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.