Tom Streithorst
Not good foundations for economies
Here in the depths of the bust, it is tempting to feel nostalgia for the boom. Let’s not. The bust has been brutal but the boom wasn’t so great either. The British economy actually grew more in 1979, the year of the “winter of discontent,” than it did in 2006 at the height of the bubble. Most of the western economies did better in the late, unlamented 1970s than they ever have since.
For the past 30 years, the world’s engine of growth has been debt-fuelled consumption financed by asset price bubbles. Growth has been sketchy, financial crises common, inequality rampant. Last week I wrote about the fragility of borrowing and spending as an economic strategy and suggested it might be time for our policymakers to find a better one, by taking a look at what worked during the golden age, 1950-1973, the greatest period of growth the world has ever seen.
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Edward Docx
On 6th December, 30 years ago, on a dark and miserable night in south London, a few streets from where I am writing this, a young Peter Mandelson was elected as a Labour borough councillor to the world’s most insane local council—Lambeth. Representing Stockwell, the 26-year-old Mandelson found himself sitting on a Labour council led by a man called “Red Ted,” who was backed by a grim cast of Trotskyites and Bennites. Though few pause to consider it now, this was Mandelson’s first experience of real politics. It was winter 1979 and the Labour party was just about to forget about the British people altogether in favour of a long and enthusiastic tour of the hinterlands of lunacy and irrelevance. Mandelson was living in a tiny flat in Kennington. His bed—in the living room—folded into the wall.
On 17th February this year, Baron Mandelson of Foy and Hartlepool was attending a drinks reception at the Manhattan penthouse that is the official residence of the British consul-general in New York. The secretary of state for business, enterprise and reform was in America to talk up the British economy. The centrepiece was a speech to the Council on Foreign Relations. But, as he waited at the studios of CNBC during a busy day of interviews, Mandelson overheard the chief executive of Starbucks, Howard Schultz, claiming that Britain was in “a downward spiral.” On screen Mandelson reacted robustly; later on though—at the party and in the presence of journalists—he let fly: “Why should I have this guy running down the country? Who the fuck is he?” he was overheard to say. Thus a mini-media storm was set in motion. And yet there was a further, more private, layer to the evening’s events. At some point, Mandelson took a moment to send a text to the young daughter of a close friend who was also in New York and with whom he had been in touch throughout his visit—a text to the effect that the evening was deeply tedious and that he wished they had gone to the Armani party instead as they had discussed. It was New York fashion week and he would much rather have been with David and Victoria.
The two dates are illustrative. The first, in 1979, because many people forget the political landscape into which Mandelson first ventured and from which he has spent the last 30 years in flight—both individually and, with Gordon Brown and Tony Blair, as one of the triumvirate who created new Labour in the mid-1990s. Imagine that you are in your mid-twenties and that, for the next three years, your diary is full of meetings at which you will discuss lamp-posts and dog mess with people who have no interest in the practical necessities of government (or even lamp-posts and dog mess) and who believe that Trotsky is humanity’s best chance of salvation and denounce you as “an enemy of the people” if you demur. Of course, Mandelson is famously the grandson of Herbert Morrison (Labour home and foreign secretary, deputy prime minister), but it is on Lambeth council where Peter had his first real experience of the actual workings of the Labour party. And it is important to remember that he was not a media-fixer there but an elected representative; that he had to fight these people hand to hand through every policy decision, and that these experiences, as much as his ancestry, are what will have shaped his future thinking. A man’s life is set on its course and his opinions begin to ossify in the years between leaving home and his early thirties; and for Mandelson this period coincided with the far-left frenzy in the Labour party. It must have been dismal, and it is why the SDP was formed in 1981 and why Mandelson left politics for television the following year.
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David Halpern
To discuss this article visit First Drafts, Prospect’s blog
In 2010 British public sector borrowing will be £175bn—more than the health and criminal justice budgets combined. The “structural gap” in our finances, after spending on the recession, is £90bn a year. And government figures now imply that reducing this gap will have to come mainly from cuts, not tax increases. The rows over public spending have barely begun.
Britain has been here before. The Institute for Fiscal Studies thinks our late 1970s fiscal hole was larger than today’s. Back then, our debts were eased by inflation and the windfall of North sea oil. Yet even these didn’t stop the winter of discontent, the defeat of Callaghan and Labour’s breakdown into open warfare. Chris Hood, professor of government at Oxford, also sees parallels with the early 1920s, when a recession led Lloyd George to cut budgets bloated by war and liberal welfare policies, slashing roughly £100bn in today’s terms.
In both cases some areas, such as health, were protected. Defence bore the brunt in the 1920s; capital spending, education and local government did worst in the 1970s. Yet even if history says belt tightening is possible, can a Whitehall machine accustomed to year-on-year funding increases suddenly deliver savings? As one senior Treasury figure put it: “I am confident that we can deliver any given number…. but I am much less confident that the right things will get cut.”
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Ed Howker
To discuss this article visit First Drafts, Prospect’s blog
To his critics on right of the Tory party, David Cameron is a modern-day Ted Heath: an energetic young politician with a veneer of electoral appeal, but lacking the iron to make tough decisions, and with a tendency to triangulate—that Blairite technique for making policy only in the centre-ground. His sometimes detached relationship with his parliamentary party, his propensity to consult a meagre team of trusted advisers, and his association with fashionable lifestyles all match Heath too. Just as Cameron’s wife Samantha, the creative director of Smythson, designed one of 2007’s “must-have” handbags, Heath was asked on becoming leader in 1965 by the Sunday Times: “Do you appreciate that you are the first Tory leader with wall-to-wall carpeting?”
