We were warned

It's turning into a golden autumn for Gordon Brown - but it would have been a bette

By Martin Bright Published 16 October 2008 10:37

Credit where credit is due - and you have to say that a £37bn injection of cash into high-street banks is one shedload of credit - Gordon Brown has had a good autumn. There is a year between Brown's darkest night as Prime Minister when he called off "the election that never was" (Friday 5 October 2007) and the announcement of the government's part-nationalisation of the banking system (Wednesday 8 October 2008). When students of history come to study this period, which of these momentous events will define this government's legacy? Which, if either, of these decisions was wise?

The conventional wisdom may turn out to be wrong in both cases. It is by no means settled that Brown was wrong to cancel the election. What if Labour had scraped home in a snap election last November? Would a hobbled government working with a reduced majority have been better placed to deal with the present economic situation? And, there was the real prospect that David Cameron's novices might have ended up in charge during the credit crunch, an even scarier prospect.

Will the bank bailout prove to be the correct decision? It was right, morally, to protect the general public from the ravages of the credit crunch by shoring up the institutions that hold their savings. But there is no guarantee that the measures to "recapitalise" the banks, announced on 13 October, will work in the long term. At his press conference, Brown was uncompromising in his criticism of market speculators, a point he pushed home when speaking to City figures later in the day, saying there should be no "unfair incentives for irresponsibility or excessive risk-taking for which the rest of us have to pay". But there has been little talk from the Prime Minister or the Chancellor about the consequences politicians should face for the risks they have taken with our money.

To be fair, they haven't often been asked. When the question was put directly to Brown at his Thomson Reuters lecture to the City, he answered in the only way he could: ultimately he has to bear responsibility.

The Prime Minister insists we should look on the billions being spent on the banks not as debt, but as an investment in essentially robust institutions. Almost everyone, from Labour's hard left to the City, is united in their support for the measures, but it is hard to imagine being persuaded by such an investment in any other circumstances.

"It's like this," says your friendly government financial adviser. "We want you to put £37bn, that's almost three times the budget for primary schools, into these institutions. We admit they have already been extremely irresponsible with their customers' money and that the management of these banks is seriously flawed and their top-heavy bonus system is a scandal. We have been slow to introduce the necessary safeguards to stop them gambling away your hard-earned cash and we cannot guarantee a good return. But, despite what you may have heard recently, shares do go up as well as down."

Already, the Prime Minister has stated there now needs to be a "second wave" of measures to shore up the system with far-reaching reforms to ensure that nothing like this happens again. As we go to press, Brown is telling EU leaders in Brussels that there should be a thorough overhaul of the international banking system, which would include increased transparency, an end to the culture of speculative incentives and reform of the International Monetary Fund.

Gordon Brown's reinvention as a European is one of a series of ironies. Brown has always been determined to win over the Europeans to his "British model" of economic management: that is, the liberalisation of markets, an end to subsidies, an openness to globalisation, increased competition. In short, the Americanisation of the European economies. He has now found his opportunity to lord it over Europe, just as the American model has been shown to fail.

There is a notion around that Brown has been looking with disapproval for some time at the excesses of the market. But, until he became Prime Minister, Brown chaired the International Monetary and Financial Committee, an advisory body to the IMF's board of governors, which is responsible for "supervising the management and adaptation of the international monetary and financial system, reviewing developments in global liquidity . . . and dealing with disturbances that might threaten the system". Take a look at his October 2005 encomium to the global economy, Global Europe: Full Employment Europe. This was a Treasury paper written almost as the economic manifesto for Britain's presidency of the European Union. Not much sign of caution in this document, which called for the EU to adopt a "risk-based approach to regulation" by rewriting the EU's "enormous and unwieldy rule book". Brown argues for stricter regulation now, but then he was militating for something quite different. He was a crusader for the "British model" in Europe. See, too, his Mansion House speech of June 2005 "Global Britain, Global Europe: a presidency founded on pro-European realism", or his 2006 Treasury paper The Case for Open Markets: How Increased Competition Can Equip Europe for Global Change.

The Prime Minister is now keen to reform the IMF to create "a new international financial architecture for the global age". In his Thomson Reuters lecture, Brown announced: "With the same courage and foresight of [its] founders, we must now reform the international financial system around agreed principles of transparency, integrity, responsibility, good housekeeping across borders." This, he said, would act as a global early warning system, a kind of economic tsunami alert, rather than leaving the IMF to mop up after the event.

