Sin and the City
Twenty three years ago, the City was excitedly awaiting the Big Bang – the moment which would usher in a new era of self-regulation of the financial services industry. I had a grandstand view of the impending arrival. The legislation to prepare for the Big Bang was called the Financial Services Bill, and I spent several intense weeks leading for the Opposition as the Bill was taken through its Standing Committee stage.
Mrs Thatcher’s government, in line with its free-market philosophy, was very clear that the City could in essence be trusted to regulate itself. They resisted all attempts to give the regulators some teeth. The next few years of what some called self-regulation but which was in reality a free-for-all saw a huge expansion in financial services, in the size of the institutions providing them, in the sums of money involved, and in the rewards “earned” by those who worked in the City.
For those of us who argued at the time that the “free” market was not infallible, and (in line with Keynes, who had warned that financial markets were peculiarly prone to excess) that the City would require substantial regulation, subsequent events have come as no surprise. Even we, however, could not have foreseen the size of the money-go-round, spinning ever faster, that produced outrageous fortunes for a few and, eventually, crash and ruin for many.
Nor could we imagine that it would be a New Labour government that would become the most enthusiastic cheerleaders for the new lords of the universe. So dazzled were Ministers by the riches generated in the City that they did not think to enquire as to how many of those they claimed to represent actually benefited from the new wealth – wealth largely gouged out of the pockets of the rest of us.
The current revulsion at City excesses – the inflated bonuses, commissions, salaries and perks – is understandable; so, too, the anger at the growing evidence that nothing has changed and that those responsible for the mess will be paid mega-bucks for (allegedly) cleaning it up.
But the reaction to the greed and irresponsibility of the financial free-for-all, while natural, is a diversion from the real point. The reason for the government’s continuing genuflection to the City is that, after 23 years of unregulated City operations, and a growing reliance on financial services to keep the economy moving forward, the collapse of the City means that there is nothing much left.
The game is given away in the Chancellor’s statement this week on his plans for future regulation of financial services. His constant references to the importance of the City to our economy should be seen, not as an endorsement of the course followed over the last 23 years, but as a confession of failure. It is an admission of how far governmental indulgence of City excesses has distorted our economy and how big has been the price that the rest of us have had to pay for the rewards that City operators have milked from that same economy.
The real damage suffered as a consequence of the City’s domination of our economy is not to be measured, in other words, only in terms of the current crash and financial meltdown. The weight given to the City’s interests over a long period has seriously distorted our economic performance – and the more successful the City seemed, the more important its earnings to our national accounts, the more other parts of the economy were allowed to wither away.
The problem is not a new one; it was Winston Churchill who, as Chancellor of the Exchequer, remarked in 1925, “I would rather see Finance less proud and Industry more content.” An excessive attachment to the interests of those who hold and manipulate existing assets, at the expense of those who want to create new wealth, is – after all – a characteristic of mature economies which have substantial assets to protect – and we have been a mature economy for 150 years.
But the era of self-regulation and the demands of the global market meant that this policy bias became magnified many times over. Economic policy as a whole was tailored over this period to serve the City’s interests – so consistently, and over such a long time, that it was no longer recognised as abnormal. There was, we were assured “no alternative”; the global market meant that if the City were not given free rein, others would muscle in on their territory.
So, monetary policy was given centre stage. The policy itself was handed over to bankers, so that it was no longer subject to scrutiny and Ministers were no longer accountable for it, but so that it could be decided for a limited purpose that – arguably – primarily served the purposes of one part only of the wider economy.
Macro-economic policy was largely abandoned. Keynes was dismissed and forgotten. Interest rates were pressed into service to maintain the value of the currency and to underpin financial assets that might otherwise have been regarded as of dubious value. Little or no attention was paid to the competitiveness of the rest of the British economy, so that any thought of following an exchange rate policy that would stimulate exports, employment and investment simply never occurred to our policy-makers; manufacturing in particular was allowed to continue its relentless decline. Most of our economic eggs were placed in the financial services basket and only City operators had access to the golden eggs amongst them.
