVC Lighting.

Basically, we convert standard lighting fittings

into emergency fittings.

I normally work a 42-hour week.

My basic without any overtime is...

about £1,000 net, that's after tax and everything.

But, with the overtime, you can earn £1,200,

£1,300 if you get a good month.

Trevor's salary is more than FOUR times

what the people who actually make the lights are paid.

Kind of lucky that it's a Chinese company, cos at the moment

China seems to be the place to be, they're doing quite well financially.

So, you know, we've got plenty of work where I am,

so I can't complain.

For the moment, NVC's Birmingham plant is little more than a warehouse to distribute goods

that are made much more cheaply in China, where the economy is booming.

It's a pattern reflected across the world.

Developing countries making things and getting richer,

many Western countries stagnating. How did it happen?

We can blame greedy bankers, high-spending governments,

our own profligacy. But there are also deeper causes,

and to find the answer, we need to delve back into China's past.

In 1978, Deng Xiaoping took over the leadership of a country

devastated by a disastrous economic experiment.

China was JUST beginning to emerge from

probably the lowest point in its development

for several hundred years, possibly for even a thousand years.

That was the inheritance that Deng Xiaoping took on when he took power,

and that was really the assignment that he had handed to him -

how to dig China out of this deep trench of developmental malaise.

More than 30 million Chinese had starved to death in the 1960s,

and millions more were left to wander the countryside destitute.

For older Chinese people, that misery feels like yesterday.

Thank you very much. Delicious meal you've cooked here.

Memories of hunger are acute for Rena's parents.

TRANSLATION: Life in the countryside was very tough.

We didn't have enough to eat.

Family life has changed a lot now.

Almost every family has a telephone, almost everyone has a mobile.

-TRANSLATION:

-And cars.

TRANSLATION: We could never have dreamed about these things before.

-Gan bei.

-"Gan bei" means "bottom up".

-Bottoms up. Gan bei.

Deng transformed a country and, eventually, the world

by progressively introducing elements of capitalism

into communist China.

'He got criticised from many quarters

'and Deng in his typically pithy, fiery Sichuanese way

'replied with the immortal phrase,'

"It doesn't matter if the cat is black or white,

"as long as it catches mice."

Which, although it was never explicitly stated

was understood by everyone to mean, "It doesn't matter if China

"is capitalist or communist as long as it gets richer and stronger."

At the same time as Deng was setting China on its course to become

the world's second biggest economy, and perhaps its most powerful,

Britain was beginning to go the other way.

'Rail fares are going up for the third time in 12...'

'The pound plummeted to its lowest level...'

'British Leyland shares have been suspended on the Stock Exchange...'

'..generally unemployment is suddenly a lot worse.'

The UK's traditional industries had become inefficient,

often nationalised, and torn apart by strikes.

In 1979, a leader came to power who, like Deng,

challenged and destroyed powerful vested interests.

Very excited. Very aware of the responsibilities.

'In the most basic terms,

'Thatcher's vision was to let the market free.'

She believed that the state had become far too dominant

and that we should take the shackles off industry,

take the shackles off finance, cut taxes, deregulate

and let private business, the private sector,

drive the economy forward.

The best way to think about Mrs Thatcher is she was a classic Conservative.

Classic Tory constituencies were looked after by her

and classic Tory enemies were taken on.

Nowhere was economic change felt more keenly than in Longbridge,

home to the mass market car-maker British Leyland.

On a vast, sprawling industrial site,

by the '70s, this motoring giant was in seemingly perpetual crisis.

We are invincible! CHEERING

The Chinese company NVC's UK Marketing Manager,

James Hunter Johnson, started work in 1979,

the year that Mrs Thatcher came to power.

Industrial disputes were almost a monthly activity.

At least every year, there'd be some sort of industrial disruption

around about the time when wage rates were being renegotiated.

We actually had a lock-out.

So, the workforce actually occupied the factory,

the management was locked out for at least two or three weeks

and production, of course, just stopped completely while that was going on.

It's been an extremely bumpy career to have

over these last 30 years in manufacturing industry.

