Sunday, 17 May 2009

No exaggeration, politicians really have ruined the country

It has long been a common exaggeration to blame politicians for ruining the country. With the expenses scandal raging; confidence in our political institutions at rock bottom; and the economy in freefall, the accusation is at last beginning to look convincing. What was the instrument that politicians used to bring the country to the edge of ruin? It was the housing bubble.

When house price inflation took off in the late 1990s, no one could have imagined the damage it would inflict. Nevertheless, the bubble began gently enough. The early victims were young workers, who were priced out of any realistic prospect of owning their own home. It also created a privileged class of middle-aged property owners, who were able to extract huge amounts of mortgage equity from their houses.

Unfortunately, their appetite for equity withdrawal became insatiable. With each passing year, house price inflation became a political imperative. In order to maintain the electoral support of the property owners, New Labour indirectly encouraged the growth of the financial sector, and weakened banking sector regulations. The banks reciprocated with a tsunami of cheap credit.

For a decade, this compromise worked; home owners were happy, they kept borrowing and spending, and the economy grew. However, the price was an explosion of household sector indebtedness, laying the foundation for the mother of all financial crises.

When Northern Rock collapsed in August 2007, the game was up. Within a year, the UK taxpayer was forced to provide a trillion pounds of support. Brown and Darling tried everything resurrect the magic formula; liquidity support, nationalization, recapitalization, and state guarantees. However, nothing could save the housing bubble. Within 18 months, prices were down 20 percent.

For its part, the Bank of England panicked, reducing interest rates to close to zero, and in the process utterly undermined any incentive for personal saving. The insanity wasn't confined to Threadneedle Street, the Treasury was also infected. Any pretence of fiscal restraint was abandoned, as the government generated the largest deficits in peacetime. The Chancellor irresponsibly undermined the tax base with a ridiculous VAT reduction. He followed up with the most extravagant budget in post-war history; which could see public expenditure hit almost 50 percent of GDP within two years.

This colossal government intervention failed to prevent the economy from sliding into recession. By the second half of 2008, the economy was contracting, industrial production had collapsed, and unemployment was rising. Public debt levels exploded, pushing the UK to the brink of a credit downgrade. Added to this, sterling had lost roughly 30 percent of its value against most major currencies, while inflation proved to be stubbornly resistant to the collapse in economic activity.

In summary, it is hard to exaggerate the magnitude of the economic mayhem. The country needs political leadership to confront this crisis. It needs a government willing to make some difficult choices. It needs a government willing to stabilize the economy, demand responsible monetary policy from the Bank of England, drastically cut public expenditure and raise taxes.

Instead of providing leadership, UK political system is in meltdown. The reason is the housing bubble. Members of all political parties were caught speculating on property, the very cause of our economic difficulties.

Ordinary voters are horrified by the realization that the allowance system was distorted into the perfect financing mechanism for property speculation. The allowance was all too often used to upgrade houses at the public’s expense and then flipped for a profit. The constant switching of addresses was used as a cover for extravagant purchases of furniture and home entertainment systems.

Moreover, members of parliament ensured that the system lacked effective oversight. They bullied the fees office, demanding approval of the most outrageous expense claims imaginable. What is extraordinary, however, is that these so-called representatives could not understand and foresee the outrage that this methodical exploitation of the taxpayer would provoke.

The implications of the expenses scandal are far-reaching. The Labour Party is unlikely to survive. The voters will not forgive the unfathomable depths of hypocrisy practiced by Labour MPs. The deserved destruction of Labour has far-reaching consequences for the unity of the country. In Scotland, the Labour Party was an imperfect bulwark against Scottish nationalism. With Labour about to disappear from the political landscape, the dissolution of the Union is a real prospect.

The two other main parties are also in poor shape. Both parties are also mired in expenses corruption. While the electorate is likely to be more forgiving, neither party inspire confidence. Smaller parties are likely to benefit, and we could be on the verge of a new epoch of highly fractured and unstable parliaments, with all parties held in profound contempt by the electorate. To say the least, this is a deeply unattractive vista.

While the political crisis rages, the country descends deeper into an economic morass. It's a horrible mix, economic collapse coupled with political disintegration. When we finally dig ourselves out of this chaos, we should remember the medium of our misfortune - the housing bubble. It laid the basis of our economic ruin, it destroyed our financial system, and it created a damaging recession. It also corrupted our politicians, and undermined our once great democratic institution - parliament.

Ten years ago, the idea of rapidly appreciating property prices seemed like a benign and largely beneficial scam. However, looking at the experience of the last 18 months, this bubble could be the end of the United Kingdom as we knew and loved it.


Anonymous said...

AC: "the accusation is at last beginning to look convincing."

Well, they are the ones in control, after all.

electro-kevin said...

I do believe that Britain is finished.

Vote fringe or spoil papers from now on.

UKIP, Green, Libertas (not BNP please)

Destroy the three main parties. They've all betrayed us.

Seema said...

Housing, expenses, and economic ruin - only here in Britain could we connect all three.

It is all so depressing....

Anonymous said...

"Vote fringe or spoil papers from now on."

Problem with spoiling the papers is that someone will get elected, most probably from one or other of the three established parties.

I think the postal vote will be very significant next election.

For me, it has to be vote fringe.

I don't want them preening on television saying "Well we got an overwhelming majority, [sotto voce] on three percent turnout".

Anonymous said...

"However, looking at the experience of the last 18 months, this bubble could be the end of the United Kingdom as we knew and loved it."

