As I See It
Brown forgets he failed to deliver ‘strong messages’
The collapse of Lehman Brothers ten years ago this weekend has inevitably prompted questions about whether we have learned anything from that calamitous period – and taken sufficient measures to try and avoid it being repeated.
There was certainly a great deal of nonsense talked about it at the time, with politicians of every tribe instinctively rushing to offer partisan judgments about their opponents and some hoping to declare the end of capitalism.
Too many had forgotten that with false booms come corrective busts and that capitalism was in fact responding, as it always does, by exposing underlying weaknesses to economic realities. Unfortunately for some, including many innocent parties, capitalism was working, not failing.
In the United States Democrats were quick to blame President George Bush Jr for tolerating the growth of subprime lending The critics chose to ignore it was President Bill Clinton who encouraged Fannie Mae and Freddy Mac, the main US mortgage lenders to expand their loans books for political benefit in markets most likely to foreclose. I know this to be true because I’ve seen the press releases boasting of Clinton’s decision in the nineties.
Not surprisingly, former Chancellor and Prime Minister at the time, Gordon Brown, has not been slow to comment, offering the warning that the world is “in danger of sleepwalking into a future crisis”. Ironically, he talks of us being at the latter end of the economic cycle, when he was once famous for telling us how he had delivered us from the threat of boom and bust.
More hypocritically, or maybe forgetfully, Brown has warned that there is not yet enough fear of punishment for banking malfeasance – nor has there been “a strong enough message sent out that government won’t rescue institutions that haven’t put their houses in order.”
I happen to agree; far too many UK bankers went unchallenged for their conduct by the authorities, unlike in Iceland where a number of banking executives ended up in jail. It was Brown’s government that could have given warning messages in the UK, but on 13 September 2007, a full year before the Lehman Brothers collapse, his government sent the wrong signal by providing emergency funding to Northern Rock. By February 2008 it had been fully nationalised.
The first run on a British bank for more than a century had ended with a government bale-out and the message that such institutions were too big to fail.
On 29 September 2008, only two weeks after Lehman Brothers folded, Brown’s government again stepped in to take on Bradford & Bingley’s £50 billion of mortgages and loans. More was to follow with rescue packages announced on 13 October for RBS, Lloyds TSB (which itself had already been persuaded to take on HBOS) and ultimately on 29 November the nationalisation of RBS.
Have we learned from that period? Well, there have certainly been many inquiries and copious recommendations bringing regulatory changes – with a pushback against the idea of corporations being allowed to be too big to fail – but it remains to be seen if any future government would behave differently when confronted with the public fears that Brown and Alistair Darling faced.
Yet for all the banking collapses and the genuine financial pain felt by many thousands of people, most Western economies have recovered. Corporate profitability is now back to peak levels, and while economic growth has varied markedly by country, it has, for all but a few exceptions, been generally healthy.
Most remarkable has been the turnaround on unemployment, which after the crisis commenced was steadily climbing in the UK. Bank of England external adviser David Blanchflower famously predicted it would reach three million if the Conservative – Liberal Democrat coalition followed through with what was at the time branded as austerity. Yet once the public sector began to shed the half million employees it had taken on in the Blair years the private sector responded and we now find employment at record levels and unemployment at a 40 year low.
With the UK minimum wage relatively high by European standards and a benefits top-up system in place, together with a growing job market, and real growth in wages, migrant workers continue to be attracted while domestic skill shortages proliferate due to poor levels of training and falling education standards.
The nature of the economic problems in the UK and Scotland are changing and some of them are because of the success of the recovery.
Unfortunately, this apparent recovery masks a number of major challenges. The Scottish City-based economist, Ewen Stewart, believes our politics has been transformed, largely, but not exclusively, as a result of the QE monetary experiment, which although successful in averting a 1930’s style collapse, has created a perception of clear winners and losers that has fed into the populist revolt delivering Brexit, Trump and other similar phenomena.
“The winners, notably older and asset rich, have benefited from QE and very low interest rates, through asset price reflation” he says. While losers across the classes – the savers, the pensioners, those on fixed incomes and benefits – in seeing the failure of the establishment to take responsibility for their largesse, have challenged the political consensus.
“Trump was a 200-1 outside bet at the start of the Republican primaries and there was no word for BREXIT in the English dictionary,” says Stewart. “Now the old certainties are not so certain.”
The lesson must be that to recover political stability requires us to recover economic stability – so until the UK public and private sectors can once again handle normal interest rates “stronger messaging” about the consequences of bad judgement will not save our institutions from further turmoil.