Monday, July 28, 2008

Will Labour recover when the economy strengthens?

Many pundits say we won't, citing the way John Major's government fell, despite the economy recovering from the 1990/2 recession.

To understand why John Major's government fell, you need to go back to 1992 and Black Wedneday. At the time I owned a small flat with a mortgage and was at work, when around 10 a.m. we got news that interest rates had risen from 10% to 12%. Around noon we heard that rates had gone up again to 15%. We were in shock and no one did much work that afternoon. Instead we sat at our desks thinking, S**t, my mortgage payment has increased by 50% and frantically bashed our calculators in a futile attempt to rejig household budgets to accomodate the rise. It was real stomach sinking stuff.

It wasn't until 7 p.m., after the nation had been stewing in fright for a good seven hours, that Lamont announced that Britain had come out of the ERM and rates would remain at 10%. The only other time I've experienced a similar crisis day of the oh-my-god-is-this-really-happening sort, was 11th Sept 2001 (by 7th July 2005, we'd got inured to bombs, especially as ours followed Madrid's).

Rapidly the papers started to dub it "White Wednesday", as outside the ERM, interest rates could continue to fall. The feeling was very much that the markets and George Soros had rescued us from the idiocy of our own government (who prior to this also had the Lawson boom and bust, surging inflation, and the severe recession of Q4 1990 to Q2 1992 to it's charge sheet) by forcing them to see sense. The Tories had spent the '80's claiming that the markets were good and governments were bad - and this too played into the narrative. The good markets had rescued us from our bad Tory government. In other words the markets got all the credit for the recovery. John Major and his government got none and instead were despised as the people who would have tried to force us to bear 15% interest rates in a downturn.

Fast forward to 2008 and the situation is quite different. The markets this time are the villains. The public believes that banks are staffed with idiots who bought US sub-prime paper without realising the risks; that Northern Rock was run by idiots who thought they could finance mortgages through the money markets rather than traditional deposits; that the shareholders of Northern Rock were idiots for not overseeing the Northern Rock management properly.

The narrative this time is, who will protect the good citizen from the heedless foolish markets. Naturally, the public approved when Alistair Darling guaranteed bank deposits. And they approved of Northern Rock being nationalised. (Nationalisation is no longer a dirty word - even the Americans are doing it).

People knew that the Labour government protected the country from the world-downturn of 2001-2005 (though some ignorant Tories persist in claiming that this period - during which the USA, France, germany, Italy and Japan all dipped into recession at some stage - were the "good times"). So naturally they looked to the Labour government to protect them from this crisis too.

So we come to the budget of 2008. This is the point when Labour's ratings start to fall off a cliff. While people agreed with the individual policies that Darling announced, he simply didn't provide the firm and staunch assurance they were looking for (and which Labour had provided in 2001-2005). This got compounded by Brown pointing out that there was a world problem and that we didn't control oil prices for instance. The oil and food price spike is down to global factors not in the control of the government. But voters don't want to hear that their government can't do anything. It makes them feel even more helpless.

The government should simply state that we will do whatever we have to do to protect people, and then firmly announce what they are doing to safeguard people. So far Alistair Darling (who is becoming more confident) has announced intention to increase the deposit guarantee to £50,000 and has revised the rules on banking supervision. The Bank of England's Special Liquidity Scheme, which came into effect in April, has eased things in the money markets. All these are good moves - if only they'd been able to get more publicity for them. Mr Darling is modest, but should seek the limelight more. Mr Brown should stop talking about the rest of the world and cede the limelight to Mr Darling.

We will get through this difficult period, and this time, the markets won't get any credit for the upswing at all. All that belongs to government, as long as government remains firm and steadfast and projects confidence (difficult I know when Brown is being assaulted on all sides for his leadership).


Anonymous said...


Re the other thread - just to be clear - you are not predicting a contraction of the economy ? No more bust ?

Hint - the economy shrunk in May and June.


snowflake5 said...

You claim that the economy shrank in May and June - but I note thyat this assertion does nit come from the ONS - but from "analysts". the same ones that have been making incorrect predictions about the economy these last eleven years.

snowflake5 said...

Anonymous posted the following on the snowflake image:

"To you use your expression,which idiot allowed the banks & building societies to give ridiculous loans to the public?

