“Linwood no more; Bathgate no more; Ravenscraig no more…Salmond no more” The First Minister has reacted with fury at the claim that he has praised Thatcher’s economic policies in the 1980s which inspired the Proclaimers’ famous list of industrial closures. In an interview with Total Politics Magazine about Scotland’s attitude to Thatcherism the FM said: ‘We didn’t mind the economic side so much. But we didn’t like the social side at all.” Not an endorsement of Thatcherism, perhaps, but certainly a nod in the direction of her market-based policies.
But no one should be surprised that Alex Salmond is pro-business. Whatever else an independent Scotland would bring, it would not be socialism in one country. He has long made clear that he believes Scotland’s future lies in emulating Ireland’s low tax, low regulation economy, and its dash for growth through inflated house prices and attracting high net worth individuals.
A more important question than whether Salmond is embracing Thatcherism, is whether his support for Celtic neoliberalism may be obscuring his view of what is happening in the real economy. This is important because the inflated Irish economy has come to the brink of collapse as people have realised that house prices don’t equate to real wealth, and that greed isn’t necessarily good.
Now, like all First Ministers, Salmond spends a lot of his time in the company of bankers and financial types who dominate the Scottish economy. The Royal Bank of Scotland, is one of the biggest banks in the world, and practically owns the country. When you come off the plane at Edinburgh airport you could be forgiven for thinking that you were in a land called RBS such is the degree of branding around. The FM has come to support the RBS rather as if it were the national football team. A fortnight ago he issued a statement about their prospects which read like a Royal Bank press release. Dismissing the bank’s announcement of the second largest losses in banking history he said: “I am certain that the Royal Bank of Scotland will overcome current challenges to become both highly profitable and highly successful once again.”. Well, maybes aye and maybes no; but since when has the FM become the CEO?
I think this is carrying things too far. The Royal Bank of Scotland employs 8,500 people in Edinburgh and is a very important company in Scotland, but the First Minister should not be backing the banks uncritically. The reality is that RBS, under Sir Fred “the shred” Goodwin, has been behaving as irresponsibly as the rest of the banking world – perhaps even more so, given the scale of its losses in mortgage bonds and other assets and its purchase of the Dutch bank, ABN-amro. RBS piled into sub-prime lending in America in the craziest years of the boom and is now having to write down billions in losses. RBS has had to try to restore its books by issuing an emergency cash call for £12bn in June, the largest corporate rights issue in history.
The problem with a small country like Scotland is that big companies can exert a disproportionate influence on the political system. It’s not just RBS, but HBoS, Standard Life, all those ‘intelligent finance’ types in Edinburgh Park. They have colossal lobbying clout and produce much of the economic material that the Scottish civil service uses to frame its economic policies. The trouble is that these companies are not impartial observers of the economic scene – they are players who want their view of the economy to prevail. Politicians should be wary in case they turn unwittingly into their apologists.
The First Minister continued last week to show the influence of bank thinking in his comments on the housing market in Scotland. In his Donald Dewar lecture, at the Edinburgh Book Festival launch he said that house prices in Scotland were bucking the trend south of the border. “Scottish house prices appear fairly stable in comparison to other areas’”said Mr Salmond, “with prices in Scotland increasing by 2.9 per cent since the start of this year, compared to a fall of 2.8 per cent across the UK.”
There were two things wrong with this. First of all, he was wrong: according to the Register of Scotland, which is the only reliable source on house prices since it measures actual prices rather than estate agent spin, house prices in Scotland fell by 5.1% in the first quarter of 2008. That’s almost as precipitate a fall as in England. In Edinburgh new build flats are selling for less than 20% of their prices last year. It is a myth that Scotland is in some way immune to the credit crunch, and it is a myth that is being promoted by commercial interests who gain from it – principally the banks, who have been urging politicians to talk up the market. But not even Alex Salmond can defy the laws of economics.
The second problem with the FM’s speech is that he appears to think that high house prices are a good thing, and is calling for action to “support the housing market”. The FM is talking of bolstering house prices by spending millions on schemes for “affordable housing” and to “help first time buyers”. Actually, the last thing government should be doing is encouraging young families to enter a collapsing market. The best way to help first time buyers would be for the market correction to take place speedily, without government interference, so that prices fall by the 30-50% necessary to return them to sustainable, pre-bubble prices.
It was predatory lending by the banks – handing out 125% mortgages and the like – that pumped up the house price bubble in the first place. This was underpinned by central bankers who kept interest rates too low for too long to encourage an asset price spiral. On the basis of these unrealistic real estate values, banks like RBS and HBoS, built a huge structure of leveraged debt, which ensnared us all. Now the whole edifice is collapsing, leading to trillions in global banking losses and a severe tightening of credit.
Britain is now entering what is likely to be a long recession as the mess created by the banks is cleared up, and Scotland, like Ireland, is not well placed to weather it. We are heavily dependent on financial services, make very little and have high public spending. Alex Salmond is right to call for policies to counter recession, but he should be wary of asking the banks for advice. They have been responsible for what is emerging as an economic catastrophe, and the government should be thinking about how to help the thousands of people liable to lose their homes and jobs because of the irresponsible behaviour of Thatcher’s children.