Where do we go from here? It’s pretty clear that Gordon Brown doesn’t know and that Alistair Darling and the other members of the cabinet don’t either. Nor, it seems, does anyone else. It was much easier to predict that something nasty was going to happen than it is to know now when and how the nastiness will end. You had only to cast an eye over four financial indexes – current account, corporate debt, personal debt, house prices – to know that something bad was around the corner. Except that Brown, Darling and the other cabinet members didn’t cast an eye over the four indexes, or if they did, decided to ignore them. They can’t even excuse their ignorance of what the bankers were up to, since they chose not to know: indeed they had a political interest in not knowing, for as long as this gimcrack structure stayed upright their electoral chances weren’t too bad. They could of course admit that they’d been naive, but they aren’t likely to and it would be no help.
One theoretically workable solution would have been to let nature take its course. Whatever happened, most of the standard of living gains of the last 20 years would have been preserved. New institutions would have emerged from the wreckage of failed banks. Manufacturers would eventually have started renewing their inventory. People would have been more cautious with their own and others’ finances – at least for a while. As long as the state could afford the dole payments and avoid holding elections the system could have been allowed to heal itself. That is the capitalist way. Unfortunately, almost anywhere except China, the state can’t avoid elections, nor can any politician do what Andrew Mellon was reputed to have recommended in the 1930s – liquidate everything.
We live, after all, in a democracy. To do nothing is politically impossible. To do something, however, requires a proper understanding of what went wrong. Here, much of the media commentary has missed the point. It has been all too easy to blame the bankers; their behaviour makes it almost compulsory. It is also easy to blame the clever Oxbridge types who invented risk models and forms of securitisation neither they nor anyone else understood. But their role was always secondary. If you tell bankers to go ahead and make money that is what bankers will do. If the Labour Party says it is intensely relaxed about people getting filthy rich, people will get filthy rich, and if you announce that you will regulate their activities with a light touch they won’t care how they get rich. Adair Turner, in his defence of the Financial Services Authority, was perfectly right to say that had the FSA told any bank to give up its riskier practices the government would have been down on it like a ton of bricks. This says little for the FSA’s independence or its courage but, alas, it’s true.
Under New Labour departments of state are named not after their function but after their aspirations – the names, it seems, are designed to tell you what the government aspires to. Part of the department that was once ‘education’ is now ‘innovation, universities and skills’, in case we failed to understand that the government wishes to encourage skills and innovation. The department that used to be concerned with ‘trade and industry’ is now concerned with ‘business, enterprise and regulatory reform’, ‘regulatory reform’ meaning simply ‘removal of regulations’. The very name was both a signal to the City that the government wanted it to make a great deal of money, and an expression of the ideology that has prevailed in most English-speaking countries since the early 1980s: an ideology deeply hostile to the quasi-social democracy of the 1960s and 1970s, and one which regarded wide and increasing income inequality as essential to economic success. It purported to be an alternative to social democracy which would eliminate the state, progressive taxation and all other impediments to getting or remaining rich. The Clinton administration, for example, with doubtless the best will in the world, thought that the poor should have access to decent houses and so encouraged the large-scale lending of unsecured mortgages. It did not, however, think it necessary that the income of the poor be raised to enable people to afford the houses they were ‘buying’. The whole edifice of credit and reckless banking and risk models was built on gross income inequality within democratic societies – states where elections have to be won. Britain and the US were the model, and their folly has now dragged down with them more prudent and productive societies – Germany, for instance. But it was the ideology that came first, not the bankers. The bankers were merely ‘facilitators’ and were showered with honours and government jobs as a result.
Knowing what to do now depends on the kind of economy and society we wish to re-create. That is the hard part and there is no evidence that Brown has given any real thought to it. All he seems to want is the status quo ante plus an FSA with more gumption. But we can’t restore the old housing market, nor (surely) can we restore styles of life so reliant on credit. That means the government has to consider a form of income redistribution. Conceivably, it should also consider the ‘balance’ of the economy. The last British government to try to preserve a balanced economy was the Wilson-Callaghan government in the 1970s; the succeeding Thatcher administration gave up trying. To restore balance (if that is thought to be desirable) implies favouring or fostering manufacture at the expense of financial services, which would go against what both Conservative and Labour governments have done in the last 25 years. It’s unlikely that politicians any longer even have an institutional memory of what you would need to do. The crisis is systemic: it’s not merely about overpriced houses or busted banks, it’s about the Labour Party and the way it has chosen to govern the country: the privatisations; the money-grubbing; the disastrous relationship with the United States, which has infantilised the country’s political elites and so damaged its interests. In sum, it’s about a political system that now seems almost beyond reform.
