I’ll start by acknowledging that those of you who have read my posts
before will know that I’m not a particular fan of Gordon Brown. I’ve
no serious prejudice against him, or even against Labour, but I’ll
confess that having watched him perform as Chancellor I’ve never been
impressed.

The credit crunch is a major economic event – hopefully to be
mitigated from the worst of its immediate impact by the intentions of
the Fed to buy up all the bad loans. That may or may not work, but if
it does, it will very likely still have some unforeseen longer-term
consequences that could either be good or bad. We’ll see.

There is a lot about the credit crunch that Gordon Brown isn’t
responsible for.

He’s not responsible for the human failings of greed and avarice which
have been the biggest driver towards achieving the near destruction of
the banking system - bottom line is, if you give greedy people enough
rope they will hang themselves with it, as they very nearly have.
Nobody is singularly responsible for human nature, but anybody in a
position of authority is responsible for at least being aware of human
nature.

A few commentators have spoken about the source of the problem being a
trend of deregulation of the City of London that began under the
Conservatives in the 1980’s. There were very ugly scenes of excess in
those times but that was many years ago and there’s been plenty of
time for anybody genuinely sensitive to it to put it right.

Gordon did change the way the financial system was regulated; giving
“independence” to the Bank of England, establishing the authority of
the FSA and delineating the Treasury’s role in matters.  But is the
Bank of England really independent? Did this “independent” Bank have
independence to choose how to measure inflation, or was it given that
as a part of the Governments brief? I don’t think the Bank is, or can
be, truly independent in controlling inflation. Interest rate
decisions have political import and that is irresolvable. So Gordon
Brown didn’t architect excess, but he was the architect of the system
that was intended to prevent excess - and prevent excess it didn’t.

There are economic factors that mitigate Gordon’s blame somewhat. The
shares crashes of 2000/2001 (dot.com, techs and 9/11) meant it was
inevitable that there would be a period of low interest rates at the
beginning of the decade – USA had a touch of recession at the time and
their rates were always going to be low. However, over here, the
housing market was obviously overheating and Gordon, the Bank, or
somebody, should have seen that as the kind of inflation that actually
mattered, rather than being outside of the scope for managing
inflation as delegated to the Bank of England. It seemed that, under
Labour, house prices and personal debt had become nobody’s
responsibility. Some people think that may have been intentional.

The Government has spent huge sums on the National Health Service and
other public services. Doubtless all that was well meant, but it was
also very definitely ideological and the credit expansion in the
economy must inevitably have been a key factor making it possible.
Keep in mind that another policy was to promote PFI schemes in it
which have mortgaged the future of many elements of the public
services. So credit, generally, was a strong theme in what Labour were
doing and one wonders whether, if something could have been done to
check financial excess, then might that have been inconvenient from
the Government’s ideological stand-point?

Credit should have been tightened-up by end of 2003, cooling the
housing market and slowing the trend towards historic levels of
private debt.  In 2004 private debt reached £1.3 trillion – that
should have been a clear signal. Action taken in 2003/2004 would have
meant that our economy would have looked less healthy, and maybe there
would have been a few more people suffering from it.  But how much
will those people suffer now the crunch is here? That’s the real
question to consider when pondering what Gordon did and didn’t do.
E.g., will there be more than 2m unemployed next year? Will the
children of those families be living in poverty? Will people suffer
from greater crime levels (on either side of the justice system)? Can
we sustain public spending or will there be painful cuts? Will the tax
burden go even higher, and in the context of a recession? Those are
some of the questions to consider when thinking about past policy
under Brown’s chancellorship.

Although between 2003-2005 commentators in the popular press were not
shouting very loud about impending financial doom, one has to remember
that they work in the popular press – presumably with the intention to
remain doing that. There aren’t very many people writing about
politics and economics for the national dailies who want to be known
by their editors as mavericks – as that’s not such a reliable career
move. And, even less objective than the dailies, there had been very
regular reports from the council of mortgage lenders, from all of the
building societies and most of the banks telling us that house prices
were going-up and every thing was great.  Even this time last year
there were people in the finance industry telling us that house prices
would rise 25% over the next five years. A balanced forecast?

However, there remains a massive volume of economic research and
literature that did put the situation in 2003/2004 into worrying
perspective. It is most definitely the sort of stuff that Gordon and
many at the Bank and the Treasury should have cut their teeth on in
their younger days. But, despite it, the situation was allowed to
steadily get worse.

So is the credit crunch the fault of human nature? But human beings
are what we are – so human nature can never be “wrong” as such. It
just is what it is, and it causes everything in economics.

Is it all the fault of Johnny Foreigner in this new global economy?
Well the beginnings of the bust were in the US sub-prime market – but
no, it’s not Johnny Foreigners fault any more than it’s ours ‘cos we
were in that and similar markets too. Some say it’s no longer possible
to abstract our British financial system from that of the rest of the
world. I am swayed by that view. But it should be possible to draw
some lines in the sand that retain a level of common sense at home. We
need British international banks and we need British UK banks, with a
protocol of business between them which provides a level of security
from untoward external events.