I've almost given up counting the number of times I have changed jobs,

but it must be 10 or 15 times now.

NVC's premises in the UK reflect the changing of the guard.

Its warehouse is perched on a hill overlooking the desolate former home

of the motor manufacturer, where Trevor Foster once worked.

I've done numerous jobs over the years,

mostly in the car industry.

My last job before this one, I ended up at Continental.

We made petrol pumps for a lot of the big car companies -

Landrover, Jaguar, Volvo, etc.

Unfortunately, they had to ship the business off to the Czech Republic

cos it was proving to be too expensive to produce parts in this country.

So it all got shipped off to the Czech Republic

and we all got made redundant.

In Britain AND in the US,

manufacturing employment slumped in the 1980s.

Under Margaret Thatcher and under US President Ronald Reagan,

a different kind of global economics was taking root

which would eventually lead to the great unravelling

we're now experiencing.

The fundamental problem in both the United States and the UK

was that beginning with Thatcher and Reagan there was this ideology

that markets were efficient and self-regulating.

-How ARE you?

-I'm fine. How are you?

'They thought that the private sector could do no wrong

'and that we didn't need to have regulation

'and we could cut tax rates'

and the economy would produce a lot more revenue.

A lot of this was just hogwash and ideology.

In 1986, Margaret Thatcher's love of free markets

unleashed a financial revolution called Big Bang.

It spurred the creation of the modern banking system

which in 2007-08 came close to bankrupting itself and us.

25 years on from Big Bang, there's still some nostalgia

for the regimented order of the London Stock Exchange's trading floor -

gone, along with tight restrictions on what firms could do.

Although it was very sad that you had this amazing club

for the last God knows how many years coming to an end,

it was going to throw up a great, new opportunity

which actually turned out to be very successful.

Big Bang allowed big international banks to buy up stockbroking firms.

High street retail banking was combined with more risky investment banking,

and vast financial conglomerates were created.

'Immense money was flowing around at the time.

'Everything became magnified by a huge amount'

because of the amount of money that came rolling in.

And...salaries were going up.

Certain people were in great, great demand and paid huge salaries.

Basically, everyone was earning more, whatever you were doing.

It was sort of Champagne times

and things were very, very exciting across the board.

The culture of British finance changed in a fundamental way.

Banking should be boring.

I was in banking 25 years ago -

it was a pretty boring business.

And then, of course, we had things like Big Bang in the UK,

where basically banking combined with trading activities,

with merchant banking, hedge funds and so on.

And so now your bank is just as likely to be spending

quite a lot of its time, and maybe even more of its money,

on Delta One trading.

If you can define what that is, you're doing better than

chief executives of a number of the banks.

With the arrival of impenetrable complex financial concepts,

such as Delta One trading,

London became the world's leading international financial centre.

Totally took away the character of the City.

All of a sudden, we're all sitting behind television screens

and talking on telephones, and very soon, one doesn't know

who one's talking to at the end of that telephone.

I'm sure it has been very, very good for the City, yeah.

I mean, it's been marvellous for the City.

The numbers that are around now.

The trade that takes place on a daily basis is absolutely colossal.

The rise of financial services in the 1980s and '90s,

as manufacturing shrank seemed to be the answer

for a country struggling to compete in the world.

But it was to create an economy that now seems unbalanced

and unable to grow.

While Britain was embarking on its financial revolution,

in America, the emperor of all free marketeers

was ascending his throne to become the world's most powerful central banker.

Alan Greenspan was appointed by Ronald Reagan

to be Chairman of the US Federal Reserve.

'Greenspan was somebody who believed very passionately

'in the primacy and efficacy'

and morality of free markets.

This wasn't just a technician, a man who understood central banking.

This was a man with an ideological commitment

and that ideological commitment had consequences.

One consequence of the triumph of the free market was

an astonishing surge in the pay of those at the top.

Banks and financial firms took bigger and more dangerous risks

to generate bigger profits and huge pay packets.

And when the bosses of our mainstream companies

saw the spectacular rewards that were going to bankers,

hedge fund managers, private equity partners,

they too demanded and got absolutely enormous pay rises.

