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December 02, 2014

Comments

Jackart

The confidence with which you praise deficit spending in a boom, despite the biggest rise in peace-time taxation in history, is utterly misplaced. Confirmation bias.

gastro george

What is the point of Dan Hodges, apart from being another stick to beat Labour with?

Ben

> With hindsight, he should have regulated banks more tightly. But very few people said this at the time,

Wow. It was obvious. He tripled house prices. It was and is a disaster. He tried to stop inequality and boom and bust but all these things exacerbate it.

I guess again that shows your banking love-in. Perhaps 2008 did surprise you. Oh dear.

The guy was a total fool. One of the worst leaders in UK history.

Anthony Cox

Having read Darling's account of the 2008 crisis, I'd chalk management of that up to Darling, not Brown.

Matt Moore

"Companies then were running a financial surplus because of the dearth of investment opportunities. That meant someone had to borrow. Had the government not done so, economic activity would have been weaker and hence interest rates lower. That would have fuelled even greater malinvestments."

This feels confused.

"Companies then were running a financial surplus because of the dearth of investment opportunities." Only an incredibly tiny amount of such a surplus is held as cash. The rest is in banks. Being invested, just not by the company that originally earned it. I think you mean, a dearth of investment opportunity in the UK compared to emerging economies.

"That meant someone had to borrow." Yes, but why the UK government? This just doesn't follow. If businesses are borrowing because of many local investment opportunities, should government be saving? We don't exist in a closed economy. You just said there were a dearth of investment opportunities in the UK. What was the government spending it on then? The correct outlet for excess saving was overseas investment.

"Had the government not done so, economic activity would have been weaker and hence interest rates lower." If interest rates had been lower, that would have solved your original problem - a lack of investment.

Michael in UK

Can Chris or anyone comment on this:

at succesive budgets we heard Gordon Brown's mantra "our prudence is for a purpose" yet we saw the Guardian Thursday's weekly public sector job supplement grow to being half an inch thick.

Is there any consensus on the true proportion of the deficit being caused by 1. Labor's "ordinary" spending pre 2008 AND
2. costs/losses caused by the global financial crises 2008 onwards, and the Labour government's response to it.

Simon Reynolds

I don't think Jackart is correct about there being a boom in the UK prior to the last recession.

Eg, see Ben Broadbent:

"But one notable thing about the 2008/09 downturn is not just that it hasn’t been followed by much of an expansion – of that we are all painfully aware – but that it wasn’t preceded by a much of a boom either....GDP grew only in line with its post-war trend in the run-up to the recession. Scaled by the working-age population, growth was actually slightly below that average."

http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech618.pdf

Dave Timoney

Distance lends perspective, but this is still a middle-distance view. Over the very long run, Brown was no different to most postwar PMs: buffeted by circumstance and a prey to his own fears and prejudices.

I suspect historians will highlight only one decision during his time as Chancellor, namely his opposition to the Euro, though the significance of his obduracy will not be understood for a long time yet (contemporary counterfactuals are obviously nonsense).

His decision to hand control over interest rates to the BoE may have had its technical merits, but it was of a piece with his willingness to trust the City. Some have assumed a cynical, Faustian pact - bad money being turned to good use - but it actually looks like timidity, as does his studious ignoral of the 1%.

Though Brown is often caricatured as a bruiser (a hazard faced by any Scotsman who doesn't look like Michael Gove), he was actually a bit of a prig (so quite like Gove, then).

gastro george

@Matt Moore. You have to think of the sectoral balances. You can divide the sectors into four: company, personal, government and external. If companies are saving, and we run a trade deficit, then that has to be balanced by government spending and/or personal debt.

Luis Enrique

Ben,

It is just a fact that very few people were calling for the regulation of shadow banking or pointing out that MBS held on balance sheets of big banks had the potential to bring down the global banking system, pre-2007.

hard to see how that's consistent with the need for tighter banking regulation being "obvious" at the time

Ben

Michael UK - exactly. The guardian were creaming it in on job adverts. Journalistic capture.

Luis - you might not have been aware that liar loans were common place in the UK pre 2008 but banks knew only too well. It was obvious. Private debt was through the roof. The UK wasn't simply a "victim" of banking issues. We were and still are a housing ponzi scheme at heart. All our banks had issues.

