Ed’s cognitive dissonance
As Special Adviser to Brown (1997-2002), an MP from 2005, a minister from 2006 and a Cabinet minister from 2007, Ed Miliband’s hand is well and truly dipped in the blood of the financial catastrophe Labour presided over. Expect a return to old ways if Labour wins on Thursday
One of the worst mistakes you can make in a job interview is to dress up a strength as a weakness: “So, Karen, what do you think is your main workplace weakness?” “Colleagues say I work too hard.”
Ed Miliband is trying to pull the same tired trick on the British public. “Was the Labour Government in any way to blame for the crash that happened on Labour’s watch?” “We didn’t regulate the banks enough!”
No doubt there were inadequacies in financial regulation (including changes brought in by Labour), but Miliband is dodging the question by arguing in effect, “it was the capitalists what did it!”
This is self-serving cant. Others have detailed how the Labour government went on a spending splurge after the turn of the century (see here and here, for example), thereby arguably cutting economic growth and certainly leaving the UK less well placed to handle a severe economic shock.
But Labour’s culpability does not stop at its traditional spendthrift fiscal policy. Its monetary policy was a mess, too. The 1990s and noughties saw great global imbalances. China ran up huge budget surpluses thanks in part to currency manipulation, and commodity producing nations were heavily in the black too.
They needed somewhere to put their money that was safe and gave a return; much of the cash went into US and UK bonds, property, and other assets.
This matters, because it is in part the bond market that disciplines governments. If governments spend what is deemed too much, investors will demand a greater risk premium for the debt, fearful that they will otherwise lose out to inflation or currency depreciation.
But in the noughties this discipline was relaxed, because the Chinese and others had to put their huge, manipulated surpluses “somewhere”, even if the return was poor.
In response, UK and US monetary policies became too loose. This is reflected in, for example, the rise of the term the “Greenspan Put”. Whenever the US economy ran into difficulty, rather than work through that difficulty, the Fed would cut interest rates. For example, from 2000 to 2003, the federal funds rate target was cut from 6.5 percent to 1 percent to ease investors through the bursting of the dot com bubble.
Time and again investors were shielded from the consequences of their own actions, and so animal spirits became “irrationally exuberant”, as Greenspan himself had it.
Asset price inflation took hold, most obviously in the property market. Mis-pricing was made worse by a number of factors, including President Clinton’s changes to the Community Reinvestment Act in 1993 (which encouraged lenders to grant mortgages to people they otherwise would not lend to), and by the securitisation of mortgages which eventually meant that investors could barely see what they were buying (if they looked).
The UK’s Labour government did not start the party, but it brought along more cheap booze. Soaring asset prices were attributed to an end to “boom-and-boost” and Gordon Brown’s clunking brilliance – a sign of policy success.
In 2003, when property inflation started to have an impact on general inflation figures, Brown simply switched the focus from the RPIX measure to the CPI (which gives less weight to housing costs and prices), thereby obviating the need for action on interest rates.
In January 2004 at a CBI lunch Mervyn King warned that property prices were unsustainable. In 2005, The Economist warned of a bubble. These and other warnings went unheeded.
We know how it all ended, but who is to blame?
It is true that many (but not all) bankers made horrendous mistakes. Financiers have rightly lost their jobs and careers, and some chancers who rode the bubble have gone to jail.
Yet markets are based on the price system. Profits and prices are the “free speech” of markets, shouting out to investors and entrepreneurs which sectors to move into and which to get out of.
Inflation, often a product of official policy, is commercial censorship. It distorts market messages. Why invest in a factory when property throws off twenty per cent a year? Why worry about that yield reducing, if Greenspan and Brown will act as back stop if things go wrong?
The political class had undermined market discipline.
That is not to excuse the investors who called it wrong. Political interference and bad policy are part of the business environment that managers ought to monitor.
And many people and institutions called the peak correctly, made a lot of money and walked away.
What does this tell us about Ed Miliband? As Special Adviser to Brown (1997-2002), an MP from 2005, a minister from 2006 and a Cabinet minister from 2007, Miliband’s hand is well and truly dipped in the blood.
All the indications are that, like Brown, he regards Labour’s pseudo-roaring pre-crash economy as a work of Brownite genius (albeit under-regulated), whereas the bursting of the bubble is essentially a capitalist failure that is un-connected to the causes of the bubble in the first place.
In office, Miliband would usher in the same economic mess as every other Labour government, because he has the socialist traits in spades:
The arrogant self-assessment of left-wing politicians as unusually caring and knowing and therefore beyond reproach; the consequent inability to listen to non-political actors; and the view that scorning wealth creators as “predators” or similar is a manifestation of insight and of compassion that positions you as some sort of latter-day fiscal Rosa Parks.
Miliband was in the Treasury when inflation was stoked and borrowing got out of control; he was in the Cabinet when the banking system came close to collapse and the deficit hit unprecedented highs. But does Ed think he or his colleagues made any mistakes, beyond being insufficiently socialist?
Andrew Gibson is an occasional contributor to The Commentator
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