The gap between the very richest and the very poorest widened

at a pace we hadn't seen since the Victorian era.

When you look at the multiples of an executive pay

to the median, or middle, of the workforce,

they're broadly stable throughout the 20th century

until you get to the 1980s, and then you get the take-off.

The multiple of top pay to the middle was about 25 to one.

Today it's over 150 to one. It's gone up six times

in just over 25 years.

That's a breakdown of basic morality.

These CEOs don't deserve these compensations.

Typically, the highest-paid ones

lose the most money for their companies.

So it's really...

corporate theft.

Pure and simple.

Overwhelmingly, the benefits went to the top people,

the most sophisticated people, the managers,

the people who were plugged into the benefits of the global economy,

whose companies were making very high profits.

But what about the rest of us? How did we do?

Real wage growth, in terms of take-home pay,

of the typical American worker,

has been zero since the mid-'60s.

As Britain deindustrialised, over the same period,

you had the service sector expand and high-end skills

were better rewarded and valued.

So that meant that, of course,

if you were not a high-skilled worker,

your income would have fallen

cos the work that you previously did

would have been done by developing countries

who could do it more cheaply.

What was happening was incomes were going down.

People would have been very unhappy

if their standard of living went down as their incomes went down or stagnated.

So, in effect, we came up with a solution.

We said...

.."Consume as if your income was going up."

Well, now, how do you consume as if your income is going up

when your income is going down? Only one way - debt.

-Are you sure you've got everything, Money?

-Let me see. Wine, Camembert...

The financial revolution spawned a debt revolution.

In the new, deregulated world,

everyone could have a loan, a credit card.

-I'm so glad you came along, Access.

-That's what friends are for.

Our incomes may have been rising relatively slowly,

but we could boost our living standards by borrowing to buy.

Debt changed from a risk to a must.

Suddenly you had a society in which

the ruling elite increasingly were obsessed with money

and that fed down through the media in all sorts of ways.

Barclaycard! You're not in Macclesfield now, Bob.

'It became the case that we were absolutely obsessed

'with the pursuit of money, possessions, appearances, fame.'

Crucially, if the people at the top are offering that as a model,

the people at the bottom are going to be influenced by it.

-It's a Barclaycard, Latham.

-Yes.

-'Our values had completely changed.

'We wanted more, we wanted better.'

We were encouraged to spend, spend, spend

and we borrowed, borrowed, borrowed.

This is part of the house that was added, I think,

in Victorian times. This is maybe about 100, 110 years old.

But really this is why we bought it,

because we just wanted somewhere to bring up the children

which gave them more space, somewhere to play in the garden.

James Hunter Johnson bought his dream house in the early 1990s.

In those days, it wasn't difficult to borrow money to buy property.

I think everyone was confident property values would go on rising.

So taking on a big mortgage - which we did in order to buy this -

didn't seem to us to be a great risk.

I think we were just generally confident

that salaries would continue to creep upwards,

that would give us the money that was necessary

to either make improvements or to,

in due course of time, pay off the mortgage.

I think people felt themselves getting richer

because their houses were becoming more and more valuable

and that gave them the sense of confidence to borrow more

for consumption, for credit,

and that kept the whole thing bubbling,

the whole machine turning.

WORKERS SING IN MANDARIN

Meanwhile, China was building new factories and selling more overseas.

Vast amounts of cheap and initially low-quality Chinese goods

were making their way to Western markets.

But the road towards liberalisation stalled,

in 1989, when the Chinese authorities

ruthlessly suppressed students demonstrating for democracy

in Tiananmen Square.

The whole country froze.

And economic work of all types

was put onto a backburner and many of the economic reforms

that had begun in the 1980s were effectively stalled.

With resentment building inside the country,

the Communist Party realised something drastic had to be done

to accelerate growth and boost living standards.

In the summer of '92, Chairman Deng

went on a historic tour of China's southern economic zones.

'The situation was getting so bad

'that eventually the leadership in Beijing realised'

that if they didn't do something to generate economic growth,

they perhaps would not be able to create enough jobs

to keep the population acquiescent.

