The Credit Crunch started in February 2007 with reports of new problems in the sub-prime mortgage market in the USA, slowly pricking a wider bubble in innovative investment products which undervalued their high levels of risk of a payments default. This led to the collapse of Lehman Brothers in September 2008 as part of a global banking crisis, which is still unresolved and being called the Second Great Depression.
Yet to listen to many UK politicians and journalists, the recession is all because of “the last Labour government” left a deficit in the public finances by spending too much.
This is a good example of scapegoating. The credit boom up to 2006 meant many people, and especially home owners, experienced rising house values which could be used for new cars, holidays and even second homes abroad. The people spending too much was actually many of us, not the government.
The difficulty faced by governments generally since the banking crisis started is a loss of tax income. At its peak in the UK, nearly 40% of tax income was coming from the de-regulated financial sector. As the crisis developed, tax income fell away dramatically. Government spending on unemployment and similar benefits started to rise, which in normal economics is seen as helpful to the economy, because public spending rises to offset the fall in private sector spending, reducing the downturn and helping recovery: known as the counter-cyclical or automatic stablisers. It is classic Keynesian economics, developed from the lessons learnt after the First Great Depression which governments at the time, especially in the USA, made worse.
And the USA did learn its lessons. Since 2008 the federal government has injected over $1.1 trillion in new capital into the troubled financial sector as well as pushing on infrastructure, health and welfare spending, leading to modest growth and contained levels of unemployment. This was started under Republican President Bush and continued under Democrat President Obama.
But in the UK the coalition government has taken a reverse approach, and with a reverse outcome. The new capital for the troubled banks, starting with Northern Rock and RBS in 2008 remains in place, but instead of being built on it is denigrated as “Labour profligacy”, with infrastructure spending then cut, with health spending being cut in real terms, and with welfare benefits under enormous pressure. The outcome is 2.5 million people unemployed and a fine debate on whether the UK recession will be double-dip or triple-dip.
President Obama spelt it out recently in his State of the Union address to Congress: “You can’t cut your way to prosperity.”
Some people are beginning to say that history will judge Gordon Brown more kindly than the press do now. His role in 2008 in stablising the banking crisis was ahead of all other countries, and has been said to have given the USA authorities the courage to intervene similarly on Wall Street. However, and perhaps unfairly, his time in leadership is judged more broadly on character and not for his decisive economics – the ‘would you have him round for dinner?’ test.
So, rather than give any degrudging credit for work done, rather than learn the lessons from the First Great Depression, and rather than look at ourselves and how we lived in the boom years to ask how sustainable was all that, instead … it must be all the fault of the last Labour government and the mess they left behind.
Andrew Ross Sorkin, Too Big To Fail: inside the battle to save Wall Street, (2010), Penguin. New York Times financial journalist – Hank Paulson – Lehman Brothers