That is why the global crisis has hit the United Kingdom harder than anywhere else. The financial meltdown has meant that we have nothing much else to fall back on. And that is why the government has gone back – cap in hand – to the authors of the great misfortune, to ask them to dig us out of the hole. There is no better hole to find.
Millions will pay the price of the financial collapse with their jobs, homes and taxes. But many more – and over a much longer period – will suffer in ways that they do not even recognise as a result of the policy priority given to City fat cats whose primary focus remains their own privilege rather than the British economy. Whether through indifference or cowardice, our politicians seem intent on perpetuating a 23 year-old error.
Bryan Gould
6 July 2009
This article was published in the online Guardian on 9 July
Too Late for Complacency
Reality is beginning to catch up with complacency. We have consistently underestimated the severity of the recession; our forecasts have constantly had to be adjusted to take account of the ever-worsening outlook, but they still lag behind the true dimensions of the downturn.
A sign of the times is the fall in GDP for the first quarter of the year. What this figure tells us is, that despite the optimism expressed by the Treasury and others in the months before Christmas, the recession is well into its second year and is still building momentum. No one now believes that the second quarter of 2009 will show any reversal of the trend, and that means that we are now about to enter our seventh quarter of recession, with little or no relief in sight.
Why have our forecasts so consistently understated what has been happening, with the result that our policy response has been dangerously inadequate? The answer is a complex one.
The first part of the answer lies in the fact that we are experiencing a different recession from the one that has afflicted most of the rest of the world. Our recession has come in three phases; the first began at the end of 2007 with our own home-grown recession, when our domestic economic policies hit the buffers and the constant use of ever-higher interest rates and an over-valued exchange rate in a failing attempt to control inflation had done enormous damage to our wealth-creating sector.
Long before the rest of the world, we had already become accustomed to living with recession. We were therefore less panicked by the onset of the second – global – phase of recession, in the third quarter of 2008, when the world’s financial institutions were in free fall. We felt that we were already grappling with the problems, and we were in any case less affected – in the short term at least – by financial failures than most other countries. There was a sense of “phoney war”; people began to believe that the recession was not so bad after all.
But what they had not reckoned with was the third and most dangerous phase of recession – the price paid by our small, vulnerable, open economy when the financial crisis impacted the real (and not just the financial) economy around the world. What we are now discovering is that as growth turns negative, unemployment rises, credit becomes more difficult and expensive, and investment plummets on a global scale, there are very nasty consequences for our export markets and for the prices we are paid for our goods – and that is to say nothing of the increased cost of the international credit on which, in our indebted state, we are so greatly dependent.
The worst of our recession, in other words, is yet to come; as I warned in these pages in December “we are still looking to the early end of a recession that has barely begun.” We are likely to be first in to the recession, but last out. Our share of the pain from the global downturn will follow – at the end of the causal chain – as a consequence of the pain felt by others, but we are still behaving as though the measures thought adequate to deal with the first (home-grown) phase of recession will carry us through. Part of the reason for this, sadly, seems to be a continuing predilection for relying on monetary policy, and an ideological reluctance to accept the value of government intervention.
Our so-called “stimulus” package has been piecemeal and small-scale – scoped to deal with recession in early 2008 but inadequate to respond to what is now in store. And, it has been less effective than it might have been because it has been misdirected, taking the form of tax cuts for the well-off (who may or may not spend them) rather than direct investment in economic activity and in lifting demand.
We still seem to pay inordinate attention to the OCR, but that bolt has largely been shot. Monetary policy, once interest rates have been cut to low figures, is largely ineffectual to stimulate the economy. The Governor of the Reserve Bank’s insistence on keeping further minor cuts up his sleeve does have one consequence however; it is read by the foreign exchange markets as an invitation to pile in to the New Zealand dollar, so that a once again over-valued currency will ensure that any nascent recovery will be still-born. And, when we eventually do turn the corner, the odds are that we will be back on the same debt-fuelled treadmill that ran us into the buffers in the first place.
