Recession - Gordon Brown interviewed on the Today programme

(http://www.youtube.com/watch?v=La7Sm9_1tSE&feature=related)

Above: in the years that Gordon Brown was Chancellor he made the concept of Prudence into a financial cult. Prudence was the sui generis New Labour mechanism that would prevent boom and bust. However, if you look at his record on economic policy prudence was entirely absent as the British economy abandoned monetary control and built up a huge obligation of public and private debt.

Gordon Brown was interviewed on the Today programme on BBC Radio 4 this morning. The interviewer was Evan Davis whose gushing style was not entirely appropriate to the gravity of the discussion. He also seemed to be talking to the Prime Minister as an equal ("I didn't spot the recession coming either...") which again didn't seem to be appropriate - I wanted to hear Gordon Brown critically interviewed, not listen to a discussion between two equal economists.

However my main complaint with the interview is the way in which Evan Davis did not respond to the specific things the Prime Minister was saying. One can sympathise with the situation Gordon Brown finds himself in, and many of the measures he is taking seem sensible. But from an historical point of view I want to know how this economic collapse happened and why it happened and who was involved at each different stage.

The Prime Minister told Evan Davis that this downturn was unique and had been caused by sub-prime lending in the southern states of America. Previous recessions in the United Kingdom were caused by inflationary pressures, but this recession was caused by banks lending irresponsibly. Evan Davis did not really pursue these avenues.

For instance, inflation was low NOT because of financial prudence, but because of ever more cheaper Chinese imports which kept inflation artificially low and thus kept interest rates artificially low and so allowed expansion of the money supply in the form of an almost limitless availability of cheap debt (allowing the housing market to boom and personal credit to surge - credit card maximum limits were being increased on a 6-monthly basis by unreasonable percentages). If the government had controlled the money supply sensibly how could the banks have lent irresponsibly? And when average house prices exceeded three and a half times average income was that not a signal things were getting unmanageable (and possibly that moment, whenever it happened, was a canary in the mineshaft in terms of debt in the economy)?

Gordon Brown often speaks with passion, and this passionate style sometimes reveals Freudian slips. For instance, there was a moment in the interview when he repeated Margaret Thatcher's TINA mantra ("There Is No Alternative"). For a Labour Prime Minister to use such a culturally loaded phrase (steeped in the rhetoric of the 1980s recession) seems incredible, but Evan Davis let it pass (John Humphries or Jeremy Paxman would not have done so).

Towards the end of the interview Evan Davis tried to examine Gordon Brown's promise "no more boom and bust". This was possibly the lamest part of the exchange, and in terms of transactional analysis Evan Davis was like a little child pleading with a stern parent to say "yes" (which this particular stern parent was never likely to do). It would have been better to deconstruct the phrase and ask the Prime Minister to explain why he repeatedly sent out this cultural behaviour signal.



Above: "no more boom and bust" - encouraging individuals to max out their credit cards and borrow against their homes because the good times would never come to an end. No need for caution, no need for savings. The economic cycle had been abolished.

Two alternative views are emerging about what to do with the economy. Both the Conservatives and Labour agree (broadly) on the palliative measures necessary to cushion the effects of the downturn. Where they disagree seems to be on the level of government borrowing to get the economy moving again.

To me (and I am not an economist) Monetarism seems harsh and uncaring, but I can see it must eventually work. It must work because even the gloomiest projections say 85% of the working population will remain in their jobs, and as this 85% pay off their debts they will start to "feel good" and so resume spending (especially with cheaper prices on offer for houses, cars, white goods etc). The real blow will fall on the (up to) 15% unemployed.

Keynesianism I am less certain about. Significant government spending on big capital projects will keep people employed and improve our infrastructure for when the economy recovers. Cutting taxes such as VAT will ensure people have money to "go out and spend". Forcing the banks to lend money will again ensure people can "go out and spend" as they will be able to get car-loans, mortgages, hire purchase etc. The level of government debt doesn't really matter as governments can roll the debt forward into future decades and it will eventually be dissipated by a gentle level of inflation. There will be no fall-guys in this scenario.