Nor, alas, are the Keynesian solutions being proffered on all sides so simple. Keynes in the 1930s was writing about a country with high unemployment and a slack economy, but with sound banks and building societies that were, if anything, managed too conservatively. A country also with very low levels of personal indebtedness despite the spread of hire purchase – most people couldn’t afford to be in debt – and a manageable housing market. Keynes didn’t have a banking crisis to deal with. Thanks to our place in the world economy, ours is now a ‘leaky’ economy: any domestic reflation tends to ‘leak’ abroad and has less effect at home than it should. The model of state intervention Keynes describes in The General Theory currently fits the United States much better than Britain.
And then there is the problem with Brown’s own innovation – the Private Finance Initiative. The PFI was designed to make it look as if the government was spending less than it was by (in effect) paying private firms to build hospitals, schools, the London Underground and so on. The private sector would find the money and the state would repay it over a period of years. The PFI is a dreadful arrangement (the London Underground, where the principal PFI contractor, Metronet, went bankrupt, is a good example of its failings) and an actuarial nightmare. It has locked the government into private-sector financing at a moment when the private sector cannot find the money – which is why the Olympics are going to cost the taxpayer an arm and a leg. The government is now lending money to private firms in order to rent back schools built with its own money.
Where the government goes from here is anyone’s guess, but there are some things we know it can do and others that it should. Much tighter regulation of the banking and financial services sector is obviously necessary, and seems inevitable whichever party is in power. ‘Seems’ because we don’t know how much regulation the City will accept – it is still immensely influential with true believers (like the prime minister) who decline to admit error – and how far it will sabotage such regulation as emerges. Whatever the difficulties, there is also plainly room for more ‘Keynesian’ expenditure. Even if every current PFI project goes ahead, the government has so far promised little – certainly by comparison with the US or Australia or the amounts it has itself put into the banks. Now would be the time to undertake large-scale construction of social housing, which would benefit the building industry and correct one of the scandals of the housing market – the disappearance of decent housing for affordable rent.
There is another Keynesian lesson the government could learn but probably won’t. It could bring in measures aimed at income redistribution. The best form of redistribution is one in which the money is earned rather than borrowed, and spent rather than saved. Keynes may have overdone this argument, which was associated with ‘left’ Keynesians in America and his younger followers here, but it has obvious force. The trouble is that such a redistribution is almost unimaginable, given that income inequalities are central to the Anglo-Saxon ideology. To end them would be to bring the whole thing down.
If, however, the government does have redistribution in mind, it could make a modest start in the Budget on 22 April. It could, for instance, significantly increase the state pension (which hardly anyone denies is too low), raise family-related benefits and lift the minimum wage with a government-funded top-up. And it should pay for these increases, at any rate in part, with a readjustment of income tax bands such that the well-to-do pay their fair share – something not seen in years. Doing this would have a much more immediate effect than the ‘quantitative easing’ of the money supply currently taking place, and would go some way to compensating low-income savers who rely on their now almost non-existent interest payments to supplement their pensions.
That the government has got us into a terrible mess is indisputable and to say, as Brown does, that the crisis is purely a result of what happened in the American mortgage market is dishonest. He should, however, be spared two now frequently repeated criticisms. First, that the government wasted huge sums supporting the banks. It had little or no alternative other than to recapitalise them. It could not have let RBS or HBOS go bankrupt, which they would certainly have done. Although the government was negligent in its regulation of the banks it could have had no more idea than anyone else of how much money would be involved. But it was right to spend it. A second criticism, made particularly by the Conservatives, is that the government overspent in its second term and so left us with a mountainous national debt even before it began rescuing the banks. It is not a mountainous debt by international standards and again the government had no alternative. Its massive spending is one of Labour’s few defensible actions. We tend to forget how rundown the country’s social and physical infrastructure was after 18 years of Conservative government. If the Tories are looking for people to blame they could start with the real villains of the piece, the members of Thatcher’s first government, and go on from there.
Saving the banks was one thing, leaving them in private hands is quite another. The government should have nationalised RBS and HBOS instead of foisting HBOS on Lloyds with a demeaning promise to suspend the competition laws in Lloyds’s favour. And having nationalised them it should have made them into instruments of public policy: at the moment it effectively owns them but plays virtually no part in their activities. As it was, the government did everything it could to avoid any nationalisations. It dithered for ages over Northern Rock before it was driven by circumstances into outright public ownership. When it was clear that RBS and HBOS were both sinking, Brown rushed to ensure their recapitalisation with public funds, not because he was setting an example to the world, as his admirers thought, but because he was determined to do whatever it took to avoid nationalising them. It was an act not of courage but of timidity. By that stage no one, except for the directors, some of the more optimistic shareholders and, of course, the members of the present cabinet, would have blinked an eye had the banks been taken into formal state ownership. What was once an electoral strategy – the repudiation of what Old Labour was thought to stand for – now paralyses the Labour Party, and Brown in particular.