There will be some developments to help us – net migration figures and a stabilising housing market perhaps – but the most important factor depressing our immediate economic future is rising unemployment. We have only now started to see the full potential of job losses. The actuality and the fear of unemployment is only just getting under way. If we don’t want to see the recession deepen into 2010, we should be acting now.
Bryan Gould
28 June 2009
Tragedy
One of the fascinations of politics is that it unfolds over different time scales and at different levels. At one end of the scale are the personal and short-term; at the other, the matters of policy and principle, the history and development of ideas and of political movements.
It is no surprise – given the symbiotic relationship between the practitioners of politics and of political reporting at any given moment – that the latter should habitually focus on the human-interest immediacy of the movements in individual political (and other) fortunes as they swing up and down. A case in point, last weekend, were the reports detailing the latest turn in the career of Peter Mandelson.
The on-again off-again career of Lord Mandelson has provided much innocent entertainment for observers and a rich seam of copy for political commentators over the years. Yet, even so, it is surprising that the momentous events of recent weeks, which could herald a seismic transformation of the British political landscape, could have been viewed through such a narrow lens as was seen in the articles about Lord Mandelson’s latest transformation.
It is true that Andrew Rawnsley ended his piece by briefly taking a wider perspective. The story was not, we were solemnly assured, one of unalloyed triumph. Peter Mandelson, we were told, genuinely cared about the Labour Party; its probably imminent demise was enough to turn the moment of his greatest success into a personal tragedy.
We can readily agree that the demise of the Labour Party would be a tragedy – but surely a tragedy on a much greater scale than of one individual’s personal disappointment. It is doubtful, after all, if many tears will be shed for Lord Mandelson. Many – including all those whose allegiance to the Labour Party over recent years has been sorely tested, as well as those who have rejected Labour in favour of other promises to defend their interests – will see the noble Lord’s disappointment as being richly deserved.
This is not a tragedy in the Shakespearian mould – a fatally flawed individual being undone by his inability to deny the power of the flaw that drives him. This is a tragedy that is likely to engulf an audience of millions, not just the leading members of the cast.
Peter Mandelson is rather in the position of a ship designer whose vessel is revealed to be unseaworthy. He is consoled by observers with the assurance that they know that he did not mean it to ship water and, having arranged a lifeboat for himself, he then persuades the captain to stay on the bridge until the ship goes down.
New Labour was, after all, Peter Mandelson’s project par excellence. He signed others up for the journey, and was initially fortunate enough to engage a brilliant skipper for the project. But, when a new captain proved to be no seaman, and the ship’s design faults meant that it foundered, disappointment is hardly an adequate sentiment. Those who entrusted their lives and life-chances to the seaworthiness of the vessel are entitled to require the designer to accept responsibility for, as well as disappointment at, the loss – and at the tragedy that is theirs.
We are surely now in a position to judge the New Labour project, not according to the claims of its progenitors, but in the light of its likely final outcome. The project started, after all, with an overwhelming parliamentary majority, a popular and telegenic leader, a huge appetite for change and a real sense of excitement and anticipation in the country – all delivered by an overwhelming election victory.
What has happened in the twelve short years since then is not the familiar story of a government that gradually loses support and – having used its opportunity to best effect but nevertheless having been exhausted by its efforts – is defeated by newly revitalised opponents. The immediate future facing the Labour Party is one of virtual extinction as a party of government. It may take a generation for Labour to recover – if it does so at all. In the meantime, the effective voice of the democratic left – the most consistent and reliable generator of change and reform we have – will be stilled.
That is the real tragedy – not to be expressed in terms of individual careers – but in the destruction of one of the main forces in our democratic politics. Without it, our whole politics will be poorer. Faith in our democratic institutions and processes will be weaker.