I've never loved the UK. I have always voted for a party which has wanted to bring it to an end. I thought the UK was made up of several countries and not 'a country' as you say. It's only reverting back to an earlier Wales, Scotland, England and N Ireland which will one day joing the republic.

trimalchio said...

Alice - you've excelled yourself with an excellent analysis. The pieces of the jigsaw are falling into place but more than that, this piece is the first I have seen which tries to see ahead of the next few weeks.

I work in retail financial services. In 2004, the FSA started regulation of mortgages. At the time, I went round telling anyone who would listen that they would immediately crack down on self-cert and this would pop the housing bubble. Time went by and nothing happened. I now believe that this was deliberate policy coming from the Treasury. I cannot otherwise account for the chasm between regulation of pensions and savings on one hand and mortgages on the other. I was woken up to this by Ros Altmann, who I heard speaking a couple of months ago.

By the way, electro-kevin, please don't vote UKIP - they are a bunch of serial troughers every bit as bad as Labour and the Tories.

boiling frog said...

Great article. The unintended consequences follow on, unforeseen, but with a march of imperative inevitability.

Seor Alba said...

Liebour will still be elected in Scotland. This is a one party state. They control so much of the economy that nothing short of violent revolution will see them removed.

You have nothing to fear from the SNP. If they are elected - unlikely anyway - to solo majority, then a referendum will be held on Independence, and the Scots won't vote for it. Look to Quebec for the model. We are the 90 minute patriots. We haven't the balls to go it alone.

DBC Reed said...

Terrific analysis.The housing bubble is all too often seen as effect not cause,as some kind of benign tumour,not a malignant growth.
The Property-owning Democracy Movement is international, has no leadership,no articulated programme and no opposition.In the UK it forms a one-party state,with all the main parties engaged in symbolic conflict while MP's get on with keeping the voters happy with house price rises . This is of course bribery of the homeowning majority but without using candidates' personal fortunes as in the C18th .
As most Mp's seem incredibly thick and up themselves,while being frightened silly of being identified as anti-house price inflation ( I have had persona experience of this),politics becomes very simple without any difficult decisions: keep the homeowners happy and re-election follows.
With the collapse of economic policy,with none of the experts even recognising the most enormous bubble in housing and now the expenses scandal, its time that the whole ruling-class stood down.The bankers and now MP's have been shewn up as con artists.
Politics need to get back to the old-fashioned,grown-up struggle to provide well-paid jobs rather than unearned income from houses.( In a way the present system is an insane version of the Major Douglas dream of a an unearned income for all,but loaded with debt and distributed through the housing market.)

Anonymous said...

Seor Alba is right. The SNP are going nowhere.

The people who will benefit, though, are the "colleagues" in Brussels, who will shortly put the boot in and finish off our grossly weakened country.

They are concealing their glee, but it's there all right. The hated obstructor has collapsed, and will soon be eliminated. The empire will march on.

Anonymous said...

Alice, please don't despair, another bubble will come along soon. It looks like it will be the government debt bubble for the UK.

The UK has had a good run for its money. History tells us that empires rarely last more than a couple of hundred years at most. The UK is declining just like the Roman Empire did.

Before long, the little people will go back to under-the-counter bartering and paying each-other with US Dollars; Swiss Francs or even Chinese Yuan, just like Zimbabwe is doing now.

The Brits will whine but that's all. They will keep taking it, where the sun don't shine, from whatever is left of our government. The nation will confirm the "boiling frog" theory as its Swan Song.

Robsp said...


Anonymous said...

This is pinnacle of corrupt British politics.
They decide themselves how much of our hard earnt tax they take for themselves.
It is the public who pay taxes that should vote for their salaries not themselves.

Their behaviour is no better than the greedy bankers and stock market employees who have stolen all the money and left us all in a very big mess, causing immense suffering to millions of people.

Who is going to put this right?

Well I can tell you now it is not any single politician who is currently in parliament today. Hence voting for some more of the existing politicians will make no difference to preventing corruption of this sort from rearing its disgusting head again.

First of all the existing politicians no matter how corrupt they are, must put in place adequate controls to prevent this happening again, next will be for the UK to have a brand new set of politicians who really care about the quality of life for people in the UK and a new set of ethics to prevent corruption at the highest levels from setting bad examples for everyone to follow.

We really need a new Political party with better policies for all and ethics to match.

Anonymous said...

It's like something out of Wagner, we are approaching the final act. The fascinating thing for me has been the discrediting of the political class before the collapse of the economy.
I think revolution and show trials are in the near future. I think I'll stay at the beach in Thailand until it's all over.
I await the panic out of sterling with some trepidation, but hey, it's too late to stop it now.

Anonymous said...

This point in history could be the perfect point in time to get rid of politicians for once and for all time.

How can a sovereign country afford to pay billions of pounds of hard earnt cash to politicians. All they seem to do apart from stealing money is to make laws no-one is really interested in.
Yes these lawless lawmakers just think of things to do to try and justify their incomes.

We are a mature democracy with enough laws at present to keep the country going.

Lets have a break from politicians for the next 10 years so that all debts are paid off. During this period we could see what alternative system could be implemented that does not really cost very much but more effective at servicing the public needs.

Oldftb said...

"could be the end of the United Kingdom as we knew and loved it"

I doubt many of us have loved it for an awfully long time.

It's not the country we knew and loved a few decades ago for many reasons and the damn house price infatuation is just one of them.

But, maybe, just maybe, the current financial, economic & political crisis might be a turning point to a different & much better future for all the people in the UK?

Anonymous said...

oldftb- doubtful....