A committee of MPs today blames the “reckless behaviour” of the banks for the financial crisis, which is as neat a way of any of letting the New Labour government off the hook as any yet devised.
The Treasury committee’s view of the collapse of the financial system is partial and one-sided and a bit short on history. If the banks were reckless – and they were – it was because they were encouraged to be so. And no one in government complained as the tax receipts rolled in, especially not Gordon Brown who was chancellor for the decade when the credit-fuelled boom took off.
Why were the banks “reckless” and take extraordinary risks with their lending? That is the question. Why, as the committee asks, did bankers make “an astonishing mess of the financial system”? The answer usually given is that they were “greedy” and simply loved piling up the bonuses and forgot to look out for tomorrow.
That doesn’t really get below the surface, however, and puts the collapse of the global financial system down to a few badly-behaved individuals. The real truth is that the so-called boom Britain has experienced was only made possible by a massive extension of credit (and its opposite, debt) under the direction of the government.
It is not that Brown did not know what was going on. His government actively encouraged London to become one of the centres of fantasy finance, which inevitably contributed to the series of bubbles that have now burst and broken the back of the global economy in the process.
Verification of this comes from the Institute of Fiscal Studies, whose director Robert Chote, shows how the Treasury actually knew that the boom was not what it appeared to be. Between 1998 and 2008, output in the economy was 3-4 per cent above its sustainable level, he estimates, in what he calls “an alternative view of history”.
This view, he said, would “cast a much less flattering light” on Brown’s record as chancellor. “It would certainly suggest that he should have been running a much stronger fiscal position.” In plain English, Brown’s officials suspected it would end in tears, and should have reined in spending, but decided to keep the illusion going in the hope that the days of boom and bust were a thing of the past.
Chote explains how much of the so-called boom actually amounted to an increase in share and house prices, which people cashed in on to fuel consumer spending on imports. Yet this activity was treated as if it were a sustainable growth in the real economy. Apparently, the Treasury is now rewriting history to try and disguise what happened.
Of course, the banks contributed. Why shouldn’t they have? They are in business to make money and if that could be done by recycling dodgy loans as securities, creating more and more complex ways of moving funds around the globe, increasing profits as they went, they knew that the government was behind them all the way, to the point where Brown told them in June 2007 that they had created a new “golden age” in the City.
Ultimately, the banks and the government responded to the fact that the only way that the expansion of the goods-producing side of the global economy could be maintained was through greater and greater amounts of fictitious or fantasy finance. The collapse of one has revealed the massive over-capacity and over-production in the other, which is why trade has collapsed around the globe. Global capitalism as a whole is unsustainable any way you look at it and the best way to mark May Day is to renew our efforts to put it out of its misery.
AWTW communications editor