But what if the Keynesian strategy doesn't work and not only do we have high unemployment but ALL of the working population is saddled with a crushing level of government debt that will take many years to pay off (through higher taxes and higher interest rates and ultimately through much higher unemployment)?

To me these alternatives sound like the difference between a calorie-controlled diet and the Atkins Diet. We know that if you eat less calories and take more exercise you MUST lose weight. Unfortunately this process is difficult and painful.

But with the Atkins diet you can eat as much fried fatty food as you want and not only will you lose weight you will be leaner and have less fat in your body. The Atkins diet is easy to keep to, as you are eating the things you like in the quantities you like. The Atkins diet became wildly popular in the early years of this century as it told people basically what they wanted to hear.

I would love there to be an easy way out of this economic mess, but in my heart I know there is not.

Listen to the Prime Minister's interview: http://news.bbc.co.uk/today/hi/default.stm

More on the notorious TINA phrase: http://en.wikipedia.org/wiki/There_is_no_alternative

More on Transactional Analysis: http://en.wikipedia.org/wiki/Transactional_analysis

Twilight of the gods

Above: Yesterday the turmoil in the markets continued.

Towards the end of the working day I was visiting a client at Canary Wharf (yes I am visiting clients once again). It was a long meeting that went on until nearly six. Afterwards I took one of the express lifts down to the ground floor, and instead of turning right into the station I went through the marble Reception and out into the open air (the first time I have done this at Canary Wharf).



Above: outside the hush of the tower, I heard the agitated sound of a crowd. Looking down from the steps I saw thousands (no exaggeration) of financial people standing in the balmy evening at the open air bars that overlook the old docks. All of them had drinks in their hands and were talking, talking, talking.



Above: I walked a little distance away and turned back to take this photograph of the Canary Wharf tower. The proud tower stood, Tuchman-like, in the last rays of the golden sun. A moving (in the physical sense, although it would also have for some people emotional implications) red digital display on a nearby building reported nemesis in the form of final stock prices.



Above: other parts of the financial city were almost deserted. The sun slipped away leaving the landscape in a twilight of the gods. I knew I needed to hurry to get my train, and yet I also wanted to see the ending of this infamous day and record it as best I could.



Above: how much wealth has evaporated today from Canary Wharf?

On the crowded DLR train back to Bank I stood next to a man in his fifties talking into his mobile ’phone:

“Just finished, not like you part-time traders… I can’t even begin to tell you how bad it’s been. I don’t know where to start. Well, I DO know where to start – I’ll start with a pint so have one ready when I get there… He sat next to me all day. He was punch drunk. All he did all day was read out the falling prices…”

This was the music going through my mind: http://www.youtube.com/watch?v=20RldhK9354&feature=related (the Nibelungen obsession with their golden treasure drove them mad and brought about their gotterdamerung).

Barabara Tuchman’s Proud Tower: http://www.amazon.com/Proud-Tower-Portrait-Before-1890-1914/dp/0345405013

“In June 2008 Lakshmi Mittal said: the volatile years of boom and bust are now relegated to the past. As we now know, that was utter bullshit.”

Continuing turmoil in the financial markets.

One of my clients was good enough to let me sit in on a financial conference where various “masters of the universe” (fund managers) attempted to explain the situation.



Above: the RAC Club in Pall Mall.

The conference was held at the RAC Club in Pall Mall. It was the first time I had been in the building, which was designed by Mewes and Davis (who also designed the Ritz Hotel) and opened in March 1911. We went through a crowded small lobby and up the stairs to a gaudy rotunda (big Edwardian murals, gilded hanging electroliers, Doric columns), and then into a long hall called the Mountbatten Room.

About two hundred financial people were at the conference. After a cup of tea (too weak) we took our seats near the back, facing towards a low stage. I have been to a number of these events, and this time I was struck at how black-suited the audience was (as if in mourning) and how everyone (with no exception that I could see) was wearing a tie.

A tall, elegant woman walked across the stage and stood at a podium. The noise of the audience subsided. Washed in a subdued spotlight, she began talking about her fund:

“We are very conservatively managed” (murmurs of approval). “We have significant cash and no debt. We own fifty of the best stocks around the world, unconstrained by benchmarks.”