Ben

Regarding Broadbent's comments. What happens when you add more members to a group who are doing well? If all goes well all continue going well.

What happens when you add new members to a pyramid scheme? Boom time! Until it isn't. You are here.

Luis Enrique

Ben

you still haven't explained why we did not see people calling for tighter regulation of banks if the need for it was so obvious.

by the way, as far as I know, private debt had little or nothing to do with the financial crisis in the UK.

Ben

Luis

plenty of people where. I guess you and the author either (or both):

1. work in a bank so you were high on the hog
2. have BTL and so didn't question a system handing you more in cash each day than a GP earns.

Private debt has everything to do with the malaise we have now.

Plenty of people saw the problems just not the same people who were benefiting from them or sat in the FSA twiddling their thumbs hoping it blows up after they got their pension.

The idea that it was a surprise is re-writing history IMHO. Labour did this extensively in the wake of the crisis because they are utterly horrible people.

Luis Enrique

Ben,

Don't be silly. Guesses very wide of mark. I think internet was around in 2007 you should be able to reference your claims about lots of people calling for banking regulation.

AFAIK excess household debt little to do with UK crisis. Some high street banks made very low quality loans in commercial property. Or had unsustainable funding models, overpayed of acquisitions. We didn't get a crisis because households became unable to service debts.

An Alien Visitor

I think New Labour were more superficial than this article and their own publicity suggests (that includes everything from politics through economics to culture). They were certainly radical in ditching the radical elements of old Labour and turning labour into a party of business as usual.

One clear indicator of this is that in many areas the ConDems are simply reversing what they did.

Jim

There was a point in the mid 00s when it was announced that people's spending was (in aggregate) far higher than their incomes, the balance being largely funded by equity withdrawal. Rising house prices were funding equity withdrawal and increased consumer spending, which in turned fed the economic boom, general feeling of well being and desire of the banks to lend to all and sundry, which in turn boosted house prices. Rinse and repeat.

If I, the lowly holder of an A level in economics, could see that such a situation wasn't going to end well, one wonders why such economic giants such as GB couldn't. Or perhaps he was in fact utterly blinded by his conviction that he could do no wrong, and that the economic growth of the 1997-2007 period was entirely down to his actions, when in reality it was largely due to factors outside of his control - namely a long term trend towards lower interest rates, the resulting large rise in personal indebtedness, and the unusual (for the UK) lack of inflation despite a 10 year boom, mainly as a result of cheap foreign imported goods.

Alex

OK, so you're a genius and totally knew the crash was coming. What's your plan to get Tony Blair of all people to agree to kick all those Kirstie Allsopp junkies in the wallet?

Luke

In support of Luis, I looked at about two hundred cases of residential liar loans/BTL gone wrong - lenders repossessed and sued my clients. The odd thing was that most mainstream banks were hardly involved at all, in particular RBS/NatWest did not crop up once, nor Barclays. Lloyds and HSBC once each.

HBOS and Northern Rock were a good source of work, but the big banks (particularly RBS) were not. Obscure sub-prime lenders were the main source of work. Anecdotal I admit, but I find it hard to believe residential UK loans were that big an issue.

Abdullah

Jackart suffers from hindsight bias, though, of course, he won't admit it.

Ben

Alex - don't let the BoE cut interest rates in 2003 in "surprise move".

Luke - clearly you didn't go to B&B for a mortgage. They told me to lie about my income without me even knowing it was an option so I certainly didn't give the guy a nod and a wink.

Jim - economics is "counter-intuitive" dontchaknow.

So today we have FLS extended and help2buy still running. BTL classified as a "business" with tax relief.

In a couple of years time when it all blows up again you boys will all be surprised.

Jim

"OK, so you're a genius and totally knew the crash was coming. What's your plan to get Tony Blair of all people to agree to kick all those Kirstie Allsopp junkies in the wallet?"

No I'm not a genius, far from it. I sold a house in 2003, convinced that the market had peaked, and someone would very soon bring the party to a sudden stop with higher interest rates. How wrong I was!

But the solution from Browns point of view was simple - tell Blair what was needed for the good of the country (measures to reign in the banks and slow the housing market from 2004 onwards) and resign if thwarted, and tell everyone why. But Brown was a politician to his fingertips, and cared more about Labour winning the 2005 election, and him becoming PM, than doing the right thing for the country, if he even had a clue what that was.

