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Vince Cable: Why our economy is trapped in a time warp of tribal politics
THIS week has marked the first anniversary of the nationalisation of Northern Rock. This time last year, and after months of prevarication, the Government finally admitted that simply sinking ever more money into a failing private sector bank was not in the interests of taxpayers or the bank's customers.
A year on we face, on a much bigger scale, essentially the same problem but in a context where the economy is now in steep decline.
Since last February, we have experienced one of the most tumultuous years in the history of the financial sector and the British economy.
Hundreds of thousands are losing their jobs. Large numbers are struggling to pay their debts including the mortgage on the family home. Billions have been wiped off bank shares and two more banks – Lloyds and RBS – have been in serious danger of collapse.
Yet Westminster politics is still trapped in a time warp of tribal politics.
Eighteen months into the credit crunch and six months into a recession, the Conservatives and the Labour Party are still rehearsing the same arguments. The Conservatives have one message: "It's all your fault, Gordon." The Government, on the other hand, endlessly repeats its claim: "It's nothing to do with us; it is a global problem."
The Prime Minister is, of course, correct when he says the credit crunch is a global phenomenon which first hit the US. But trying to claim that the US is the source of the recession in the UK because the credit crunch hit the US first, makes about as much sense as my claiming that because I left my umbrella at home this morning it rained today.
Rather more elegantly put, it is the logical fallacy post hoc ergo propter hoc – after it therefore because of it. The reality is of course that British banks like US banks had been irresponsibly lending money to many customers who were not able to sustain the obligations and bundling the loans into securities to sell in international financial markets; there was always going to be a reckoning.
Moreover the British authorities cannot escape responsibility for the fact that house prices sky rocketed and personal debt spiralled out of control.
The Prime Minister knew that this was a problem, indeed way back in 1995 as he set out his vision for the British economy he pledged that "we will not build the new Jerusalem on a mountain of debt".
In his very first budget as Labour Chancellor, he said: "I will not allow house prices to get out of control and put at risk the sustainability of the recovery."
Yet when people – like me – pointed out that this is exactly what was happening, we were either ignored or chastised for daring to question the Government's claim that 'boom and bust' had been abolished.
These arguments about blame – of who did what and who should have done what – are decreasingly relevant for millions of people in fear of losing their job or their home. Few people can understand why the political classes are failing so abysmally to stop the petty rivalries. They want to be told honestly what government can do and what it can't.
The most pressing problem remains dealing with the banks. Three of the world's biggest banks are British – RBS, HSBC and Barclays. Lloyds/HBOS is not far behind. Together, they hold assets of over 6 trillion.
To put this into perspective, this is more then four times the size of the UK GDP. We are in the extraordinary position where the British government, and the taxpayer, are having to shore up global banks whose balance sheets are far bigger than the British economy.
As a result of government intervention, the taxpayer now owns 70 per cent of RBS and, potentially, a majority of Lloyds. The Lloyds group continues to be dragged under by HBOS.
The Government has drifted accidentally – and with little idea what to do next – into virtual nationalisation of these banking giants.
The Government must now act decisively to take control of these banks and ensure that they lend to British business currently starved of credit.
Once nationalised, the Government can then set about separating out the banks' 'bad' and 'good' loans while stopping the nonsense of the 'bonus culture' and the massive tax dodging operations many banks have been guilty of.
The aim and the end result must be to sell off the banks, in due course, hopefully at a profit for the taxpayer and once they have been restructured to split off safe and sensible high street banking from high risk casino-type operations.
The other key issue is how far the Government can continue to support the economy with public spending and investment without creating a crisis in the public finances.
Inevitably, because of the recession, there is a fall in government revenue and rising spending on the unemployed. There is, additionally, the loss of revenue from the City following the banking collapse. The Private Finance Initiative no longer works so the Treasury has to borrow itself for necessary infrastructure.
But the Government cannot just be a spectator as the economy folds. It is much better for it to borrow to invest in capital projects creating jobs today and assets for the future rather than to borrow to keep people out of work.
We must however recognise that even with a successful bank
sell off down the line, there will need to be a serious tightening of public spending after the recession to restore the budget to balance.
As we enter the run up to the General Election, I believe that the parties will be judged not on political point scoring or pie in the sky promises, but on an honest assessment of where we are, where we want to get to and the tough choices that will need to made.
Dr Vince Cable MP is the Liberal Democrat Treasury spokesman.
He was born in York.
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Saturday 26 May 2012
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