A black-suited man with glasses went up onto the stage:

“We want to take advantage of the opportunities that will inevitably arise in these turbulent times. What is required NOW is highly experienced investment talent. We are ruthless about weeding out the losers in our portfolios.”

A black-suited man without glasses appeared on the stage and talked about America:

“The US housing market has still not stabilised, and excessive supply has resulted in falling prices. The toxic mortgage products sold in the US allowed the option of repayment below the interest rate, with the balance just added to the mortgage. But remember US mortgages are non-recourse which means the owner can just walk away and rid themselves of their mortgage burden – that is why the US will revive sooner than the UK.”

A man with short reddish hair came on:

“There will not be a V-shaped recovery given the scale of leverages in the world economy. We are in a slow process of de-leveraging the UK, and this will take two to three years. Average UK property prices need to stabilise at three times average salary.”

There was a break for coffee. While my client talked to various cronies I went through the crush right to the end of the room where the waiters and waitresses were standing behind a long table lined with cups and beverages. The sunshine burst through the windows and illuminated the teas and coffees (the rest of the chamber had gloomy subdued lighting).



Above: refreshments were served in a strip of sunlight at the far end of the room.

We resumed, and a man with a designer-beard spoke from the middle of the stage:

“In this recession the strong are going to get stronger and the weak will get weaker. The companies that emerge as winners will be really big winners because the competition will have disappeared. But…” (his voice acquired a warning tone) “…there is a real risk we will try to deal with the UK leverage by inflating our way out of it.”

A man with a loud voice paced up and down the stage:

“The US bailout will not work because it does not address the key problem of lack of trust between banks. The bailout is just bailing out the bad deals already made and is not putting new money into the system – which will require recapitalising the banks. Tax cuts will just mean consumers will buy Chinese goods and the money will flow straight out of the economy.”

A tall elderly man spoke to us:

“It is the attraction of dividends that will eventually drive the markets higher.”

An angry man (with narrow angry-looking glasses) walked up and down on the stage:

“Recovery will depend upon the abilities and imagination of the politicians who govern us…” (pause and angry look to the audience) “so I would advise you to remain cautious” (laughter from the worried financiers). “In June 2008 Lakshmi Mittal said the volatile years of boom and bust are now relegated to the past. As we now know, that was utter bullshit.”



Above: I left early just as the food was being served, and as I was about to go down the stairs I turned and took this photograph across the gaudy rotunda to the entrance of the Mountbatten Room where the masters of the universe were drinking wine and eating canapes.

The demonisation of foreigners

Above: the use of foreigners as scapegoats for a nation's problems has a long (and disreputable) history. Several times yesterday, in an interview for the Politics Show, government minister Yvette Cooper said the economic crisis "came from America". New York financiers are to blame for our troubles (trade unionists and Scottish Nationalists have blamed "Non-dom spivs and speculators", non-dom being shorthand for non-domiciled financiers living in London).

Financial “meltdown” and turmoil in the markets.

Many comparisons with the past are being made.

As a (very amateur) historian, with an interest in economics, I have been struck by the demonisation of foreigners in the lexicon of the present “credit crunch”.

How many politicians recently have said our problems “have come from America”?

In 1920s Germany politicians blamed “international financiers” for their economic problems.

In the 1970s James Callaghan blamed “the gnomes of Zurich” for Britain’s economic woes.

Today we are being told the economic crisis “came from America”.

In times of crisis it is always easier to blame “the other”.

Financial Times

Above: the Financial Times offices are at the south end of Southwark Bridge.

World money markets in turmoil. Barclays Bank making predatory swoops on Wall Street. The British government paralysed in indecision.

The Financial Times avoids sensationalism and attempts to tell you what is happening (if you can understand the jargon).

The Financial Times was founded over a hundred years ago. One of the most influential publications in the world. Printed on pink paper – immediately identifiable branding.

Editor of the Financial Times is Lionel Barber. An expert on American foreign policy. Author of The Price of Truth (about Reuters news agency) and Not with Honour (about the Westland scandal).

More: www.ft.com