It is an outcome, a tragic outcome, that is the inevitable and predictable consequence of deliberately removing Labour from its value base and from its supporters. It is the direct result of treating power as an end in itself, of seeking power for the purpose of simply perpetuating it. New Labour not only failed to take a once-in-a-century opportunity; it turned its back on the idealism and creativity that, under President Obama, is reinvigorating American society and politics. This is the end result by which Peter Mandelson should be judged. You bet it’s a tragedy.
Bryan Gould
15 June 2009
It Has Come To This
So, it has come to this. In twelve short years, New Labour has travelled from the exultation and boundless optimism of the 1997 election victory and of a movement whose time had come to a craven pursuit of self-preservation by frightened MPs.
And even then, it is a self-preservation that can only be pro tem. So narrow have horizons become, so short-term the perspective, that the interests of party and country will be sacrificed for a few more miserable months in a crippled parliament and a dying government.
Let no one be deceived into thinking that the decision to soldier on under Gordon Brown’s leadership was taken in the wider interests of the party or the country. Nor was it a signal of affection or respect for their leader, or even just loyalty. This was every man for himself. The only calculation that seems to have mattered was the one that said that the pay packet could be kept coming for a few more months. For who could doubt that the warning from Lord Mandelson, with his unerring instinct for the baser motivations of political life, that to change leaders would inevitably mean an early general election, was enough to stop many potential rebels in their tracks?
This, then, is the end game of the New Labour project. To the extent that history ever makes final judgments, we can begin to see where it has led – not to a long period of Labour hegemony, as was so confidently foreseen, but to the real danger that Labour will have destroyed itself.
Let us remind ourselves of the course pursued by New Labour strategists. The catalyst for that strategy was the 1992 election defeat, although its seeds probably go back to 1987. The Mandelsons, Blairs and Browns concluded in the wake of those defeats that Labour was unelectable and that the Thatcherite hegemony could not be successfully challenged. They decided that the greater part of Labour’s analysis of what was needed to reform Britain should be abandoned, and that the Thatcherite agenda should in essence be adopted.
In this, they were surely wrong. Of course Labour needed to modernise, and to adapt its principles to new and continually evolving challenges. But the Thatcherite revolution had largely run its course. Mrs Thatcher herself had been rejected by her own party, which proceeded – under John Major and his successors – on an increasingly uncertain course. By 1997, the Labour alternative under almost any leadership would have defeated the Tories. The sacrifice of Labour’s central values in favour of a callow and unsophisticated acceptance of the market’s infallibility was simply unnecessary.
By then, however, the New Labour style and purpose had been fully developed. The project developed its own ideology. What mattered was the winning and keeping of power, rather than actually doing something with it. Power, once achieved, should be used for its main purpose – to perpetuate itself. New Labour would be all things to all men, taking the pain and hassle – and even the politics – out of politics. It would occupy the centre ground, careful not to offend the powerful. It would thereby force other contenders to the margins, and usher in a long period of unchallengeable dominance.
The simplicity of this goal and this strategy meant that the Labour Party itself could largely be ignored, both as an organisation and as a source of ideas and analysis. New Labour leaders and tacticians could appeal directly to the voters, through the media, and through spinning the message, and could thereby free themselves from the need to take the party with them. The loyalty of the ambitious could be guaranteed since they would quickly recognise that the path to power lay through New Labour.
It hasn’t quite worked out that way. The voters quickly tired of spin. They intuitively recognised the unattractive limitations of pursuing power at any cost. They were repelled by the contortions produced by the absence of principle and strong values. But most of all, they were brought in time to make an ever harsher judgment of policy failures.
Those failures were partly the result of hubris – on the part of a leader who was so persuaded of his moral infallibility that the country could be led into an ill-judged invasion of another country on no greater foundation than his own say-so – and partly the consequence of a sickening obsequiousness in the face of the rich and powerful. And, while New Labour could just about be held together by a brilliant front man, there was nothing else to fall back on when the voters tired of him and when his successor was revealed as totally lacking in political – not to say human – skills.
