Tuesday, 28 February 2012
What were you doing in late June 2007
Superficially, Brown took over as PM when the country appeared to be in fine shape. The economy was humming. It had recorded almost 2 decades of uninterrupted growth. Inflation had picked up slightly, but remained close to the two percent target. The same day he took office, the Land Registry published the house price inflation rate for the previous month. Prices rose by 0.7 percent in May, giving an average national house price of £180,594.
Nevertheless there were ominous signs that something was going wrong. The Land registry also provided data showing that annual house price inflation rate had dipped below double digits. ABN AMRO Bank issued a report indicating that UK property prices were 50 percent overvalued. Not that you would have noticed this in London, where the year-on-year house price inflation rate was 15.3 per cent. Earlier that week, the Building Societies Association announced that in May 2007 mortgage approvals fell by 13 percent compared to the same period the previous year. The Association also announced that actual lending also dropped by 17 percent year-on-year.
British Banks had also begun to wobble, though no one had any idea of the magnitude of the crisis that was brewing within the UK financial system. The day after Brown became PM, Northern Rock issued a profit warning, sending its shares down by over 10.0 percent. HBOS shares were also on the slide.
The Office of National Statistics reported that UK households owed about £1.3 trillion - a figure that had doubled in just seven years. The numbers were sufficiently alarming for Mervyn King to suggest to the Welsh CBI during a meeting that week that it was "unwise" for households to borrow so much on the assumption that interest rates would remain unchanged.
Brown seemed unaware of these dark auguries of impending doom. Brown’s leadership campaign promised a dizzying array of policies. He pledged that Britain would become a world leader in combating climate change, committing the country to huge cuts in carbon emissions. He promised to build 3 million homes by 2020. House planning restrictions would be relaxed. He wanted to build five new eco-towns. He said he would start a revolution in the NHS. Doctors would be forced open surgeries at weekends. He even suggested that polyclinics would be open to tender and possibly run by private companies.
Brown wanted to hold an all-party convention to look at Constitutional reform, and hinted that he would support a written Constitution and Bill of Rights. he was going to clean up sleaze in Westminster with a new ministerial code setting out clear stands behaviour for ministers. He was going to learn the lessons from mistakes made in Iraq. He was also going to strip the Prime Ministerial office of the powers conferred on it by royal prerogative, including the ability to declare war. Nevertheless, his desire for greater democracy did not extend to the question of Europe. He supported the EU reform treaty and ruled out any possibility of a referendum.
His leadership manifesto was classic Gordon Brown. He was a master at pushing out a headline grabbing policy statement. He could project extraordinary dynamism, disorientating the opposition, and redirecting political debate onto issues that he wanted to discuss.
Four years on, we can also see the vacuous nature of his administration. Brown’s breathtaking policy agenda was never more than a series of bullet points on a press release. Where are the eco-towns? Where is the written Constitution and Bill of Rights? Where are the new homes? What happened to the revolution in the NHS?
There is an answer to these questions. Within a few weeks of assuming the premiership, Gordon Brown was faced with the greatest financial crisis in almost a century. The serial failure of British Banks derailed his reform agenda. Instead of building eco-towns, he was forced to save the country from a financial sector meltdown. Constitutional reform and revolutionary change in the NHS had to take a backseat as crisis management became the priority.
The rescue plan comprised of three components. He prevented the collapse of RBS and HBOS by injecting taxpayer resources into the financial system. He used fiscal policy to sustain aggregate demand. He achieved this through a temporary 2 percent cut in VAT rate and sharply increasing public expenditure. The Bank of England provided the third component. The bank rate was cut to 0.5 percent, the lowest rate in living memory.
Brown would repeatedly claim that these frantic policy shifts would save the UK economy from disaster. He pulled back from the brink and without his radical interventions we would all been hurled into abject poverty.
The problem with Brown's line of defence is that if Brown pulled back from the brink, he was the one who put us on the edge of catastrophe. He had been Chancellor for 10 years. He presided over the housing bubble; he weakened banking sector regulation by creating the financial services agency. The run up large deficits during the boom when he should have balanced the government accounts.
A counter factual is always impossible to disprove. Nevertheless, the economy failed to return to its pre-crisis growth trajectory. In absolute terms, UK GDP is about four percent lower today compared to 2007. The UK has stagnated while public debt and unemployment has exploded.
It is now almost 2 years since Brown lost the general election. In retrospect, his period office seemed rather chaotic and mercifully short. He bounced from one crisis to another; his promises of reform were unfulfilled.
While it is easy to conclude that his government was a failure, there is also danger that too much of responsibility for Britain's lamentable current state is placed at his feet. It wasn't Brown who signed the uncountable number of loan agreements that led to the UK household sector running up debt stock of £1.3 trillion. He wasn't responsible for the outrageous risk-taking that characterized the UK banking sector. For example, he had nothing to do with the calamitous RBS takeover of ABN Amro. To his credit, Brown kept us out of the Euro, and held his ground against the enormous pressure from Blair and Mandelsohn who wanted to join the ill-fated single currency.
Brown wasn't the only architect of our present predicament and we do ourselves a disservice to claim that he constructed this mess alone. He had help from business people, bankers, civil servants, journalists and academics,who went along with the New Labour charade. He was ably assisted by far too many of us who bought into his nonsense of no more boom and bust.
Blaming a cynical old hack like Brown gives far too many of us a free pass. We neatly transfer the full bill for this mess onto a man who has long left office. We need to remember more than the fateful moment when Brown became Prime Minister. We should also remember that it takes more than a single politican to create the greatest financial bubble in our history. It takes a gullible and deluded people to construct our present calamitous situation.