Brown has pushed the line that it gives him "no comfort" that he has been proposing such reforms for some time. Yet the international institutions he now criticises have been warning for some time about the dangers of the "British model". In fact, the IMF issued just such an "early warning" about Brown's stewardship of the British economy more than 18 months ago.

The chilling prediction can be found in a publicly available IMF document dated March 2007 with the technical title "United Kingdom 2006, Article IV Consultation, Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for United Kingdom". Such country reports are produced each year as a result of discussions between the IMF and individual nations.

Brown's assiduous biographer, Simon Lee of Hull University, noticed the warning signals contained in the report. He wrote last year, in his book Best for Britain?: the Politics and Legacy of Gordon Brown, "as the IMF has noted, by encouraging the UK economy to become even more linked to global financial markets, the British model has increased the vulnerability of the UK economy to global risks and contagion".

The report warned of the UK's high levels of household debt, not something the Prime Minister can blame on global markets, and it noted the UK housing market was overpriced and could be heading for a crash. More crucially, it contained a warning of "the gap between customer lending and customer funding through deposits" leading to a reliance on the wholesale markets - precisely what brought down Northern Rock.

When the business journalists reported the IMF's findings on 5 March last year they concentrated on the headline statement that Britain's economic performance remained "impressive". But that was a historical judgement. A far more significant part of the report concluded: "Given these growing cross-country linkages, global risks are particularly important to the UK financial system, more for their potential severity than for their likelihood of being realised."

In other words, it probably won't happen, but if it does, the British financial system will be hit very hard indeed.

Well, it did happen. And the IMF's early warning system had sounded the alarm. In bilateral discussions, the UK was warned in March 2007 that our system was particularly vulnerable to shocks in the international markets precisely because of Britain's unique links to those markets. The government simply chose not to listen.

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Tags: Economy 2008

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27 comments

Thu, 2008-10-16 14:01 — Ian C

The idea that the distortions that result from a more social democratic model will be any better than a free market one is illusory.

Free markets need regulation - smart, ahead of the curve regulation. Not reems of it, just smart regulation. Political regulation by definition is always populist in nature and responsive to past experience not to future threats developing just over the horizon.

In any event, what we are going through is an old-fashioned credit crunch that happens periodically in capitalist countries. On this occasion it was caused by the large supply of cheap money available coming out of Asia and encouraged by both the Fed and the British Government through prolonged low interest rates. With such a carrot dangled in front of them, with such a fractured regulatory world in a highly iinnovative era, show me a business man who would not take advantage of this environment - we all did if only through a 0% credit card deal.

The Labour Government did so by suppressing the inflation targets by which interest rates were set, altering the fiscal rules to suit itself and vast expansion of PFI while failing to reform public services and introducing new services that only a suicidal form of social democratic governance would do (gay outreach workers and very many other non-jobs).

There were plenty of signs and many who knew. Brown will never get away with denial that he played a major part or that it was foreseeable.

Sun, 2008-10-19 13:25 — Gerry Myer

Amongst the contributors only Dr Hill seems to grasp the magnitude of the threats facing our futures – certainly no politician does. Indeed I’m inclined to agree with James Lovelock that we are sliding with increasing speed down a slope of progressively increasing steepness and that it is probably too late to effect any remedy. There is no prospect of human society organising itself in a sustainable way and even if there were it is possible that climate runaway is now irreversible.

The considerable scientific effort to detect radio signals from space that suggest evidence of life on distant planets has failed to show any positive result. Why? True, the vast series of conditions required of a hospitable planet is hugely demanding and the probability of life then forming is imponderable but it is virtually certain that the number of planets in the universe is unimaginably large and therefore quite probable that at various times since the Big Bang intelligent life forms have existed elsewhere.
In common with homo sapiens, such living things during their primitive stages of evolution, would have needed to be selfish in order to survive. But almost as soon as the technological prowess of those species developed sufficiently to transmit radio signals, the selfish “gene” would have led to their demise through the destruction of their environment. Slaves to instant gratification, humans can expect a similar fate.

