Politics
Foolish bankers, scared politicians and a crisis of their making
Published 24 January 2008
In the more moneyed parts of London, it is hard to avoid them. They talk fast cars, yachts, private jets. They talk "short selling", "front running", "bottom fishing". The City fats cats can come from anywhere - the US, France, Bulgaria. Only their accents divide them from their common purpose: to make fast profits, irrespective of the risks. For years, their lavish lifestyles were reinforced by a conviction that they were contributing to global wealth. Governments, particularly new Labour in Britain, fawned on them, imposing only the lightest regulation and rejecting entreaties to stop them dodging taxes. If the economic crash of January 2008 has done any good - and the harm it has caused ordinary people far outweighs this - it is that the public may call into question the foundations of the fragile prosperity of the past decade.
The stock-market falls of recent days were overdue. Equities were performing far in excess of the value of fixed money, such as bonds, and far in excess of reality. It is not the rich who will suffer most. Every corporate and personal pension fund will bear the brunt of the downturn. And even if the markets recover to a certain extent (thanks to the desperate cut in interest rates by the Federal Reserve on 22 January), they reflect a widespread assumption that the US has entered a recession in all but name and that other countries, including Asia's emerging powers, are likely to suffer.
Back home, Downing Street's blithe assertion that the UK is "well placed" to withstand the "uncertainty" is a necessary but almost certainly futile exercise in confidence-building. Britain's economy is, in fact, more exposed because of its dependence on financial services. Gordon Brown and his Chancellor, Alistair Darling, are hamstrung. With receipts falling and the public finances squeezed, they have no room for tax cuts or the other usual recipes for stimulating activity. Mortgage rates are likely to be cut next month, but such a move has already been factored in by the markets. There appears to be little more the government can do than wait, and hope.
In the meantime, ministers struggle to cope with Northern Rock, a specific crisis that is a perfect metaphor for the excess and irresponsibility of the banking world. The handling of the first bank run since Victorian times has been inept. As Alex Brummer states (page 10), the government has allowed politics to dictate its hand, instead of taking decisive action at the start.
With the potential for the biggest economic downturn in a generation, one might think politicians, policymakers and economists would inquire after its causes. There seems no sign of that whatsoever. Global leaders, from China to the US to Europe, will define their task in narrow terms. Bolster the markets, cut rates where they can, keep inflation in check, restore consumer and market confidence. Indeed, as Tristram Hunt points out in our cover story (page 28), the Prime Minister, in his travels in China and India, seemed to define UK foreign policy in purely mercantilist terms. What sells is what works.
Gordon Brown is rightly praised for creating the conditions for a decade of stability and growth. But he appears to see little need to test either the morality or durability of the assumptions underlying the globalised economy. In Britain, as in the US (less so in continental Europe), growth has been based on consumer spending, fuelled by cheap credit, and a housing boom that bore no relation to earnings and exacerbated the wealth divide.
The irresponsibility of the financial services sector has nothing to do with rogue elements. It is built into its core functions. It accounts for the rise of sub-primes, which at their peak accounted for one-fifth of all mortgages in the US. This model was built on straw: cheap housing loans to the poor, funded not through the deposits of bank customers, but by reckless forays into the bond market. Not only are vulnerable Americans suffering, people deceived into embracing false riches who are now seeing repossessions at an unprecedented rate. But others will suffer, too.
Markets go down; they will go up again. Over time, this crisis will recede, but if those in power do not draw some lessons from it they, too, will pay the price.
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