Thats why history will judge him harshly - he either believed his own hype, and was oblivious to the warning signs, or knew that trouble was in store and did nothing about it for personal or party ends. Neither says much about him.

ben

Jim. That for me is undecided. Brown: thick or evil. I think thick.

magistra

Chris,

Picking up one of your points of Gordon Brown’s failure – how do you increase public sector productivity without managerialism? Public service productivity is fairly hard to calculate, but in terms of the big areas (health, education, social services), what you have is a large number of more or less independent units (hospitals, practices, schools, councils), where a lot of the work is being done by individual professionals or small groups of them. It’s not like in a factory where if someone on the factory floor finds a better method for making widgets it can easily be spread along a whole production line. If you find methods for better practice/increased productivity by a teacher, a social worker or a nurse, it will only spread slowly (if at all) by example; professionals are often reluctant to change their own tried and trusted practices. It’s only top-down imposition across the whole of the NHS, the school system etc that’s likely to allow the large-scale changes to boost productivity substantially.

Neil Harding

I wrote in 2001 that the economy was booming on a debt bubble. And even before that I knew Thatcher's deregulation of credit controls was a mistake. In fact the only ones who seem not to have known what was going on in the economy was economists! Everyone I spoke to in the building trade from bricklayers to labourers knew the market was crazy and heading for a crash. I can't be so nice about Brown. It was people like him that made me leave the Labour party. All about Stalinist control to reach the top. How can anyone like that be moral?

Guano

The two main political parties, large sections of the press and the majority of "economists" believed that the economy could keep on growing on the basis of personal credit. It was an established belief within the Westminster Bubble, as was a belief in the correctness of invading Iraq or the belief in Blair's forms of public sector reform. The people within this Bubble confirm each other in these beliefs and, when they are shown to be mistaken, they will say that no-one could have foreseen that their assumptions were wrong. There were, however, many people outside that Bubble who doubted these assumptions.

The people now praising Brown as a "titan" are doing so in the context of a Westminster Bubble that itself got a lot wrong (and continues to claim that no-one could have foreseen the crash or the disaster that is Iraq). Those who criticise him do so for the wrong reasons.

Luis Enrique

Far from being counterintuitive, the idea of a country consuming more than it produces is called a current account deficit and economists are always predicting crises as a result, which often fail to materialise.

Nobody is going to deny the UK housing market is crazy or that high levels of household debt increase vulnerability etc.

But there seems to be the idea in this comments thread that we had a crisis in the UK because a housing and personal debt bubble burst and I don't think that's what happened.

It might be closer to what happened in the US, where housing was first domino to fall, but even there, there is no reason for falling house prices to bring down system unless much wrong elsewhere.

In UK I don't think mortgage defaults played much role although I may stand corrcted about hbos. Its not what did for r northern rock.

I too spent a decade predicting the UK housing market would crash and reading about equity withdrawal and thinking that can't go on forever. But this does not mean I predicted the crash. I had no idea what the banks had done to themselves. I'd never heard of shadow banking or mbs.

I notice a continuing absence of evidence that it was obvious in advance that the banks needed regulations. As we now know in hindsight.

paulc156

Luis Enrique: "I notice a continuing absence of evidence that it was obvious in advance that the banks needed regulations. As we now know in hindsight."

Yes, I noticed that too. Read all the way to the bottom of the pile.

Stevenclarkesblog.wordpress.com

I wonder how much of the negative assessment of Brown stems from personal animus?

He was a dour, intellectual, socially awkward outsider who didn't follow the usual channels to power. The products of England's private schools and Oxbridge, with their breezy confidence and sense of entitlement, who populate the press (and other parts of the Establishment) never saw him as being 'one of us'.

Of course, this comment is just an excuse to wheel out P.G. Wodehouse's immortal line, "It is never difficult to distinguish between a Scotsman with a grievance and a ray of sunshine."

e

From my position of ignorance I thought the crisis/ banking crash was a consequence of a business model dependent on interbank lending; and that confidence in interbank lending collapsed because “what’s actually in these parcels of crap being used as security” was being openly discussed – the result of protracted (US) reporting on subprime lending and its consequence to individuals and municipalities. Prior to 2008 and the bailouts, what democratic power was in a position to successfully question either the integrity or efficiency of private banking enugh to justify greater regulation? I think none. And GB lost in 2010 so we can’t know if he would have done more than today’s administration to avoid a return to our same old (housing) market dependent rut. It’s surely not possible that he could have done less.