And it was then that Deng Xiao Ping -

by this time an old and frail man, hard of hearing -

decided to take matters into his own hands.

-TRANSLATION:

-I remember he gave a speech on his southern tour.

Obviously, he encouraged us to be open-minded.

He wanted us to try new things...

..to move fast and not be afraid.

Wu Changjiang is the founder

and chief executive of Rena's company, NVC.

'19 years ago, he was a penniless student.

'Deng's tour changed his life.'

-TRANSLATION:

-It was a big encouragement

for college students like me.

That was the reason I moved to Guangdong at the end of 1992.

The things that he said lit a kind of prairie fire

under the Chinese economy

that really got it moving in the second half of 1992.

The whole country just wanted to get going

and he'd given them the permission to engage in, as it were,

capitalist economic activity.

As China's growth accelerated in the 1990s,

Wu scraped together the £1,500 he needed to start his own company.

Today he's worth over 300 million.

There are literally thousands of such industrial success stories

across a country whose economy

has expanded six-fold in the 20 years since Deng's famous tour.

-TRANSLATION:

-My success is not a big deal.

My generation just had more opportunities than my parents'.

Reform and the Opening Up policy

gave us the opportunities which they didn't have.

MUSIC: "Alive And Kicking" by Simple Minds.

While Mr Wu was scrimping to create and build his business,

Britons had begun spending in earnest.

The era of big money and big consumption

was epitomised by our national game.

The Premier League was launched in 1992 and back then,

the average wage of a Premier League player

was six times that of most fans.

Today, our top stars are paid around £200,000 a week,

-an incredible

-400

-times what a typical British fan earns.

The 1990s spending spree was the start of the longest period

of rapid uninterrupted economic growth in our history.

But in a way we were cheating to win,

although the ref didn't notice till the game was over.

Under normal circumstances,

the carefree spending of the 1990s would have led

to sharply-rising household inflation

and interest rates would've shot up to hold inflation in check.

But, in the 16 years before the crash of 2008,

none of that happened.

And if that was a good thing, we have the Chinese to thank.

The prices of the things we wanted to buy,

many of them made in China, became cheaper and cheaper.

Every one of our pounds bought more of the stuff we coveted

thanks to the industry of the Chinese working 18-hour shifts

and earning just a few dollars a day.

I came here to talk about the economy today with Mr Greenspan.

If he wants to express his opinion on that subject,

-I'll be glad to hear it.

-LAUGHTER

Western leaders of all persuasions

didn't worry whether rapid growth fuelled by debt might be dangerous.

No surprise there -

elections are easier to win if we're all feeling richer.

'Even politicians of the centre left -

'the Tony Blairs, the Bill Clintons - embraced globalisation.

'In fact, that was one of their badges of modernity

'that they weren't bad old lefties,

'they were people who "got it", who got the modern world.'

They wouldn't, er... accept the argument

that actually competing with Chinese workers

would have a deleterious effect on the incomes of people in the West.

That was regarded as backward, old thinking.

I think the most that Clinton or Blair and their advisors said is,

"Yeah, there'll be a transitional problem."

Of course you can see, you know, if a factory closes here

and reopens in China, there's a pretty clear cause and effect.

But the argument was, "You can't stand in the way of that.

"That's standing in the way of progress."

CHEERING

Our leaders insisted that consistent growth of around 3% a year

was no more than our right.

High inflation was gone for good. Boom and bust had become boom and boom.

The good times would go on and on.

Borrow only for investment,

hold debt down,

earn before you spend,

don't live on tick.

I want this to be the New Labour government

that ended Tory boom and bust forever.

But the year Tony Blair came to power

was actually to witness the first cracks in globalisation.

Some emerging economies of the East,

the so-called Tiger economies like Thailand, South Korea and Malaysia,

had borrowed heavily from overseas to finance their development.

The markets took fright.

Could they repay those debts?

Countries that had been saving quite a bit,

that had run reasonably responsible governments,

hadn't run up large budget deficits

but had borrowed to finance their growth,

suddenly found the banking sector under attack,

the currency under attack...

wholesale unemployment without unemployment insurance.