Which idiot changed the banking regulations that proved useless in preventing the northern Rock collapse?"

My reply:

The removal of credit restrictions which allowed banks to lend at will were last changed in the 1980's - so that idiot would have been Thatcher.... And UK banks have always been able to raise money in the money markets - those rules haven't changed in decades. Northern Rock simply took it too far in their eagerness not to have costly bank branches raising money from depositors instead.

Building Societies are subject to restrictive rules about how they raise capital, compared to banks - they can't raise money in the markets in the same way. As soon as Northern Rock demutualised, and became a bank, they were able to raise money in the money markets. Nobody forced Northern Rock members to demutualise - they were eager to do so. As shareholders they also had the power to rein in the Northern Rock board - but they thought that the Northern Rock business model was a wonderful one...

This has all been about the markets and private sector exercising their freedom and then coming crying to govt when things went wrong.

Also note that Conservatives have been saying that Labour's regulations of the banking industry have been too tight. Apparently we are too "nanny state" and John Redwood recommended in his paper for banks to have even more freedom to do what they like....

Anonymous said...

From the Telegraph:

The Office for National Statistics reported that Britain's gross domestic product grew by only 0.2pc in the second quarter - the slowest quarterly growth for three years.

With the annual GDP growth rate now down from 2.3pc in the first quarter to just 1.6pc in the second, the Chancellor's optimistic 1.75-2.25pc forecast for growth this year looks effectively unattainable, economists said.

They also warned that the figures showed that although strong growth in April helped keep the overall quarterly growth rate in positive territory, GDP actually shrank in May and June, by 0.2pc and 0.3pc respectively.

This underlines the likelihood that Britain is now skating close to a period of contraction, according to Geoff Dicks of Royal Bank of Scotland.

snowflake5 said...

Harry flashman - look at your quote. Paragraph two is the opinion of economists - the clue is in the words at the end, "economists said". Paragraph three and four is also the opinion of the "economists" too.

In other words it is was not the ONS who said that the economy shrank in May and June, but "economists", who decided that all the growth "had" to have happened in April, to fit their theories ... I note that the more reliable FT did not take this view. Be careful about "economists" being quoted out of context.

In March, The Times had a screaming headline saying "Unemployment looms large", which on the face of it looked like the latest unemployment figures had risen, but turned out to be the opinion of an economist of what he thought would happen - inside the paper was the actual figures from the ONS that day, which showed the rate had held fallen that month. It was desperate really, as they were relying on opinion because the facts didn't fit their case.

Anonymous said...

Nationwide now predicting a recession.

Miliband has a real job on his hands here..

Mark Wadsworth said...

the idiocy of our own government (who prior to this also had the Lawson boom and bust, surging inflation, and the severe recession of Q4 1990 to Q2 1992 to it's charge sheet)

Ahem, didn't Labour spend the last ten years copying this model - rampant house price inflation, debt fuelled economy, followed by increasing inflation (now) and a severe recession (over the next couple of years)?

What's the difference? Answer, there isn't one, they are as bad as each other. In fact worse.

snowflake5 said...

Mark Wadsworth - no, Labour hasn't been copying Lawson. Lawson if you recalled, loosened fiscal policy with his tax cuts and loosened monetary policy (keeping interest rates low 'cause he was shadowing the D-mark) while the economy was red-hot (at one point in the late '80's growth was over 5%). Naturally it caused a surge in inflation to over 10%, and interest rates to have to climb from 8% to 15%. And that was before Britain entered the ERM.

Labour have always followed a counter-cyclical policy. When the world economy was strong from 1997 to 2000 with UK growth over 4% at times, both fiscal policy and monetary policy were kept tight. In 2000 we ran a budget surplus of 2% of GDP - last seen in the late 1940's when Attlee was in govt.

In the global weakness of 2001-2005 (during which the USA went into recession for 8 months in 2001, and then fearing a double dip recession, cut interest rates to 1% from 2003-2004), Labour loosened fiscal policy. The govt has always leaning against the prevailing wind, in sharp contrast to Lawson, who poured fuel onto a fire. Hence control hasn't been lost over the economy.

Harry Flashman - I can almost taste your desperation for a recession to turn up. Hence the way you latch onto all the predictions you can. We'll see what happens.