Even before Gordon Brown’s electoral humiliations in June, Cameron’s critics on the right thought the backdrop of a global recession and Labour party strife had prevented a proper examination of the Tory leader. Labour now uses a similar argument to explain Cameron’s successes during the expenses debacle: scandal always hits the government hardest. The prime minister’s uneven response and the mass resignations around the European election only made Cameron look better by comparison.
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Michael Prest
Discuss this article at First Drafts, Prospect’s blog; and read James Alexander’s companion piece on banking’s bonus culture here
We are fascinated by what other people earn. But in recent months natural snoopiness has turned into political outrage. Taxpayers in many countries have seen funds that their governments have been forced to push through the front doors of banks, to save them from self-inflicted collapse, slipping out of the back door in big bonuses.
President Obama has introduced stringent limits on bonuses for executives of companies receiving federal aid. Governments across Europe have also responded to the popular mood with restrictions on executive pay as a condition of bank bailouts. The British government is steering an uncertain course between urging pay restraint and leaving management to run the banks that are now at least partly owned by the state. It has also announced a review of pay and risk management, chaired by David Walker, a City grandee.
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James Alexander
Also in this issue: read Michael Prest’s companion essay “What is a banker worth?“
Bonus bashing is good politics. Is it also good economics? The argument against limiting bonuses was crisply put by John Thain, until recently head of Merrill Lynch. Thain defended his decision to authorise bonuses of almost $4bn despite his company having lost nearly eight times that amount with an appeal to a free market axiom. “If you don’t pay your best people,” said Thain, “you will destroy your franchise.” Put another way: if banks cannot retain and motivate talented staff, how can they keep capital flowing efficiently around the economy?
Whatever the moral shortcomings of Thain’s argument there are holes in his logic that any reformer should consider.First, the incentive function of large bonuses is to be doubted, at least at the margin. Barclays chairman Marcus Agius said in Davos that too many bankers are used to receiving incentives “for basically turning up.” He is correct. Second, attempts to reform financial pay have not so far challenged the principle that financial services are based on highly mobile human capital and that the rewards to that capital have to be exceptional.
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Richard Reeves
Never let a good crisis go to waste,” insists Rahm Emmanuel, the hardbitten chief of staff to Barack Obama. Certainly, economic disaster and political disequilibrium create the space for new thinking. They make and break reputations too.
Gordon Brown is trying to bring the British economy down gently. A little like the passengers of Flight 1549 approaching the waters of the Hudson, voters are anxiously wondering if the captain can land safely. In private, even senior government figures now admit that Britain’s economy may shrink by 4 per cent in 2009—a downturn twice as deep as official projections. Latest polls, at least, suggest that faith in the pilot is waning.
As a result Labour circles are full, once again, of post-Brown political chatter. There will be no challenge before the election, of course. But the contours of the debate that will engage Labour in opposition are already becoming visible. It’s a dividing line that fractures the other parties too. On the one side stand those for whom the economic crisis demonstrates the need for a more muscular state; on the other, a diverse group who want to use the state to give more power to individuals.
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Graham Turner
The second bailout for British banks was dead on arrival. The markets greeted the 19th January announcement with sharp falls in both bank shares and sterling. Investors fretted over the rapid deterioration in public finances. They should have worried more about the faulty logic underpinning the scheme.
The assumption that banks are not lending is wrong. They are, but only to other financial corporations, like leasing companies, hedge funds, pension funds, brokers and so on. These organisations have been unable to access the wholesale financial markets since the collapse of Lehman Brothers and the downward spiral in house prices. So they are borrowing from banks instead. Far from credit drying up, in the first 11 months of 2008 banks lent these groups £252.8bn.
The real trouble is that banks are still not lending to businesses or households. In the three months to November last year, lending to non-financial corporations fell by £2.4bn and to households by £5.6bn. Over the same period loans to financial corporations rose 42.7 per cent to £101.7bn. Meanwhile, normal businesses are being hit by a steeply rising cost of borrowing. In 2008 the average cost of borrowing on the corporate bond market peaked at nearly 29 per cent for riskier companies. The Bank of England (BoE) has too often ignored this critical barometer. It also doesn’t appear to understand that, at a time of uncertainty, issuing more “risk free” government bonds—in order to buy up toxic assets—will crowd out corporate borrowing.
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Jonathan Ford
The mouse that ate wall street
We know that the mice got at the financial system in the past few years–even if most of us still don’t understand how. Bernie Madoff is only shocking because he was the single most brazen mouse.
Madoff wasn’t one of the big financiers on Wall Street. Although he was at one point chairman of the Nasdaq stock exchange, he remained a relatively obscure figure, known best to initiates and financial middlemen (doubtless how he wanted it). Yet he sucked in $50bn—more than twice the amount of deposits taken by Northern Rock, a bank deemed too big to fail. He was able to do so mainly because the cats slumbered. The so-called professionals who took fees for managing our money failed to keep an eye out. And worse, the Securities and Exchange Commission (SEC), which oversaw Madoff’s activities, was fast asleep.
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Willem Buiter
YES: Willem Buiter
NO: Derek Scott
Dear Derek
11th January 2009
This year the euro celebrates its tenth anniversary. Since the global financial system is in tatters, the case for Britain going in is now stronger than ever.
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