Tim Farron addresses an audience. Photo: Getty Images
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The Lib Dem leadership brought their party closer together. Labour's is tearing them apart

The Liberal Democrats' short contest has allowed that party to get back on the road to recovery. Labour's long one has them on the road to ruin, says Dan Falvey.

On 8 May the leaders of the Liberal Democrats and the Labour party resigned following a shock Conservative victory at the general election. Nick Clegg said that it had been “a huge privilege and unlimited honour” to serve as leader for the Liberal Democrats but that the party had suffered “catastrophic losses” and that they must “reflect on these in the time ahead”; meanwhile, Ed Miliband stepped down claiming that the Labour party “needs to have an open and honest debate about the right way forward”.

Both parties had done worse than expected at the polls and both now desperately needed to reorganise in order to move forward and start rebuilding so that they may once again be seen as electable come 2020.

However, this is where the similarities between the parties’ post-election woes end. The leadership elections that followed the resignations of the leaders have taken two very separate routes. While the Liberal Democrats have elected Tim Farron as their leader in a very private, respectful leadership contest that took just 10 weeks, Labour’s leadership election has been an incredibly public vicious battle that is set to drag on for a total of 18 weeks until a leader is finally elected in September.

Given the extent of Labour’s loss the acting leader of the party, Harriet Harman, claimed that the party’s leadership contest must take place in the public eye. She said: “We have to go back and ask local people from those areas [in which we lost] to be brutally honest about what they think of us and what they want from us”. As a result hustings were to be televised and take place in marginal seats so that all candidates could be properly scrutinised by the electorate.

In contrast to the Labour election, the Liberal Democrat leadership contest was much more low key. Instead of appealing to the wider public the party who were in government with the Conservatives before the election opted for a contest that was much more focused on their party members. Sal Brinton, the Liberal Democrat president, argued that the party had chosen for a swift election so that they can begin campaigning immediately. She stated: “We know we have some major elections to fight next year, the Scottish parliament, the Welsh assembly, the London assembly as well as a very large number of council seats.”

When it was announced last Thursday that Tim Farron was to be the new leader of the Liberal Democrats the mood from his party was one of excitement and eagerness. The party was ready to move forward under their new leader and do everything they could to re-engage with the electorate.

There was no divide in the party with supporters of the only other leadership candidate, Norman Lamb, equally anticipating with enthusiasm the challenge ahead. Lamb himself congratulated his rival on twitter claiming that Farron would be a “passionate leader of our party, championing social justice and leading from the front in our campaign to rebuild the liberal voice”.

The future of the Labour Party couldn’t look more different. Through their “open and honest debate” the factions within the party have become visible: The party is divided between Old Labour, New Labour, Blairites, Brownites and everything in between. The stark differences between the policies offered by leadership candidates Liz Kendal and veteran MP Jeremy Corbyn highlight the differences in beliefs of party members. In reality, Labour seems less like one untied political party and more like a coalition of MPs of opposing beliefs.

Ed Miliband was criticised by many for not being a strong leader but one thing he did do was hold a divided party together and make them work as a unit. In his absence, the invitation for MPs to express their opinions openly has caused the party to fall apart as Labour MPs begin to fight amongst themselves.

Chuka Umunna has accused some members of his party of “behaving like a petulant child who has been told you can't have the sweeties in the sweet shop” during the leadership election and Harriet Harman has seen MPs revolt against her decision for the party to abstain on a vote to changes to welfare benefits.

It is impossible to imagine how that party will be able to work together and MPs put their differences behind them post the election of a new leader, especially now that the range of opinions have been so widely circulated by the media.

With a new leader now elected and the whole party fully behind him, the Liberal Democrats looks like a party who are ready to fight the government over the next five years and make their voice heard so that they may once again become a relevant party within the political system. Labour however look nowhere near ready to fight for the hearts and votes of the British electorate.

We are only half way through their election battle and they are already starting to fall apart at the seams. For Labour the next five years represent not only a struggle for the support of the nation but a struggle for unity from their own MPs.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?