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19 September 2007

It’s the cycle, stupid!

It's Gordon Brown's economic management that's left Britain ill equipped to deal with problems posed

By Alan Duncan

Ultimately, all economics is cyclical. Long periods of economic growth are possible, but they invariably end sometime, and a downturn follows. No matter how successful or fortunate a country or company’s economic management may be, the good times always have an end point. Nobody has yet managed to abolish the business cycle: it is the most enduring economic phenomenon.

The surest sign that problems are looming is when bankers, institutions and countries convince themselves that they have entered a new period in which economic gravity can somehow be defied.

We have had the secondary banking crisis, the collapse of loans to Latin America (on which Harold Lever famously said that “countries can’t go bankrupt, but banks who lend them money can”) junk bonds, the dot com boom and now the disintegration of sub prime debt. One might add to the list hedge fund mania and the inability of any country to ‘buck the market’, hence the ERM. A further candidate is private equity, many of whom are highly geared, whose fortunes might yet prompt echoes of Harold Lever “the companies they bought will still exist even when the vehicles which bought them have gone under”.

The worst dangers lie in a combination of institutional folly and governmental hubris.

Institutions have allowed their judgment on the quality of lending to become polluted. In a boom, the game of pass the parcel can last for a long time before it implodes. Ever more inferior packages of debt can find a willing buyer who hopes to sell it on before the music stops. Sensible lending criteria become ignored for as long as institutions think they will be able to offload the problem to someone else. Also institutions become insensitive to the human misery of poor debt as they sell their loan book to others in the wholesale market and fail to think of each borrower as an individual.

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For sub prime debt, the music has stopped and market liquidity has evaporated. America has sneezed….! Much of ths has been caused by an irresponsible US Government deficit.

Thanks to globalisation (although our gratitude may yet be short lived) most governments have enjoyed a decade of sustained growth. The reason government is now culpable in the UK is that they have not used that decade to prepare for the years that will inevitably follow.

Especially with globalisation’s pressures on competitiveness, Brown should have recalibrated the economy so as to reinforce it for more difficult times later. He has done the opposite. He has squandered a decade of economic prosperity, disguised growing structural problems, and deferred decisions which could quite easily have been taken when things were going well. He has used the decade to support his political ambitions over and above the long-term interests of the country.

He has doubled the council tax, destroyed people’s pension, increased the proportion of GDP taken by the state, created jobs disproportionately in the public sector, taxed everything that moves (and right up to the buffers) and presided over a collapse in saving. Personal debt has soared, and many personal mortgages are on a 2 year special deal cliff edge. Credit card debts are also a game of pass the parcel as people try to take advantage of 6 month 0% deals. The economy has no slack in it to cope with a downturn; it is unduly reliant on the City; and housing transaction costs are likely to prove an exaggerated downward force on the housing market. He has not even managed the public finances sufficient to support inflation-based increases for public sector pay.

In other words, the condition of the economy, thanks to Gordon Brown, is ill-equipped to cope with the problems posed by events in world financial markets, and it contains elements which are likely to exacerbate the problem. UK conditions are not prepared for the turn in the cycle and worse, with nothing set aside for a rainy day, the pain stands to be greater than it would otherwise have been.

Downturn.doc