Is it all Gordon Brown’s fault? Well, he could probably wriggle-out of
the blame in the context of a conviction beyond reasonable doubt. And
many who did read the economic literature were convinced that a
serious event in global finance was coming anyway. But even if that
was inevitable, in terms of mitigating the impact upon the British
economy (the one he was managing) I’m afraid it’s rather generous to
him to only say that he could have done a lot better.

Gordon Brown appears almost surprised by the credit crunch – that may
be deliberate. The man in the street is less surprised. Typical views
of the man in the street is that there was too much credit and there
was something unhealthy about that. People know that in a kind of
intuitive way derived from their own experience of the need to manage
their own finances soundly – let alone from the hundreds of credit
card offer leaflets they put in their dustbins between 2001-2007.

As for Gordon’s “surprise”, it’s almost implausible that Gordon Brown
wasn’t aware of the risk of a crash long ago – probably in 2004. This
coincides somewhat with his growing frustration at Blair not stepping
aside to let him into No 10. If Gordon knew the end was coming then
one can better understand that frustration.

It was in 2004 that Gordon should have done his job as Chancellor to,
if not to prevent the crunch, then to make us more ready for it. Our
lack of readiness for the credit crunch is one of the reasons we have
to give the bankers such a golden “get out of jail” card.  In a proper
market economy, working for the benefit of all participants, banks
should be allowed to fail. But we can’t now afford to allow banks to
suffer from their own excess as much as would be social justice.
Unfortunately, social justice, although a phrase used by Gordon Brown
more than by any other politician in his first years as Chancellor, is
now a phrase he could only repeat if he had the very thickest of
skins.

The credit crunch is here and it’s a big thing. But the really
difficult part is going to be re-organising the British economy such
that it produces real growth (not just credit expansion) in a post
credit crunch world - and is also socially just in distributing the
benefits of that growth with all the influences of globalisation that
make that more difficult. Minimising the impact of the credit crunch
would not have been easy even if Gordon had been trying to do it. But
the British economy post credit crunch is going to be far and away a
more difficult thing to manage in the interests of the British people.
Gordon isn’t the man to do that. He is experienced as Chancellor but
just look at what that experience is comprised of – enjoying a credit
bubble and claiming that its transient feel-good factor was down to
how clever he is.

And has Gordon “no return to boom and bust” Brown learned anything?
Apparently not. This morning he said that steps must be taken to
prevent the credit crunch ever happening again – presumably to make
his “no return to boom and bust” pledge a reality, if a little after
the event. So he still thinks that that the natural cycle of economic
activity, as determined by human nature, can somehow be subverted. So
even after what he’s been through, he just doesn’t get it. He doesn’t
even understand the basics of economic theory – it’s astonishing
really.

No, Gordon isn’t a man for the future, but it remains unlikely that
he’ll be ousted by Labour. Cream always rises to the top but there’s
no rising cream in the Labour party to displace Brown. In defending
Brown’s leadership from disquiet in the ranks the Labour party big-
wigs have resorted to what they’re best at – political correctness.
It’s not politically correct for Labour to spend time “navel gazing”
its own problems while the country faces the credit crunch.  It’s not
politically correct to question Labour, as it hasn’t been since their
election in 1997.

But, in reality, Gordon’s problem is now worse than Blair’s problems
ever were. People didn’t listen to Blair because, eventually, they
thought that you just couldn’t trust what he said. Brown’s problem is
worse because people don’t respect his words even when they think he’s
trying to tell the truth.

There could well be an upward twitch or two in Labour’s poll ratings
over the next year or so – but that won’t be enough. Whatever the Fed
does, house prices are still going down, credit will still be very
tight relative to what the country is used to and there will be
extremely little, if any, economic growth before the next election.
The very best Labour can hope for is a hung parliament and it’s far
more likely that they face a crashing defeat. There will be a sea of
brave faces on display at their conference this week but, between now
and the next election, that’s all there can be from Labour – just
brave faces. To all intents and purposes New Labour is now finished.

Our politics, especially towards the management of the British
economy, must and will change over the next months/years. We need a
different way of doing economic management with rather more pragmatism
and rather less ideological influences. Of course, one man’s
pragmatism is another man’s ideology, so that’s a hard challenge. But
we at least need a genuinely brilliant and inventive economist in, or
very close to, No.11. I can’t see any in either potential cabinet. So
I think its time for the politicians, who only do politics, to give
best to the nation’s top economic academics and business leaders in
creating the economy we need for the next ten years. The politicians
must get the politics of it right, by sensing what the nation wants,
but the plan must be a plan devised by the best in the field whoever
they happen to be. No more recruiting people because they are
politically on-side. Recruit the best economists first and then make
them understand what the nation wants – and don’t be afraid to change
some basic assumptions that have existed for the last ten or so years.

If the world has changed, as some say it has, then let’s respond to
that change – and the quicker the better. Let’s do something right,
for once. Let’s make the change soon.