Luis Enrique

e

I think that's one of the big ingredients. I was just doing some refresher reading on HBoS, they were very reliant on wholesale funding, like Northern Rock. And that tide went out. Which reminds me of that nice Buffett phrase about how it's only when the tide goes out that you can see who isn't wearing any pants. And HBoS was pant free, meaning they had to write off lots of commercial property and construction loans. Having to write off loans is another way of saying people borrowed money they could not repay, although the point I am trying to make is that I don't think household debt was the origin of the crisis in the UK.

Ben

Regarding RBS/Hbos - of course they were fine until basically free money evaporated. Then all the naysayers were proved correct.

To say that the UK has no repos is misunderstanding how deep up sh1t creek the UK is. The US had a lot of repos because their economy could withstand a clear-out plus they have some pretense of capitalism. So they took their medicine.

The UK authorities *knew* that they couldn't take the hit. They knew there was nothing under the velvet but a bench. They did everything they could to stop price discovery. How do you stop price discovery? Unlimited easy credit plus limit supply. If banks started repos we have over-supply and price discovery. This is anathema to the UK.

We have huge private debt. Beneath that tip of the iceburg we also have huge commercial debt because the land isn't worth what the mortgage says. It's just an accounting scam the establishment allows because the UK is going down.

The BoE and the UK establishment have bent over backwards providing a fortune in back-door subsidies to the banks.

You are totally kidding yourselves if you think the UK is on anything other than thin ice.

Luis Enrique

"The US had a lot of repos because their economy could withstand a clear-out "

thanks for the laugh. So *that's* why the US decided to destroy to global financial system.

Ben

The UK is currently, if you'll pardon the pun, Browning it's pants at the prospect of a US rate rise.

If the UK had seen drops like US housing did we'd by discussing this in our pants on a heath, not on the internet!

gastro george

@Ben - I don't think that anybody (with any sense) is actually expecting a rise any time soon. Only the ultra-hawks are pushing for it. I wouild imagine that, like the Swedes, any rise would soon be reversed. And there is an election coming up.

I mean I can understand why it would be a concern. There are too many people who's budgets are too tight to bear thinking about a rise in mortgage rates. Only a rise in real wages is going to cure that.

An Alien Visitor

I think the crisis started in the US and spread from there. So the collpase of British banking was closely tied up with the uS crisis, and the reasons for it.

"I notice a continuing absence of evidence that it was obvious in advance that the banks needed regulations."

I find this an astonishing admission from someone who comes across as a know it all on economics. I will remember that in future. You did word this suspiciously however, almost in a legal fashion. What cannot be doubted is that the deregulation of financial markets in the 1980's caused a huge stir and great debate.

Luis Enrique

An Alien Visitor

I don't know why you react like that. I am echoing Chris claim that pre 2007 the need for bank regulations, such as those now being imposed or called for, was not obvious, as evident by fact few were calling for them. I regard that as an uncontroversial observation not an astonishing admission. I had only just started studying economics in 2007 but had I been fully furnished byva PhD I doubt I'd have been any more perspicacious than anybody else.

As I said above predicted house market crash or abrupt end to credit boom does not equate to predicting the Great Recession.

No doubt you are right that deregulation was controversial in the eighties but 20 years later complacency has set in

Ben

GGeorge - real wages ain't rising in the UK. Just lots of demographic pain as the boomers retire and demand more and more.

Osborne trots out today with a load of fudge. Nearly election time which is all he's had his eye on for 4 years, not the good of the UK people.

An Alien Visitor

I know what you are saying and I am taken aback that you are unaware of such debates. How can someone who has studied economics to such a level be so ignorant of pretty recent history around such a fundamental subject?

Though, yes, complacency, moving onto new debates, can explain why these raging debates subsided. People tend to have the debate and when the debate is over move onto other things. This should act as a lesson.

Jim

"As I said above predicted house market crash or abrupt end to credit boom does not equate to predicting the Great Recession"

No, but its closer to what actually transpired than what the political class was predicting, which was unfettered growth from here to eternity, including house prices that could only ever go up.

If you predict a Labour landslide at the next election and I predict the Tories as the largest party but no majority, and they get a majority, who is the better predictor?

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