New Labour’s crisis deepened over the weekend, with the Chancellor Alistair Darling’s open admission about the seriousness of the credit crunch. He said today’s economic times are “arguably the worst they’ve been in 60 years”, causing the pound to fall against the Euro and the dollar.
As the government’s popularity – and with it Brown’s status - sinks ever lower, Darling decided it was best to go for broke and admit the truth that everyone else had already known, and in doing so, steal a march on the Prime Minister.
After a year of denial, the Chancellor pricked the bubble of New Labour’s fantasies, to shock all around. Like his namesake Wendy Darling in the fairytale world of Peter Pan, he preferred telling stories and fantasising to the mundane everyday world of real life the rest of us have to deal with, but at last he has been forced to admit that there’s a big problem. “I think it's going to be more profound and long-lasting than people thought", he told a Guardian journalist.
He claimed that when he first became Chancellor, “we knew that the economy was going to slow down”, but he did not have “any idea” that there would be a major financial crisis: “No, no one did. No one had any idea,” he claimed. But to any serious observer of the global economy, it was already clear back then that a huge financial crisis was starting to blow as the US mortgage market went into tail-spin.
A World to Win warned about its effect on the British economy well over a year ago:
‘The contagion is certain to spread as there are very many over-borrowed, over-stretched corporations - not just financial institutions - as well as the millions upon millions of individuals who find themselves in trouble in every country. The British economy is particularly vulnerable... Some observers are comparing the situation to 1929, when the Wall Street crash led to a world-wide slump...’
Now, as house prices have fallen by over 10% in a year, widening the gap between the mortgage debt millstone millions of people are struggling to repay and the value of the property they are trying to buy. More than 30% of all UK borrowers – around 3 million households - are expected to be caught in the negative equity trap if prices drop by a further 30%, as many are predicting.
Even the remaining mutual Building Societies, like the small but successful Swansea, which has continued to lend only against the money its savers have deposited, are caught up in the vastly overblown finance fantasy.
Whilst banks and financial institutions are free to simply write down the declining value of the assets they have accumulated, no such freedom exists for those who are stuck with impossible levels of mortgage payments. In the US, around 1 in 5 of the population are already in negative equity, and many who are unable to sell their houses in an already oversupplied market are simply walking away.
Our solution? Rather than passing the buck to local councils to take over a portion of the debt – effectively using even more taxpayers’ money to shore up the private usurers - investors and borrowers should take control of the mortgage lenders without compensation to shareholders and, following the banks’ example, write down the value of the property as prices fall, and recalculate outstanding loans based on the now much lower value. Simple. But not something New Labour can countenance whoever the leader might be.