Tuesday, 28 February 2012

What were you doing in late June 2007

Do you remember late June 2007? If the month invokes only hazy memories, the following date might provoke a response. On June 27, Gordon Brown became Prime Minister. As we all bitterly recall, He was never actually elected by the people, only a cabal of Labour party insiders ever had the privilege of voting for him.

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.


Stevie b. said...

So Alice, suddenly & out of the blue you're defending Gordon Brown? I read elsewhere that he doubled the national debt and we ended up with the biggest deficit in peacetime history. He used to be a Chancellor, so why didn't he do something about bank regulation instead of letting RBS etc run riot and saddle us all with the consequences?

And of course there's the fatuous gold sale - I gather the country would be at least £10 billion better off - so far.....

If this is success, perhaps you can tell us what failure looks like?

Mark Wadsworth said...

"it takes more than a single politican to create the greatest financial bubble in our history."

Agreed, it was (nearly) all of us who created that, it's a mass movement called "Home-Owner-Ism", which claims that it wants to encourage home ownership, but actually it wants no such thing - the main aims are to restrict home ownership by driving up driving up prices and preventing new construction (NIMBYs). All it does is subsidise existing home owners to keep up the electoral majority.

It's all carefully co-ordinated by the large landowners and bankers to ensure we get big credit and price bubbles, which are always followed by nasty recessions, or in this case probably a depression.

Nick Drew said...

You've done your best to be fair to the man, Alice, but just on the simple point of bank risk-taking it must be said that Brown presided over, nay insisted upon, the ultra 'light touch' regulatory regime, the race to the bottom on supervisory prudence, as a positive matter of declared policy

and since we know bankers (like MPs and trade union members and ...) will always run amok when they think there is free money to be had, it behoves us to constrain them appropriately

this is all before we venture into a critique of his appalling personal weaknesses and failings, rank cowardice being well to the fore

in late June 2007 ? I started blogging in May of that year and was attacking Brown from the off - a couple of financial ones from June here and here if anyone's interested

but the cowardice & lack of integrity are much more important, and here's an attack (in verse!) on his pompous and ridiculous 'On Liberty' speech later that year (hosted by Hatfield Girl)

well you did ask ...

Alice Cook said...

Steve b

Oh yes, the gold sale I forgot about that,

I don't think I defended him. I just don't want him to be a convenient cover for other.


Stevie b. said...

Alice - fair enough - and in my red (or perhaps that should be brown) mist, I overlooked your point about keeping us out of the Euro. But by the law of averages, you'd hope that 1 good decision might accidentally slip in amongst all the dross.

dearieme said...

"He was never actually elected by the people": this is adolescent silliness. Nor were any other of our prime ministers. Nor, indeed, were any US Presidents.

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

I never did buy into him nor Blair.

I spent years despairing of the RW press who seemed in thrall of both.

Hacking isn't the worst thing Murdoch brought us.

It was Blair and Campbell.

Chief of men said...

tosser brown guilty as charged .you can't airbrush this bit of history.

davidb said...

That he kept us out of the Euro is an aberration. I have heard several people remark that the only reason he was against it was because Bliar was for it.

In our business we were waiting for the crash. We knew it was coming. We knew that UK PLC couldn't be doing so well if we were borrowing money. July 2007 was the first poor month our business had seen since John Major was in No 10. When we got the same in August we knew it had started.

And since then its been a roller coaster ride. I have no confidence any of then know how to fix it, but a coalition probably isnt the best way, I know that much.

It may have been better if Labour had been re-elected, just to make sure they lost the next one and were out for a very long time - not neck in neck with the Tories.

This problem is with us for a long time. We should have done an Iceland and just wound the blo#dy banks up.

tinks said...

An interesting post Alice, almost had me feeling sorry for Brown. Almost!

Like many, we fell for the myth that this man was some kind of economic guru. It was a little before that moment in 2007 that the scales fell from my

eyes. The absurdity of house prices trebling - why? I found forums and blogs (like yours) that shed light on my dissonance.

A man who talked prudence and golden rules, was nothing more than a charlatan. Was the boom not a result of debt (personal, government) and particularly

MEWing adding 3-4% to GDP, Govt deficit spending perversely increasing GDP? A man who set the scene for the taking on of debt and wanton recklessness,

whilst a few waited for the bubble to burst. Remember the Mansion House speeches encouraging financial innovation in London. The pre-election RPI to CPI

inflation change in 2003, effectively lighting the fuse for the uncontrolled housing boom. His prestidigitation in matters financial - off balance sheet

PFI, the expansion of the benefit system with out of control tax credits. Wasn't Lloyds a relatively well-run bank before the deal he brokered? And what

of the rewards given to the bankers - for services to banking!

Not only was he a fundamentally flawed man, surrounded by a cabal of quite nasty political operators, whose contempt of people became obvious with each

new and intrusive law, he was a liar with a disturbing self-importance and hubris. Remember too that Blair was ousted - he wanted his turn.

Blair was weak not to get rid of him; my take that staying out of the Euro was as much about not doing as Blair had wanted than any judgement. Remember

the manner in which the Lisbon Treaty was signed, arriving late so as to avoid the crowds?

Yes, we as a nation bought into it, and fell for la dolche vita. But Brown's stewardship of the economy and lamentable decisions will be with us for


History will not remember him well - unless it gets re-written.

Apart from that I suppose he was OK.

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RenterGirl said...

I had spotted the problems endemic in the rental market and was writing my blog. Then...crash.

Anonymous said...


Where is he now?

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