As Western investors began to dump local currencies

and call in what they were owed,

the Asian Tiger economies slumped.

'The IMF marched in, took away their sovereignty,

'converted downturns into recessions, recessions into depressions.

'The result of that, as one of the prime ministers of one of the countries said to me,'

"Never again. We were in the class of '97.

"We will never let that happen to us again."

And many of them said, "Never again.

"Never are we going to get into a position

"where outside financial markets have this kind of sway over us."

Western protesters saw the crash of the Tiger economies as evidence

that globalisation was a new way for the rich West

to exploit the developing world.

But if they were right, the tables were about to be turned.

Those emerging economies of the East,

burned by the experience of borrowing money on world markets,

pledged never again to be dependent on Western speculators.

Across Asia, governments vowed to generate growth from resources,

to save and invest, to export far more than they imported.

And nowhere did the cult of thrift become stronger than in China,

at the level of the state and of the individual.

'Rena may earn a third of her British counterpart,

'but she still manages to save.'

TRANSLATION: I usually spend at least half of my salary on my family,

including education fees for my daughter Lin Lin.

I manage to save £6,000-£7,000 a year.

I save the money for my parents' healthcare.

They are getting older and China's healthcare system

is still not good enough. On top of that,

I want to send Lin Lin to study abroad in the future.

So I need to start saving for her as early as possible.

The high savings rate in China

really comes down to the lack of social welfare.

People fear that when they get old, they won't have a pension,

when they get ill, nobody will be able to pay for them in hospital

and so they save like crazy at the moment for that rainy day.

Under the umbrella of an expensive welfare state

and national health system,

we seem less worried by rainy days.

So how much do WE save?

I save about...

Zero. Absolutely none of it at all.

Hardly anything. Nothing much at the moment, unfortunately.

Very little at the moment. Yes.

Most of my salary is taken from me before I even get it, to be honest.

I'd say probably about 10%.

-Not a lot, to be honest.

-Nothing at the moment.

Fraction-wise?

About a sixth.

-None.

-None.

And what are they saying about their saving habits

on the streets of Shanghai?

TRANSLATION: I save at least 50% of my salary. It's true!

How could I survive?

I have to save money to buy a house and for my children's education.

About 50%.

My husband and I, we both earn our living,

so we spend one salary and save the other.

About 30%.

About 40%.

I save for a rainy day, in case something comes up.

Saving is a safe and stable way to manage my money.

The Chinese consume half as much as we do,

relative to the size of their economy.

They save much, much more.

What's more, in the decade before the crash,

the great producing and exporting countries -

China, Japan and Germany -

leant their vast savings or surpluses

to the consuming economies - the US and much of Western Europe -

at a rate of a trillion dollars every year.

The global economy was becoming dangerously, grotesquely unbalanced.

The West was saying,

"Let's encourage consumption. That will encourage growth."

China says, "Yes, we are a high-savings economy.

"We have a trade surplus. We are a developing country.

"We want to sell a lot overseas."

This is how you grow, this is how you catch up.

And so you had a meeting, in some sense, of minds here.

The developing economies, especially in Asia, saying,

"We want export-led growth.

"We are going to produce for consumers elsewhere."

And consumers in countries like the United States, the UK, Spain,

increasing the consumption fuelled by credit,

some of that credit coming from these very exporters,

who are now saving much more and willing to finance.

The painful legacy of all that lending by the producing countries,

such as China, is the millstone round our necks

of record personal indebtedness.

Our mortgages, credit card debts,

personal loans and overdrafts have soared from £177 billion

at the time of Big Bang to £1.5 trillion today

that's more than the value of everything the UK produces in a single year.

And here's what's particularly worrying.

If interest rates return to anything like normal levels, well,

the interest burden for millions of families would be crippling.

On average, every single British adult owes £30,000 -

or a burdensome 165% of after-tax income.

That has come down a bit, but our personal debts

are still the biggest they've been in our history

and unaffordable for many.

My attitude towards debt is I try not to worry.

I suppose, at times, we have to live beyond our means now

because the way prices are going,

it's a struggle to keep afloat, if you like.

