14 May 2015

Labour lost because it could not face up to its role in the crash


The Labour party paid a heavy price in the 1980s for failing to come to terms properly with the events of the late 1970s, and it was only when Tony Blair came along in 1994 that the party began to have an honest reckoning. With Labour in denial, the Conservatives under Margaret Thatcher were very successful at framing the 1970s in terms of the chaos caused by the trade unions and Labour weakness, even though a previous Conservative had been complicit until 1975 under the leadership of Ted Heath. In the mid-1990s, when Blair accepted the concept of open global markets, aspiration and the need for prudence in public finances, many worried voters were convinced that Labour had finally got the message after years of living on another planet. He then won three elections.

Now, a generation later, it is clear that Labour has repeated its mistake of the 1980s, this time in the aftermath of the financial crisis, by telling itself a fairy story about the causes of the disaster that might have sounded reassuring to some traditional Labour supporters. Yet, ultimately it left the party’s leadership sounding by polling day as though it was fundamentally unserious.

This epic failure resulted in Ed Miliband finding himself on television being mocked by the Question Time audience with just days to go. When he was asked if Labour had spent too much in the Brown boom, he said “no” and was taken apart and even called a liar by members of the audience. It remains to be seen if that moment cooked Miliband’s goose, as it may have been cooked long before that. It cannot have helped that an audience of more than four million watched and the clip then looked horrendous on the news programmes that followed and on BBC Breakfast the next day. This means that many millions saw the leader of the Labour party flailing around, looking like a poor excuse for a student politician who has been asked why his dissertation is late.

It should be understood that the voters that Labour needed to win over were not ideological and they were not political obsessives. But talk to anyone involved at a senior level in the Tory campaign and it becomes clear that those moderate voters had a very big fear about Labour and money, namely that it tends to get carried away in good times and spends too much of other people’s cash. Miliband and Labour’s reluctance to face the truth about the crisis and its aftermath meant it never stood a chance of persuading these people that it had changed because at root, other than admitting some culpability on banking regulation, Team Miliband behaved as though there was nothing much to apologise for.

‎Here it is customary for Labour sympathisers to make an obvious mistake. High spending under Gordon Brown and Tony Blair (once they had abandoned prudence) did not cause the great crisis of 2007-2008, it is said. Spending on nurses and teachers was not to blame, it is said. It was the bankers and American mortgage cowboys who blew up the economy. That last Labour government was the defenceless victim of a freak accident, according to this version of events.

But no-one sensible says that high and fast-rising government spending actually caused the crisis. That would be a daft assertion. What it did instead was to leave the UK particularly badly exposed when the downturn came (as it always does). At the very least, it would have been sensible to be running large surpluses by the time of the crisis.

The primary reason the UK was hit so hard was that the country had gone nuts on cheapish money, creating a surge in personal debt. Worse, Brown had declared in the good times that this boom represented a permanent change (the end of boom and bust) thanks to the “genius” of now discredited central bankers such as Alan Greenspan and Mervyn King. Policy and spending were predicated on conditions remaining benign.

In a global credit boom like no other, the ‎UK government had allowed UK clearing banks to expand from 143% of UK GDP at the dawn of the new century to 450% of UK GDP. That expansion of their balance sheets was partly down to them increasing their activities abroad, but much of it was just crazy domestic lending on commercial property in the UK and the Republic of Ireland and to consumers. In the case of RBS, the exotic products sold by traders in its investment bank, triggered the meltdown although they were not the cause of it. In the years after, the tens of billions of losses came mainly from old-fashioned dud lending in the boom by people who forgot that “it’s different this time” is self-delusion at best, and a lie at worst.

When the boom stopped, Britain not only had to pay for a clean up of its vast banks that had been cheered on by the government, it saw business lending hit, for understandable reasons as banks scrambled to repair their balance sheets. Incidentally, that deleveraging and the war on bank capital launched by Mervyn King and then abandoned explains a great deal of the slow recovery. This was a monster hangover from a crazy party.

There is something else that the defenders of high spending and the Brown record cannot seem to comprehend. Some of the seemingly never-ending prosperity in the run up to disaster was an out and out illusion, based on easy credit, personal debt and poor behaviour by the banks. All those lovely government tax revenues from booming UK banks? Several British banks made their profits, paid their people bonuses and sent billions to the Exchequer on the back of pumping out dodgy products such as payment protection insurance, which the banks are still refunding to ripped-off customers many years later. To put it in context, the year before it almost went bust, RBS profits touched £10bn. Eighteen months later it cost the taxpayer £45.2bn to recapitalise the bank.

Government spending was not only high and rising. Much worse than that, it was paid for by a mad credit boom. The entire edifice was built on sand.

The story of the crash and what caused it is not straightforward, of course. There are a great many lessons for the centre-right about excessive scale, credit and globalisation. The liberalisation of the 1980s and the expansion of global financial institutions created “too big to fail, too big to manage” giants that had balance sheets bigger than domestic economies. The Conservative leadership was much too timid and even signed up to Brown’s spending levels, although that was because New Labour had so successfully baseball-batted anyone who suggested that even 5p could be saved from the budget. After their election win, the Tories must now do much more to get the finances in order ahead of the next, unpredictable, downturn. They should also do more of the highly promising work done on introducing greater digital competition, encouraging new providers to challenge the biggest banks in the UK.

But while the blame should certainly be apportioned fairly, Labour was in power. Gordon Brown, Ed Miliband, Ed Balls and quite a few others were there, in command of the ship of state, and they steered it into the rocks. Until their successors can come to terms with the horror of what really happened in that period, Labour stands no chance of persuading voters to give the party another chance.

Iain Martin is Editor of CapX.