Wed, 2008-10-29 18:34 — gnuneo

"taking slaves is an old war-time tradition, but these days its more subtle - you just take ownership of the companies, and just set your 'profit' margin from their hard work. Hey - at least they get *something* back right? They should be appreciative! Now, Back in the Good Ol Days... "

some it seems are indeed pining for them...

http://theyesmen.org/hijinks/wharton

Sun, 2008-10-19 22:01 — Pencils

" Boris Johnson would not be in power if the Labour Party had put up a decent candidate." -Martin Bright.

The above shows a severe detachment from reality. Livingstone is one, and by far the most popular, of at most half a dozen Labour apparatchiks, who aren't universally loathed. Most consider that it was Livingstone's association with New Labour that lost him the election.

Mon, 2008-10-20 12:52 — Martin Bright1

Most?

Mon, 2008-10-20 13:08 — Petite Anglaise

"Most consider that it was Livingstone's association with New Labour that lost him the election."

Well, I'm a 'most' and I'm up for it.

Mon, 2008-10-20 16:24 — Martin Bright1

Shall we perhaps move on? All that really matters is that more people voted for Boris. New Labour, Livingstone, they both failed to stop that happening.

Tue, 2008-10-21 01:13 — Progress

Apologies for my earlier florid language Mr. Bright.

Tue, 2008-10-21 02:36 — gnuneo

"As a country we're too big too fail. I suppose that's the rationale."

tell that to Argentina. And whilst you're at it, ask them what *they* think about the IMF.

Tue, 2008-10-21 09:01 — writeon

What I find paradoxical, worrying and confusing, is that governments are creating even more vast ammounts of debt, for future generations to repay, in order to 'bail-out' an economy that is suffering, according to the establishment concensus, from the dire consequences of the creation of... uncontrolled debt!

And there are still people who believe that Marx was full of crap and just plain wrong when he wrote that capitalism was racked by contradicions and instabilities!

Tue, 2008-10-21 10:55 — taghioff.info

@writeon

"And there are still people who believe that Marx was full of crap and just plain wrong when he wrote that capitalism was racked by contradicions and instabilities!"

Marx was probably right about that, but this one is also a case of the "super-structure" undermining the "base". Monbiot explains the implications of a short electoral cycle on decision making here:

http://www.guardian.co.uk/commentisfree/2008/oct/21/economy-green-politics

The implication of this is that this may well be a contradiction emerging from democracy, which is in many ways more worrying.

But yes, the politicians are, yet again, mortgaging our future..

Tue, 2008-10-21 20:57 — writeon

I believe we've existed in a kind of intellectual desert for more than a generation. A time of wasted opportunity and the growth of 'demagogic democracy' under the curse of Thatcher and Reagan. A stupifyingly ignorant, narrow-minded and dogmatic era, and these towering leaders and their followers have led us down a slope towards the edge of a cliff. We're struggling, yet momentum is at work and we're sliding closer and closer.

Thirty wasted years when people seemed to believe in a fantasy version of capitalism and the free market and forgot about the huge costs; periodic and terrible crises.

Tue, 2008-10-21 22:02 — writeon

As we're chatting about the short term versus the longterm, I wonder if anyone can think of a great empire that actually pulled itself together, reversed the rot and averted disasterous and forced decline? I've tried to think of an example and I can't.

Perhaps there's a mechanism at work here that's inexorable and irreversable? Anyway, it'll be interesting, as they say, to watch the American Empire disintegrate before our very eyes.

Wed, 2008-10-22 13:33 — taghioff.info

@writeon

There are few examples of internal renewal, or rather those examples are read historically as continuity, thus by (external) definition Empires do not escape decline, they just last differing periods of time.

Usually there is an external area to the Empire that picks up as the other declines, thus the ongoing shifts in the "center of the world."

In this case, it is not clear that there is a strong outside to the current system. Yes Europe and Asia are different social and economic models to the US, but we live in a fairly integrated econo-bio-sphere in terms of natural resource exploitation.

Without an outside to renew from in that sense, the question has to be asked as to whether the current phase of Imperial renewal might not take us all down.

To put it another way, the new Empire that emerges needs to be a lot more sustainable than this one, and there is not current model of capitalism done at a large scale that fits the bill yet.

Thu, 2008-10-16 12:51 — taghioff.info

Which means that the Washington Consensus, having already died somewhat in places like the World Bank and the IMF (Stiglitz had quite a bit to do with this) has now finally been put to death in the UK.

