The good Prime Minister
Wales Business — By Duncan Higgitt on September 28, 2009 6:00 am
The Prime Minister, in the US last week
WE’VE seen rather a lot of Gordon Brown in the past few days. First, he interviewed with Adam Boulton on Sky News and also the Daily Telegraph. Then Andrew Marr conducted a wide-ranging face-to-face with the Prime Minister yesterday. Brown doesn’t interview well, but he seems to be making a concerted effort at the moment. The fightback is on.
Having told Marr: “I do not roll over”, his comments were immediately interpreted as a slap-down to his Chancellor, Alistair Darling, who he may or may not have attempted to reshuffle out of the Cabinet in the summer, and who has kicked off the Labour conference by likening the party to a football team that has “lost the will to live”.
As the weeks and months go by, it becomes harder and harder to believe this Brown-Darling enmity, because when the two men work together, they can achieve results. Brown’s issue is that he is a terrible communicator. When he says that he saved the world economy from the abyss, we none of us believe him. Yet there is a growing body of evidence that strongly suggests that when Brown (and Darling) was called upon to deliver this country from perhaps the greatest peacetime crisis it has faced for a century, he was not found wanting.
Though few of us noticed at the time, it is almost impossible to understate how close to the brink our economy came as the Royal Bank of Scotland faced collapse. Hours away from meltdown, had it sunk, the shock waves would have rippled an economic tsunami well beyond the borders of this country.
This was quite different to Lehman Brothers. Apart from the fact that RBS was the world’s 10th largest bank, with a balance sheet roughly 15 times the size of the GDP of the country that gave it its name, it is a retail bank and not purely for investment, as Lehman’s was. Private customers and businesses used it for a plethora of reasons – paying wages, mortgages, short and long-term loans, to name but a few. Entire financial pillars that hold up this country’s economy have their foundations in banks like RBS. And there were international ramifications. As we have subsequently learned, RBS got itself into trouble because of its over-exposure to toxic sub-prime debts, which it used to finance its own deals and those of its customers.
Last week, the BBC concluded The Love of Money, its three-part investigation into the crash. It had featured a host of key players, including Brown and Darling, Mervyn King, Alan Greenspan and Timothy Geithner. None of these could imagine nor describe the appalling consequences of an RBS collapse.
With the benefit of some distance of time, the final programme was able to reconstruct those crucial days leading up to October 13 last year, when the Government announced it would recapitalise RBS by taking a 58% stake in it. What emerged was a portrait of Brown that may ultimately rewrite the accepted opinion of his leadership.
While Hank Paulson (a Wall Street giant prior to entering the White House) flip-flapped around with all the composure of a fish dumped on a beach by an unkind wave (and with about as much idea as to how to get out of such a predicament), Brown conferred with Darling before putting together a team that they thought would find a solution. Taking the decision to go it alone was bold enough, as there was an unwritten international rule that the rest of the world should follow a US lead. Had it gone wrong, the UK would have got the blame. And it could have gone catastrophically wrong.
Paulson had strategically erred. This wasn’t all his fault. He had taken what many viewed was a Wall Street approach to the problem by proposing to buy up the toxic debt that all the big banks have accrued. This was horribly unpopular among the American electorate, who wanted bankers’ blood. Capitol Hill voted down the plan. Similarly, taking stakes in stricken US financial institutions amounted to socialism in the eyes of Republicans, and they could not stomach such a move. Someone had to jump first.
The Love of Money reconstructed a crunch meeting at the Bank of England. Present were the heads of all the big banks and Baroness Shriti Vadera, the minister for economic competitiveness. At the time, RBS’ share price was falling off a cliff. Many believed it would be bankrupt by the time the markets opened on Monday. Though he has subsequently and stridently refuted the account, Sir Fred Goodwin is reported to have told a stunned room: “We don’t have a capital problem. We have a liquidity issue.”
Brown has been criticised for many things related to the recession. He is accused of courting the Square Mile too enthusiastically, of engendering light touch supervision, of having been taken in by the silver, forked tongues of City leaders. These are possibly all valid points, but they have only been made with the benefit of hindsight.
Warren Buffett once said: “I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.” Brown is not responsible for Goodwin. That was the job of the RBS board. We are told (again, with hindsight) that regulation could have prevented much of what happened. But those few people who raised such ideas, following concerns about our credit mountain and other issues of debt, were but voices in the wilderness.
In truth, everyone had a hand in the recession. We are all to blame. Along with credit cards, latest generation financial products, often backed with leveraged debt, became incredibly popular. Conversely, due diligence far less so.
The supreme irony for Brown is that he played a major part stopping it from all coming conclusively to the end. Like a father who is raised from bed and drives out to pick his slightly-worse-for-wear offspring while in his pyjamas, Brown has received nothing from the British electorate other than something like teenage ingratitude.
There are signs that the media is beginning to acknowledge Brown’s role. This began after a number of leading US economists feted his leadership on the rescue package – which many countries, including America, have adapted and adopted. Brown’s real dilemma is whether he will get the same credit from the electorate, or whether he will suffer the same fate as Churchill, who suffered an emphatic electoral rout in the same year that the Second World War ended.
