Wednesday, 30 January 2013

The real reasons for Britain's economic malaise


I've spent some time recently carefully re-reading Alistair Darling's (actually rather good) memoir of his time as Chancellor, Back from the Brink (above). Well, I've been on holiday. What else can you but kick back with a serious account of the financial crises of our times? But I digress.

What stands out very, very clearly from this memoir are the real reasons for the economic crash, and the reasons it's proving so difficult to dig ourselves out of it. Of course, in popular mythology this is all due to governments having borrowed too much, and British mortgage lending that got out of hand and led to an inevitable correction in the housing market - as it always does.

Almost none of that is true.

As Darling's account makes clear, there was a real, specific, particular and terrifying moment when the American banking system imploded - from Bear Stearns to the collapse of Lehman Brothers on September 15, 2008 - and it was this that brought the whole world to the brink of financial collapse. Think that ATMs will always give you cash? You'll think again when you've read Darling's account of 7 October 2008:

By the time I landed in Luxembourg [for a finance ministers' meeting], RBS [the Royal Bank of Scotland] was worth 40 per cent less than before take-off. Dealings in its shares had been suspended twice on the London Stock Exchange. My private secretary Dan Rosenfield and my special adviser Geoffrey Spence called me out of the meeting... to say that Sir Tom McKillop, the RBS chairman, needed to speak to me urgently. We cleared a room so that I could take the call. When I put down the phone, Geoffrey asked, what did he say? 'He told me that his bank is going to go bust this afternoon. And he asked me what we were going to do'.

And that's where the epicentre of the crisis lay - not in Whitehall or in your living room. Two facts (rather than assertions): almost all British banks' bad debts were entered into outside the UK, busting the assertion that UK mortgage lending was out of control. And, secondly, both governments and households had by no means unsustainable debts in the years leading up to the crisis. Government budgetary policy should probably have been a bit tighter, it's true. And households' mortgage debts were still going up  - lower house price rises would have been highly desirable. But Gordon Brown's reign as Chancellor ended with debt lower than when he started, and private credit card and other outlays were falling, not rising, before 2007-2008.

But Britain's economic crisis was not about government debt. Or personal debt. It was about banking exposure to the US banking and mortgage system. Get that truth wrong, and many other intellectual failings inevitably follow.

Counterintuitive? Yes. But the reality? Yes again.

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