It also means that the recent discussion about the British being more "liberal" is proabably dead too now, and that finally we need to wake up in the UK and acknowledge the strengths of European Social Democratic approaches.

If we are not secure, then we are not really free, and that applies more if you are poor. The problems with freedom in the UK are not problems with active government (the government was not active enough in relgulating the markets) but just plain bad politics, where we follow the US in policing the people at the bottom but not at the top.

If we want a free society, then we go for a strong regulatory state accompanied by a full set of rights for citizens. In other words a more European model.

So the US bankers pushed is into the EU, maybe there is a god, and maybe she has a sense of humour.

Wed, 2008-10-22 13:38 — taghioff.info

I keep saying this, but we need a system where rates of return on capital are roughly in line with increases in natural resource productivity.

In other words, to be sustainable we need to get richer without using up more natural resources. If an Empire (or hegemony) does not emerge fairly soon that enforces this, we are stuffed.

Wed, 2008-10-22 13:46 — taghioff.info

There are some proposals in this direction:

Andrew Simms, Larry Elliot and Caroline Lucas cam up with this, though I have not really had time to digest it:

http://www.neweconomics.org/gen/greennewdealneededforuk210708.aspx

And it got picked up by the UNEP:

http://www.unep.org/Documents.Multilingual/Default.asp?DocumentID=548&Ar...

This sort of movement may well start to form the new face of Empire... We can only hope.

Thu, 2008-10-16 17:40 — writeon

I have difficulty given Gordon Brown the blame for the world-wide collapse of capitalism, in fact the idea is patently absurd. Could Brown have pursued different policies and saved Britain from the worst effects of the disaster? Certainly, only I doubt he would have ever become prime minister or even a member of the New Labour project.

Given the structure of the modern economy and Britain's closeness to the United States, culturally and ideologically over the last thirty years, the idea that the UK could have followed a alternative strategy, whilst theoretically a possiblity and advisable, would have required a very different set of politicians and policies.

I've been writing and talking to people up and down the length of the country for a quarter of a century about the 'madness' of the economic and social policies of Reagan and Thatcher and how, eventually they would lead to disaster, and a lot of good it did, which is probably why I became a hermit and chose instead to create worlds words for a living.

Brown, like nearly all the leaders of New Labour, is more enamoured with the US model than the European one, despite Britain's lack of influence in Washington compared to Europe, but then, this choice - subservience instead of equality, has deep historical roots in military defeat and imperial decline.

What I find difficult to understand is the level of partisanship in British politics. It's partisanship without substance or ideology, except on a crude and dogmatic level. The idea that somehow a Conservative government would have followed a radically different path to New Labour and 'saved' Britain from this global crisis of capitalism is, in my opinion, ridiculous.

Brown is doing his best to save capitalism, after all he believes in the capitalist system, as do all Western leaders. They differ in how much they dare smoothe off it's excesses, but none of them challenge its fundamentals, despite its obvious contradictions and destructive qualities.

Thu, 2008-10-16 20:11 — Nilsey105

which of these decisions was wise?
read this

http://www.newstatesman.com/economy/2008/10/financial-system-british

then comment on the above question

Thu, 2008-10-16 20:24 — Nilsey105

With the exception of the last general election, i have voted Labour all my life. What i am reading now makes me want to vomit.
If Brown was a socialist then he has betrayed all his brothers and sister within the movement, fortunately he isnt. However he has betrayed the whole of the british public.
If he and others in the government were aware of the abuse committed by Northern Rock more then a year ago why has he not taken measures to have those responsible charged.
By turning a blind eye he has allowed the banks to continue doing what they have been doing and robbing the citizens of the UK .
Funny how the events are constantly twisting and turning.

Thu, 2008-10-16 22:16 — davidhill

With total world debt being well in excess of $100 trillion (personal, corporate, institutional and government) now and the US’s and UK’s total debt hovering towards $53 trillion and 9-times GDP respectfully, there is no wonder that we are at the start of a global recession. With such colossal figures of debt, amassed significantly over the last ¼ century and in total being between two and three years of total global economic output, we have many years to come of austerity and economic downturn to look forward to. Even worst is if we borrow even more like our politicians are doing and where we eventually end up like Zimbabwe, with hunger, lawlessness and socio-economic collapse? For the root problem is debt and common sense dictates that if we continue to borrow and borrow, eventually money becomes worthless. Therefore our politicians would be better using their time, efforts and power to start afresh and accept that the next decade is a period of fundamental change in how the development of the world proceeds. If not, they will definitely oversee the destruction of far more of what we see today than the 10-years of pain required to re-engineering the world order and crucial sustainable change. Indeed, in twenty-five years time if we do not change our development processes (capitalism, super-capitalism, globalization et al), we will look back and see that the financial crisis was just a mere storm in a teacup in comparison to what problems we shall have in 2033. The vision is of nightmarish proportions with substantially dwindling natural resources to sustain human life and climate change meeting head on with 8. 5 billion mouths to feed.

