At the start of Labour's tenure, the economy was in 'rude health', as the treasury officials explained to the incoming new Chancellor. Sitting here now we are at the end of period of incredible growth. With that growth came enormous tax revenues. During their time in power Labour have managed to spend all of that tax, managed to borrow hundreds of billions on top and have bought virtually every new public building and road with 'off balance sheet' PFI funding. PFI liability doesn't show up in the borrowing figures as the government effectively rents the hospital/school/bridge/road back from the construction and banking consortium that built it.
During its first 9 years of office, Labour spent it as it got it and spent a bit more because, as its conference song went, things could only get better. No one asked why it was always getting better but GB told us he had ended the 'boom and bust' cycle. Of course he never told us how he had done this, just that he had. How he had done it was to remove most of the requirements for banks to actually have capital reserves. By allowing them to borrow on financial markets against their AAA+ ratings and lend to lesser banks who had AA or even just A ratings, at a lending margin, enormous sums could be made. Because house prices were rising at such an incredible rate, the demand for this money to fund house purchases and commercial property construction was equally incredible. Money borrowed at 4% at the top of the tree would end up mortgaged against a property in Huddersfield or Orlando. The value of the mortgage may be more than 100% of the property's worth but what the hell prices were rising so it didn't matter. What also didn't matter was the lenders ability to pay it back. The lender crossed his fingers and hoped he would get it back but insured the loan with a policy that eventually got underwritten by the massive AIG corp in the US. Because the money was so freely available, demand continued and prices continued to rise. It was a classic market bubble or rather, exactly what Gordon had said he had ended. It was a boom. At relentless years of +15% price inflation it was also an unsustainable boom.
Early in 2007 there was an enormous bright flash in the night sky. HSBC announced massive losses due to defaults on sub prime mortgages in the US. This should have been a massive wake up call for our Chancellor, that the boom was over. Instead, he carried on as normal. The markets did not. The clever banks, HSBC being about the cleverest - because they woke up to the problem, realised what was happening and sold their mortgage books. Other banks began buying mortgage debt because the returns were marked up so much higher than what they were lending at on the wholesale money markets.
What Gordon Brown got wrong was:
1) He made no reserves during an extended period of growth, in fact he spent much more than he received in tax.
2) He failed to see that every market will grow and decline based on supply and demand. At the extremes this is boom and bust but so many years of growth had blinded him to the possibility that we were in a boom.
3) He relaxed the capital holding requirements of banks as though there would never be another 'bust'.
4) He allowed banks to fund long term lending obligations with short term wholesale borrowing and accepted the model as though the wholesale markets would always be there to replenish lending at the end of each short term (it was this that brought down Northern Rock - it didn't run out of money, it never really had any in the first place).
5) Despite the highest taxes in modern times, he spent every penny received on building a massive public service and central government. It would eventually employ around 25% of the workforce and would pay salaries to match those in the private section, with pensions that exceeded the private sector.
6) He would embark on a huge infrastructure regeneration programme, funded by the private sector and money markets. The repayments for this did not show up in government borrowing obligations so didn't affect the country's ability to fund its on balance sheet debt.
Around 2002/2003 there was a slight dip in revenue but Gordon was committed. Pension funds were in healthy surplus, a result of decades of shrewd and prudent investment. Gordon taxed the surplus and wrecked their balance sheets. To make matters worse, now sensing the possible collapse of a pension fund, he insisted that they make no investment that was more risky or returned less than government bonds. In effect, he said they could only invest in government bonds. This gave him a rich stream of cheap borrowing and gave him the tax on their surpluses.
There is the gold thing as well, but what is $10,000,000,000 of losses in this age.
Since all of this, he has passed a law saying that government borrowing must be halved in four years. Issuing a law on this is like issuing a law that doctors must cure patients of cancer. The country faces falling tax revenues and increased demand on expenditure as unemployment rises. Spending on social security equates to almost all of the money received from personal income tax... well it did when unemployment was <2m. It is expected to reach 2.8m to 2.9m in 2010.
Would the conservatives have made the same mistakes? Some yes, almost certainly. They would have left the banks to regulate themselves. They would, however I believe, have seen the economy overheating. I also believe they would not have committed anywhere near so much money to the public sector wage bill. They would have encouraged PFI (they invented it to fund the Dartford crossing bridge - the loan was due to be repaid in 14 years after which it would be free to use - it was repaid in 9 years - Gordon kept all the money it has taken since) but I suspect they would have kept an eye on PFI liability and affordability.
I think the conservatives would have made many of the same mistakes but they would have had a much easier recession and would not have put public sector jobs beyond reach when balancing the books. As many in the party have a banking/business background, I also suspect that they would have had a better understanding of what was going on and may have intervened. On this last point, I am not sure.
Should GB be blamed - yes most certainly. He truly is useless. As a Chancellor all he could do was spend. As a PM all he can do is make things worse.
Incidentally, the bank that started the credit crisis, HSBC, escaped the resulting turmoil virtually unscathed. As for locking up bankers, those that ran up the liabilities/losses have long since lost their jobs. Gordon has not... yet.
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