So far the saving of the banks (assuming they have been saved) is the one thing the government has done towards effecting a recovery. The proposal to put in place an international system of bank regulation and the campaign to maintain global free trade and guard against protectionism – currently Brown’s whole programme – are utterly threadbare. Bank regulation is necessary, but will work only if governments want it to work, and the idea that such a scheme might be agreed on by 20 governments at the G20 conference next month or could have any immediate effect is ridiculous. Brown’s haring off to Washington to spread the good news is alarmingly reminiscent of Blair’s trip after 9/11 – except that Blair was talking to a Republican America eager to hear what he had to say, whereas Brown is talking to a Democratic America that cares very little.
The banks are anyway not the main problem, nor is protectionism. It is simply not true that protection is always bad and free trade always good. Protection did no harm, for instance, to the British economy in the 1930s. And the fetish of free trade attracts a cast of mind which is hostile to state intervention and instinctively suspicious of government action – the last thing we need at the moment. Furthermore, any attempt to rebalance the economy, to encourage manufacturing at the expense of the finance industry, would probably demand measures purists might regard as protection: something Peter Mandelson (rather surprisingly) appears to understand.
In fact, all this is largely a masquerade designed by Brown to conceal both from us and from himself the extent of his personal responsibility for what has happened. He is investing much of his reputation in the forthcoming G20 conference. In 1933 a similar conference met in London (appropriately, amid the fossils of the old Geological Museum in Jermyn Street), similarly hosted by a (former) Labour prime minister, Ramsay MacDonald. It was ‘torpedoed’ by Roosevelt, who declined to subordinate America’s internal recovery to the requirements of any international ‘stabilisation’. Brown would do well to arm himself against the real possibility, even the likelihood, that Obama will do the same. Keynes, we might note, was on Roosevelt’s side.
There is no sense that the Labour leadership believes this might be a crisis of New Labour, not just a crisis of the banking system. All the old tattered policies are still worming their way through Parliament. The government is persisting with its wretched legislation to privatise much of the social service system, though we know from experience what the consequences will be: the private sector will take on only the easy bits, and even more stringent ‘conditions’ will be imposed on claimants – all accompanied by tosh about a ‘personalised’ service. This legislation could only have been written by financially well-padded men and women who have lost all sympathy for their own constituency. Even more surprisingly, they are proceeding with it even though the economic circumstances in which it was conceived have been transformed. (Unemployment is likely to be much higher than it was when the legislation was drafted.) In fact, completion of the contracts between the government and the private sector ‘providers’ has been delayed since no one now knows how much it will cost and some providers are presumably getting cold feet. Meanwhile the Parliamentary Labour Party seems largely powerless and the trade unions have hardly tried to stop any of this – even in the case of the proposed partial privatisation of the Royal Mail. Many MPs have, of course, been bought off with government jobs, and many of the rest have just given up, but the reluctance of the unions to rock the boat has probably gone on long enough. They basically fund the party, and although they won significant concessions over the industrial relations legislation – the Warwick agreement – they must wonder to what extent the interests of their members are being genuinely represented by New Labour.
The present crisis has established beyond doubt that neoliberalism, even the British form, and democracy are incompatible. To try to make them compatible, governments have adopted ever more risky policies, which brought down the last Conservative government and will probably bring down Brown’s. It has also legitimised a true form of social democracy as the politics most suited to a country like Britain: a society which is predominantly capitalist, and will remain so, but with an active state whose function is both to intervene when capitalism fails, or can’t work effectively, and to ensure that capitalism’s tendency to produce gross inequalities of income that are, or should be, unacceptable in a democratic society is partly corrected. Such a social democracy has always accepted – if reluctantly – that what capitalism does well it does very well, but has always rightly been suspicious of capitalism’s ideologues, particularly those who adhere to what used to be called ‘finance capitalism’. Unfortunately, New Labour has displayed no such suspicions and as a result has landed both us and itself in the mire. Its failure has severely damaged the reputation of social democracy and left the future open to a thoroughly ill-equipped Conservative Party. Who would care if the Labour Party, politically and morally decrepit as it is, lost the next election? Would anyone lose a night’s sleep knowing that the present government was no longer in charge of our futures?