And the economy’s not out of the woods yet. Many businesses may find themselves in the unusual position of preferring Labour to the untested hands of the Conservatives (particularly when the Tories called so wrong on the bailout). Yet achieving the rescue is not enough. The country needs to be led out of recession. Brown appears to be banking on this as his means of avoiding a Churchillian defeat. To save his government, he must not only achieve this aim. He must convince us that he has, too.
Tags: banking, Economy, Gordon Brown, party conference, recession, Welsh Labour
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7 Comments
Excellent article. However, I don’t think ordinary voters, especially women, can bring themselves to vote for Brown and it may well be that Darling will lead Labour into the next election. Your analogy with Churchill losing the election after WWII is interesting but not really comparable with what’s happening to Labour today. I think that Labour will lose not because of their MPs or Brown but because people no longer perceive ‘Labour values’ ( socialism) as being relevant in today’s society. Similarly, Conservative values are also considered to be ‘devalued’ by their past record and by the suspiciousness and class hatred of the electorate towards Cameron and the Tory MPs.
This should, in principle, leave opportunities for smaller parties like the Lib Dems and Plaid Cymru in Wales. However, these parties needs to evolve rapidly if they are to keep up with the zeitgeist and there are few signs that this is happening.
And an excellent response. Very well argued, with some interesting points, particularly the suggestion that the electorate has moved on but the parties haven’t. Many thanks.
Duncan
> “In truth, everyone had a hand in the recession. We are all to blame.”
I’m not sure that this argument holds all that much water. The banking crisis arose, essentially, because the housing market was artificially inflated by both the Clinton and Bush departments of Housing and Urban Development. They actively encouraged the lending of sub-prime mortgages to people with poor credit. As a result, banks became too leveraged: their mortgages were funded by too much borrowing and too little shareholder equity. When property prices began falling, and it became clear that bank assets (mortgages) were not worth what was thought, creditors asked banks to repay some of their over-borrowing. Which they couldn’t do, because their main source of income (mortgage re-payments) were in the hands of people who couldn’t afford to pay them. What’s more, these loans were repackaged and sold elsewhere into the financial system, contaminating other banks and institutions. In short, the 2008 Financial Crisis was caused by government intervention in the housing market, followed by irresponsible lending practices in the financial sector. We are not all to blame.
> “businesses may find themselves in the unusual position of preferring Labour”
Why is this unusual? For the past decade, most rich men have shunned the Conservatives, preferring instead to lobby the Labour Party. Not out of any political or philosophical allegiance. But because they wanted something in return: government contracts, peerages and sometimes the ability to make their own legislation. Historically, it was Big Business which promoted the deleterious policies of government intervention known as ‘mercantilism’ in the centuries before Adam Smith and others made the case for free markets. David Ricardo spoke of businessmen as “notoriously ignorant of the most obvious principles.” Business leaders are not wedded to the principles of economics. Like any other special interest group, they promote their own self-interest in any way they can.
> “…particularly when the Tories called so wrong on the bailout”
A government bail-out might solve the liquidity and insolvency crisis. But it’s not going to change the underlying structure of the economy: that the nation’s wealth is made up of ridiculous valuations of financial instruments based on the ridiculous valuations of homes. The Japanese took the same approach to Brown after their late 1980s bubble when they prevented a big series of corporate bankruptcies. The result: the Japanese economy stayed in one long recession for the entire nineteen-nineties and well into the noughties. Bail-outs distort the market by rewarding recklessness and imposing an immoral burden on those who behaved responsibly.
> “The country needs to be led out of recession.”
Even in the unlikely event that the flow of real savings is large enough to fund a Fiscal Stimulus (while still permitting a positive rate of growth in the private sector), it can take years before the money that is supposed to ‘lubricate’ the economy actually gets into the economy. And nobody knows what the economy will look like when that currency finally gets into circulation. A billion pounds here and a billion pounds there can set off another round of inflation that can take some very severe legislation to bring under control (state spending ends up being pro-cyclical). Presidents Hoover and Roosevelt both tried to spend their way out of a recession, but economists and other scholars who have studied the Great Depression in depth have increasingly concluded that they made matters worse.
Thanks, Michael. Taking it from the top:
- I fully understand how CDOs and other financial instruments and exotic paper got us into this situation. But the fact remains that at every level of society, this country acquired a taste for spending on debt. There has been a remarkable turnaround in our attitudes to money, and I think it’s hypocritical to argue how reckless and greedy our banks have been when nearly all of us have done the same thing, albeit on a far smaller scale. And while the £1.3 trillion personal debt mountain isn’t being discussed at the moment, it’s hard to see how that won’t make the recession worse, with defaulting spiralling as a consequence of job losses.