So, the voters look certain to reject New Labour. A whole generation of Labour leaders who could and should have stood for something more than simply hanging on to power will close the New Labour chapter by – appropriately enough – doing just that for a few more months. It will be a long and hard road back if a renewed (please not “New”) Labour Party is to rise from the ashes.
Bryan Gould
9 June 2009
New Labour Betrays Its Supporters
As the Labour Party steels itself for electoral meltdown, it may seem ironic – after the global-sized catastrophes of the Iraq invasion and the worldwide recession – that it is the descent into venality at home that will count most with the voters. But to underestimate the importance of the expenses scandal would be a mistake.
The voters understand intuitively that, having presided over and applauded a society in which greed and the pursuit of self-interest have been elevated into positive virtues, New Labour’s own pursuit of power at any cost has produced its inevitable outcomes. The expenses debacle has been much more than a series of individual peccadilloes and defalcations; it has been the expression of a political culture that has created a gulf between what is seen as acceptable and necessary in the political world and the standards of decent behaviour expected of the rest of us. The individual manifestations of that culture may seem grubbily petty and venal, but the embarrassed squirming among the political class as the detail has been exposed is testimony to how out of touch our leaders had become and how serious that is for the whole political process.
This matters more to Labour than to others. The Tories have never bothered to hide their view that power is to be sought so that it can be used to defend vested interests. The Liberals seem to believe that power is best exercised by “nice” people. Only Labour, traditionally, has pursued power with the avowed purpose of correcting the unfairness and inefficiency of allowing the dice to lie where they fall and of creating a better society.
It is for that reason that the demise of Labour – under its “New Labour” leadership – is a matter not just for pain and anger at the loss of the opportunity presented by the 1997 election victory, and contempt for those who led us down this cul-de-sac into disreputability. It is also a major blow to our whole political structure which, in the absence of a substantial presence from the democratic left, will be less effective at creating a healthy society and a strong economy than it should be.
The special importance of the left lies not just in the fact that it is, or at least has been, the major source of progressive ideas, that it has provided the most reliable stimulus of new thinking, that it has generated the most creative dynamic for reform – though all of that is true. Its true value is that it underpins the whole case for democracy and for the power of good government.
Among the many lessons we should draw from the global recession is that this is what happens if government fails in its purpose. Ever since democracy was ushered in, there has been no shortage of powerful forces dedicated to undermining it. This is for the obvious reason that the whole point of democracy is to offset the power of the powerful with the political strength of the people. In the absence of that political power, without bringing to bear the legitimacy of the democratic mandate through an elected government, there is no force capable of resisting the might of the economically or socially or militarily powerful.
The failure of government to lean against the economically powerful over the last three decades led directly to the unregulated excesses that created a market-driven recession. And, even as we grapple with the measures needed to recover from recession, the same central question is starkly posed – what is the proper role of government?
The key feature of a recession is that every individual, every business, will have a cast-iron and rational reason for battening down the hatches. Only government has the capability and responsibility to act in a contra-cyclical way, against market logic, and to pull us out of recession faster than would otherwise happen, by spending and investing at a time when no one else will.
What this tells us is that it is always the role of government – when necessary – to represent the wider interest against powerful forces, and to act in a way that would be irrational or impossible for the private individual, however powerful. It is only the left that has in the past carried into government this central concept of what the true purpose of democratic government really is.
If this week’s elections do indeed show how thoroughly New Labour has debased and betrayed the legacy with which it was entrusted, it will not just be Labour’s party warriors who are relegated and enfeebled. The vast majority of the British people – irrespective of their party allegiances or lack of them – will have been significantly disenfranchised. The blow struck by the expenses scandal against faith in the democratic process will claim more casualties than just a few MPs. The real losers from the demise of the Labour Party will be millions of ordinary people who – perhaps without knowing it – will have lost their best defence against the depredations of the powerful.
Bryan Gould
2 June 2009
This article was published in the online Guardian on 2 June