As regards to our bills, and our credit card,

we try to pay the card off as quickly as possible.

We are getting squeezed from every direction.

I like to live in quite a large, spacious house

with a large and spacious garden

and that always seems to need something to be done to it.

Unfortunately, the house is mortgaged.

I'd much prefer if it were not,

but our monthly outgoings to service the mortgage

is of the order of about £500 per month.

There were times when, really, one went to the hole in the wall

and I wasn't quite sure if any money was going to come out.

It absolutely got to that stage.

That's not the situation we're in at the moment but, even so,

with the mortgage payments and the children, it's pretty close to the bone.

There is really very little spare at the moment.

But it wasn't just consumers who took on excessive debts.

Western banks borrowed recklessly to lend to us,

taking dangerous risks to inflate their profit and pay.

On the face of it, the story that was told

was of these institutions having achieved

a much greater level of profitability

than ever previously seen.

Almost all of that increase was driven

not by banks having miraculously discovered

a money-making machine,

but rather by them gearing up their balance sheet.

If you go back just 10 years,

the UK banking system had almost no external borrowings.

By the end of 2007, it had £800 billion or so.

So the banks went on their own borrowing binge

in order to finance consumption in the economy generally.

They should not have done that.

For the UK and other banks,

a large chunk of that borrowing came from overseas.

So it was global imbalances

that were providing the fuel for this money-making machine.

It was debt, borrowed from overseas,

that was providing the fuel for this machine.

People, banks, governments and companies all borrowed

while money was cheap and plentiful.

If you add all that debt together, it's equivalent to almost five times our national output,

more than for any other big economy, except possibly Japan.

Capital, money, was surging to those parts of the world

where mainstream economic theory said it shouldn't be going.

Money was flowing not to those parts of the world

where investment opportunities were greatest - the East -

but instead it was flowing uphill

to finance not investment, but consumption in the West -

in the US and in the UK.

It's both a deficit problem and it's a surplus problem.

These big, emerging economies have fixed exchange rates.

To keep their currencies cheap, they buy up dollar assets.

What does buying dollar assets do?

It pushes down borrowing costs in the United States,

making it cheaper for the Americans to borrow,

even though they're really indebted.

The endless flow of cheap credit from the producing countries -

not just China, but also Germany and Japan

meant that consumers in the UK, the US and much of Western Europe

could keep on spending, even though we were not paying our way.

We were not producing enough of the goods and services

that the rest of the world wanted to buy.

And every time our consumption-dependent economies

hit a bump in the road, the policy response -

led by the free-market prophet Alan Greenspan -

was to cut interest rates so that we could borrow even more!

Let's be clear -

things in the West seemed pretty good. OK?

We had growth around trend and inflation around target.

OK, we were spending a bit more than we were earning

and that meant a current account deficit.

That meant borrowing from overseas,

but we could do that at spectacularly low global interest rates

because the East was saving so much.

So I think it was perhaps understandable

that the global imbalances,

that these deficits, that excess borrowing,

wasn't being taken as that much of a problem during the go-go years.

By the early 2000s,

lending and borrowing was going into overdrive.

Everyone wanted a piece of the action.

Houses weren't places to live in, they were investments -

our pension pots.

So you had a tremendous housing boom picking up,

across industrial countries.

The ECB? No, kept interest rates low.

The Fed kept interest rates low.

No wonder Ireland went on a spending spree,

building tonnes of housing. Spain went on a spending spree.

You can correlate it to the interest rates

that people faced in those countries.

And the housing boom added further fuel to the consumer boom.

People who are borrowing against rising house prices

didn't actually feel they were going into debt -

they were just taking out the home equity.

And so, you know, I borrow to buy another car

or borrow to take a vacation,

but it's my money because my house went up in price.

And, of course, the financial sector was saying,

"House prices are never going to fall across the board.

"Don't even worry about it.

"It hasn't happened since the Great Depression."

Well, it did happen, and that's when the party came to an end.

Lehman Brothers has filed for bankruptcy after billion-pound losses.

