Come back Alistair Darling all is forgiven. When the Chancellor suggested a fortnight ago that that this could be the greatest economic crisis for sixty years he was widely attacked for being alarmist. Now it’s beginning to look like an understatement, as passengers are left stranded at airports, house prices plunge, more banks collapse and Britain slides into recession along with the rest of the industrialised world.
A year on from the nationalisation of Northern Rock and the foundations of capitalism seem to be crumbling in the very epicentre of the free market: Wall St.. Another huge financial institution, Lehman Brothers, is going under as we speak. Last week, the US government effectively nationalised the giant mortgage companies, Fannie Mae and Freddie Mac, which between them account for half of all the mortgages in America – more than $5 trillion worth. This is the biggest state take-over in history, and makes the nationalisation of industrial companies like British Leyland and British Steel in the sixties and seventies look like an exercise in municipal subcontracting.
It is also the most astonishing economic u-turn of modern times, a complete reversal of the freewheeling market ethos Wall St. has always lived by. The very people who used to rail against regulation are now begging the state to come to their rescue, to save them from themselves. The economies of the West are being transformed before our eyes into a centralised system run by a financial oligarchy – the handful of banks who are still “too big to fail”. And they are using public money as collateral. As the New York economist, Nouriel Roubini put it last week: “Welcome you to the USSRA: The United Socialist State Republic of America”. It’s socialism for the banks: communism for the well off.
Politicians and most economists,say there is no alternative; that firms like Fannie Mae cannot be allowed to go bankrupt in case the entire financial system collapses. Perhaps. But if this transfer of financial liability to the state is inevitable, then surely it should be handled in an open and democratic manner, not least to ensure that the public interest is protected. There has to be a quid pro quo: transparency and accountability; a curb on profiteering; a more responsible attitude to lending; and a limit on the self enrichment of executives. Never has there been a better opportunity to strike a new social contract between private capital and the people.
Labour is failing to make this case. As the party prepares for its UK conference in Manchester later this week there is pessimism verging defeatism in the party, a loss of moral purpose. But why? Looking at the wreckage wrought by unrestrained greed during the boom years, this should be a great time for a social democratic party like Labour – a historic opportunity to reaffirm its fundamental values. The people who should be on the defensive are the free market Conservatives and their friends in the City who have brought us to this state thanks to their bonus culture and predatory lending. All those neoliberal nostrums about the evils of government interventionism have been swept aside as financiers fall over themselves to get their hands on state subsidies.
A student of history like Gordon Brown would surely learn from the example of the US Democrat President, Franklin D. Roosevelt. In the 1930s, the economic situation was very similar, with falling house prices, weak stock markets and widespread bank failures. Roosevelt turned it to his advantage by using political leverage to introduce policies that benefited ordinary people, taxed the rich and restructured the US economy such that it was based on productive industry instead of stock market speculation and property bubbles.
It was called “the New Deal”, and Gordon Brown even borrowed the phrase to describe his own job-creation programme in 1997 – a programme which was financed by a windfall tax on the privatised utility companies. Unfortunately, he is not prepared to revisit his own early radicalism and to impose a new windfall tax on the energy companies who have again been making exorbitant profits at public expense by increasing domestic fuel bills up by over 30%. The EON executive, Mark Owen-Lloyd, established a new benchmark for callous indifference last week when he joked that a harsh winter “would mean more money for us”.
Brown said he would not resort to “short term gimmicks” int he energy crisis so he has resorted instead to a long term gimmick, proposing loft insulation as a solution to fuel poverty. This won’t even cost the energy companies much because they can set most of the cost of the programme against their corporation tax. Why is Labour so afraid of taking a stand against these people? Is it still afraid of being seen as antibusiness? Is the Daily Mail, which supported a windfall tax, antibusiness?
Labour would do well to remember Roosevelt’s words: “we have nothing to fear but fear itself”. The British economy needs to be rebalanced so that it is less reliant on house prices and financial services and more on making things that can be sold abroad. Manufacturing has been allowed to dwindle to 14% of GDP. This needs to be reveresed. Brown could revive the construction industry by restoring council house building, which it practically invented. Councils have hundreds of thousands of families waiting on their lists – people with no prospect of ever owning a home – and there are thousands of builders and tradesmen are being thrown on the dole.
Instead, Brown is spending public money on schemes to stop house prices from falling to levels at which people can afford to buy them again. This is futile.The government should do nothing to impede the correction that is taking place right now. Houses are still overvalued by around 30% and the sooner prices fall to the historic levels of around three times average earnings, the sooner we will have a stable housing market, instead of one pumped up by cheap credit and liar loans.
There are other areas in which Labour is simply not making sense – pay restraint, for one. The mantra from ministers is that wages must be held down below to stop inflation getting out of control. Well, what must be blindingly apparent to the most blinkered union basher is that inflation has got out of control without any help from wages, which are falling as inflation rises. Pay cuts will not stop inflation, but they will stop people buying in the shops. The Japanese government has just called on businesses there to start increasing wages – yes, paying workers more – to revive consumer demand. Even America has been handing out tax rebates.
But Gordon Brown seems to be stuck in the Thatcherite 1980s and has failed to notice the profound changes to the economic environment brought about by the credit crunch and its aftermath. We really are in a different era. And the irony is that it should be be Labour’s era. It will assuredly not be Gordon Brown’s.