We have definitely to change for our own good to the economics of sustainability-need and to the preservation of the human experience itself

Dr. David Hill
World Innovation Foundation Charity (WIFC)
Bern, Switzerland

Fri, 2008-10-17 12:56 — BarBar of Oz

Martin, you seem to be missing the real story here.

The wizard and the coven have returned to save New Labour.

It cannot be a coincidence that the appointment of the Wizard to cabinet was so swiftly followed by the threatened demise of the economies of the entire world; instantly transmogrifying Gordon Brown from a Foote into a Churchill and David Cameron from a Blair into a Kinnock?

Commenters on the New Statesman site and at the Guardian will have to eat it: the Brown/Mandelson/Blair/ New Labour project is back in business.

Mon, 2008-10-20 23:19 — writeon

This might be considered a mere detail, but I was wondering about the ability of the UK state to keep pumping credit/debt into the economy, essentially without limit; is this well considered or is it an act of desparation?

Lend, lend, lend; spend, spend, spend; borrow, borrow, barrow.

The UK is starting to resemble Iceland, only because we're a far larger economy our systemic weaknesses can be hidden for longer. As a country we're too big too fail. I suppose that's the rationale.

Fri, 2008-10-17 19:26 — Progress

Bright you shit. Why do you think you're qualified to
criticize politicians for lack of foresight?

We now have Boris Johnson as mayor of London and
he's putting up fares above inflation and cancelled
subsidised transport for the poor, and undermined
provision of social housing.

Fri, 2008-10-24 00:48 — gnuneo

we may be at the crux of time where the last Empire falls - at least for a while, anyway. The entire basis of Empire is that it is legitimate to purchase other people's labour, to pay them less than what they are producing, taking the surplus for yourself.

in medieval times this was "tax" and "rent", neither of which went back to the people, but was spent on
aggrandisement by the Rulers or Church. Nowadays at least *some* of the tax comes back to pay for public services, and doesn't all just go on making the rich richer, and paying for the occasional wars by bored rulers. Instead we have owned labour, and surplus is taken away automatically.

why is this vital? Well imagine this - that Iraqi Oil was owned as a capitalist Partnership, a cooperative, equally by the whole workforce. Imagine also that this was written into the constitution, that it was impossible for their labour capital, and their infrastructure capital, to be owned by others. Do you seriously imagine the Bush Regime would have still "liberated" Iraq? If they couldn't have gotten their hands on the oil industry? Of course not.

taking slaves is an old war-time tradition, but these days its more subtle - you just take ownership of the companies, and just set your 'profit' margin from their hard work. Hey - at least they get *something* back right? They should be appreciative! Now, Back in the Good Ol Days...

Taghi: that looks like an interesting proposal.

Sat, 2008-10-18 00:14 — Martin Bright1

Progress -- please moderate your language. Your point is not relevant to the discussion, but Boris Johnson would not be in power if the Labour Party had put up a decent candidate. Perhaps there are lessons to be drawn for the general election

Sat, 2008-10-18 02:19 — taghioff.info

Ian C
"The idea that the distortions that result from a more social democratic model will be any better than a free market one is illusory."

Why so? Social Democratic countries are far happier to regulate their financial institutions, and it is clearly the removal of the social democratic type regulation of banking in the UK and US that brought on this crisis?

Do you really believe that there is no way to regulate markets well? Do you really believe the myth that European economies are utterly disfunctional compared to the US?

Do you really think that a model as flexible and flimsy as the US's, that folds under the pressure of a storm hitting one of its cities, and that implodes of its own accord, is going to get us through increasing climate instability, and increasing natural resource shortage?

We will see a lot more regulation, and will look back to these wonderful naive times as the adolescence of the global order, if we survive to maturity that is.