'5,000 staff at Lehman Brothers' London office had no work to do, except look for another job...'

The property crash, the paralysis in financial markets,

huge losses incurred by bloated banks, like Lehman Brothers and RBS,

led in 2008 to the worst global financial and economic crisis

since the 1930s.

But the collapse of the banks was when our problems began, not when they ended.

The crash was the moment when it became clear that our golden age

was based on an illusion -

the illusion that sustainable prosperity could be built on debt.

When the economies seized up as banks stopped lending,

governments filled the breach by continuing to spend

despite collapsing tax revenues.

So, as banks repaid their debts,

the indebtedness of governments exploded.

And in that sense,

banking sector debt was simply shuffled off to the public sector.

That's why today's anxiety

is about whether governments, especially in the eurozone,

can repay all they owe.

Public sector borrowing surged in Britain,

the US and the eurozone

as governments kept spending to keep the economy going

when tax revenues were collapsing.

The great fear of investors is that some of those governments,

especially in the eurozone, won't be able to repay their debts.

Western consuming companies

owe trillions of dollars to the great producing nations.

The crash of 2008 began to topple an unbalanced global economic system.

The fact that there are imbalances

is not itself a concern.

The concern is the direction of the imbalances.

A country like the United States, a rich country,

ageing population should have a surplus to save for

as the older people come to retirement age.

Developing countries like China should have a deficit.

They should be borrowing to finance their infrastructure,

their housing and so forth.

The problem is it's just the opposite.

In the new global free market,

the rich developed countries of the West

believed everyone would be a winner.

But they - we - have become the victims

of what is perhaps the world's first truly global economic crisis.

I think that in the aftermath of 2008,

in the aftermath of the financial crisis, there's a fear,

a growing sense among politicians,

that maybe this isn't just a transitional problem,

and that we're going to be stuck with a large part of our population

that can cope in a globalised world,

but also a fairly large part of our population

that can't cope in a globalised world.

That doesn't have, er...

the skills to move upmarket to find this fantasy technology job,

but that cannot work at the wages that a Chinese worker will work at,

and therefore they're sitting there on the dole

because the dole in Britain is a lot higher than the wage in China.

We realised too late that it was time to get back to work.

The party went on and on.

Growth was unsustainably stimulated by a frenzy of borrowing

as regulators failed to stem reckless lending by banks

and central bankers kept interest rates far too low.

Few wanted to see what was really happening.

I can remember having Christmas lunch with the Prime Minister in 2006

and saying, "Nobody looks at the money supply any more.

"You say inflation is only 2%, but the money supply

"is going up at 12% per annum. What's it going into?"

Of course it was going into an asset bubble.

Many of us were complicit.

No-one forced us to binge on spending and borrowing.

Perhaps naively, we didn't question whether we could afford it all,

whether the growth in our economy and living standards

was real and sustainable.

How much of that growth was, in your view,

due to unsustainable increases in borrowing?

A lot of that growth was unsustainable.

It was to some extent a bit of a fool's paradise.

The government went round claiming

we'd got the best growth since the year of Hanoverians,

but it was actually based on very, very insecure foundations.

And when you get an enormous build-up of people

borrowing way beyond what they can sustain on the basis of cheap capital -

you know, house prices were getting out of control,

the banks were not properly managed -

and all this was going to come to a very sticky end.

As indeed it did.

One of our most senior bankers, Sir Philip Hampton,

concedes the role played by banks in pumping up our debts.

People can only consume as people did consume

because they were able to borrow and borrow very cheaply,

either to buy homes, to buy consumer goods,

all the things that they were enjoying

without necessarily earning.

I would say the banks were at the heart of it

-as the key transmission mechanism.

-What's your view about

why we just didn't see the risks that we were taking?

I think we became convinced that markets would always find a solution

and that if we let markets operate, they would be self-correcting

and that turned out to be the wrong judgement.

In some respects, we should've seen this coming.

Why didn't we? Well, there is this psychological phenomenon

called disaster myopia, which means that the further away

you are from a disaster, the more you discount it.