- Business leaders may not be “wedded to the principles of economics”, but the best ones sure as Hell have regard to them in order to preserve their businesses, even if they don’t know them by their scholarly title. And few of them take kindly to those that would lecture them on the topic, preferring to respond with a curt “If you can’t do it, teach it”. Sure, they’re self-interested, but it has far less to with promotion than preservation. In that context, they should prefer Labour because it has a track record.
- This sounds like a political response. We were hours from a potential economic meltdown. The Government did not have the luxury of admonishment. Sure, it made a hash over the remuneration and punishment, particularly where Fred Goodwin is concerned. But that was such a small part of a far bigger picture. And I haven’t seen anything to convince me yet that our economy are in any way comparable to Japan’s, except where house prices are concerned, maybe.
- I say again, what was the alternative? Let RBS go down?
Thanks for the response. Let me rejoin you on a few points:
> “I think it’s hypocritical to argue how reckless and greedy our banks have been when nearly all of us have done the same thing.”
Your analogy is meaningless, because creditors can file a bankruptcy petition against an individual debtor in an effort to recoup a portion of what they are owed, while bankers were alllowed to debauch credit standards (lending to people who can’t afford their loans), take the money and run, letting somebody else pay to clean up the mess. To quote Gaetano Salvemini, complaining about Mussolini’s corporatist economy in 1936: “The State pays for the blunders of private enterprise… Profit is private and individual. Loss is public and social.”
> “Sure, they’re self-interested, but it has far less to with promotion than preservation.”
Economic growth – that is to say, the efficient use of scarce resources – depends on a system that features both profits and losses. Businesses are interested only in profits. If they can avoid losses by getting government grants, bailouts, tariffs and restrictions against imports, or domestic laws that stifle competition, they will do so. Losses, however, are essential to the process that shifts resources to those who are providing a better service.
> “In that context, they should prefer Labour because it has a track record.
Track record? Brown’s regulatory regime – the Treasury, the Bank of England and the Financial Services Authority – undermined an early response to the onset of the credit squeeze.
> “This sounds like a political response.”
Economics is the study of the use of scarce resources, which have alternative uses. It is not a study of our hopes and values.
> “I say again, what was the alternative? Let RBS go down?”
Instead of a bailout, creditors should have been made to recapitalise the banks. A debt for equity swap – supervised by the Bank of England – would reduce banks’ over-borrowing at the same time as it increases banks’ equity.
“Your analogy is meaningless”
- Of course it isn’t meaningless. Banks got themselves into a tailspin by driving incredibly hard sales targets. Those targets were in place to grab as much as there all there was in the market. What was the market? Well, a substantial part of it was private loans. Banks bought to re-lend – I don’t need to tell you this – and a lot of it went to retail sales, or wholesale to loan companies. Of course they were greedy, Michael. But plenty of us took out loans, and toxic debt was used to fund those loans, or to recapitalise balance sheets, or hedge against those loans. We supplied the demand, and you can’t tell me that there weren’t a lot of people who gave no thought to the micro or macro consequences of living beyond their means. I hold my hand up to that one. So should the people who can’t afford loans. To suggest otherwise is, frankly, a little patronising, as suggestions of misselling remain few and far between.
“Economic growth depends on a system that features both profits and losses.”
- Not sure how this ties in with what I was saying. Perhaps I didn’t make my point properly. My argument is that many businesses will be well versed in many economic principles because they have them in use each day, although they may not know them by name or even by character. I agree with you that efficient economies also require failure, but then again, economics rarely has to involve itself in sticky human affairs such as redundancies. I think your depiction of businesses as completely mean-spirited is a little harsh. I know plenty of company owners who care deeply for the welfare for their workforces, who believe that can be balanced with turning a profit, and who are incredibly squeamish about redundancies. If that means reaching out, they will do so.
Away from that observation, the economic growth model you highlight seems a little impractical as I can’t see it surviving its first brush with human behaviour.
“Track record? Brown’s regulatory regime – the Treasury, the Bank of England and the Financial Services Authority – undermined an early response to the onset of the credit squeeze.”
- Agree with the way it was done or not, but Labour has over a decade of experience of running an economy. It didn’t seem to be doing badly prior to the crunch, and it didn’t cause the crunch.
- Sorry, should have said politicians’ response. It seemed to be based on the assumption that we had time, and wiggle room.
Similarly, I agree that debt restructuring would have been preferable, but the only numbers game in play at this time was the hours left until RBS went pop. According to most accounts, that was a total of four: four hours before the markets opened on Monday, when RBS would have been exposed as unable to trade, a solution was found. If creditors had uhmmed and ahhhed as the heads of Wall Street banks did when Hank Paulson pulled them together to save Lehman Brothers, it would have been goodnight Vienna. They didn’t find a solution then and it is impossible to say whether creditors would have succeeded where they did not, even when faced with the hard facts.
My argument was – is – that Brown led well on RBS. He collaborated with Darling, they put together the best team they could find and they found a solution. And for that, he should be given the credit.
Mike Jones has argued his case so well that we’ve invited him to write next Friday’s Home Truths as a counterpoint and/or refute of this column. We will be publishing the piece on Friday, October 9.