I think this disaster myopia

was a core cause of us turning a blind eye

to what with hindsight

were very obviously over-leveraged balance sheets

across all spectrum of society.

We started to consume without doing the work.

And consumption without the work means borrowing,

and we all had a part to play in that,

I think, if we're honest with ourselves.

We have become a big consumer society and not a big producing society.

China's model is the opposite -

they produce SIGNIFICANTLY more than they consume.

And for the Li family and for hundreds of millions of Chinese,

globalisation has delivered real rewards.

TRANSLATION: There has been a huge change in our lives.

It's like heaven now.

We eat better,

we have enough money, you can wear any clothes you like.

In the past we didn't have enough to eat,

and the clothes were all black or white, very few were colour,

and we couldn't afford them anyway.

Perhaps Rena's 15-year-old daughter Lin Lin shows the attitudes

we'll need if we're to win in the global economic race.

-TRANSLATION:

-I've heard that in the West, people chase their dreams.

But it's difficult to do that in China.

Most people are quite busy with their daily lives.

They need to work and make money.

In the past, you could beat your fellow students

by studying very hard.

Now you put the same effort in just to keep up.

So you have to study harder, harder and harder to stand out.

Rena is optimistic as she looks ahead.

-TRANSLATION:

-China has changed a lot over the past few decades,

but it's not such a big shock to me.

I believe China will be stronger in the future,

but this strength is only for itself

and it won't be a threat to other countries in the world.

What about Rena's colleagues in the UK, NVC's British staff?

I think it's a shame a lot of industry in this country

seems to be going down the pan or being shipped abroad,

or being owned by foreign countries.

It's as if we're becoming a giant warehouse,

just distributing to the rest of the world,

and not actually making, creating, which obviously brings jobs.

It seems as though the children are going to face

a much tougher future,

but I always try to put a positive spin on things,

and no-one's got a crystal ball.

It might pick up. It looks dire at the moment,

and if you listen to what they're saying out there,

it most probably will be dire.

But I'd like to think that there might be a chink of light at the end of the tunnel.

We might go through a rough patch,

but we'll come out on the other side, fruitful.

James Hunter Johnston sees the bad and good of globalisation.

'The children are going to have to compete their fellow villagers

'in Shanghai or Beijing or Mumbai, no question about it.

'But there's another side to the coin.

'The global economy has brought them'

lower cost and higher quality goods

than I or my parents could ever have dreamed of possessing.

# Turn out the lights

# The party's over... #

Whatever the benefits of globalisation,

there can be no return to debt-fuelled capitalism in the West.

We've reached the end of the road -

I mean, the particular way of doing capitalism for kind of 30 years

has actually proved to be dysfunctional and has failed.

And now we have to ask ourselves big questions

about how to how to do better capitalism.

What we didn't pay as much attention to

was the possibility that the cheap money

flowing into industrial countries

was actually making the financial sector more fragile.

The same lesson the emerging markets learned in the 1990s

is something the industrial countries have to learn now,

which is you cannot push

your own demand fuelled with credit too strongly.

Modern financial markets, even for strong industrial countries,

-are unwilling to tolerate that.

-I think many people in the West

are seeing the downside of globalisation

that many people in the emerging markets saw before.

The principle of globalisation, international trade,

was that when it is managed well, everybody could benefit.

Increasingly, particularly in the West,

the growing inequality that has often been associated with globalisation

is actually undermining social cohesion.

When you consume far more than you earn, as we did for many years,

eventually there's a reckoning.

The best way of seeing the crash of 2007-08

is as that reckoning, the moment when the penny dropped

that much of the rich West

had borrowed far more than it could ever repay.

The global economic system,

which had seen the producing countries,

many of them relatively poor, lending to the consumer countries,

which in its heyday had produced record amounts of growth,

well, that system was bust.

The party is over.

In the next programme,

I'll be look at what this economic crisis

means for us over the coming decade.

If we are going to build a sustainable economy,

what kind of sacrifices will we have to make?

What does it mean for our living standards?

And can we respond properly to the challenge of China?

# Turn out the lights

# The party's over

# They say that all

# Good things must end

# Call it a night

# The party's over... #

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