Keith Marsden is a member of the Council of the Centre for Policy Studies and a former adviser at the World Bank and senior economist in the International Labour Organisation.
Following the G20 Summit, Gordon Brown has been posing as the saviour of the world economy. He claims to have master-minded an effective action plan to tackle the global recession. But he continues to deny any responsibility for Britain’s economic downturn. He blames it on the collapse of the U.S. sub-prime mortgage market, its repercussions on other financial activities and sectors in the U.S. and elsewhere, and the consequent contraction of world output and trade. He also refuses to admit the role played by Britain’s lightly-regulated banking sector in creating high-risk and little-understood financial instruments, and with his encouragement, purveying them around the world.
Independent data, and his own speeches, show that he was far from blameless. While Chancellor of the Exchequer, he failed to take action to prevent or restrain the bubbles that had formed in Britain’s housing market as early as 2004. In an op-ed article published by the Wall Street Journal Europe (“Gordon Brown’s Boom and Bust”, May 28th, 2004), I pointed out that house prices had risen by 55% in London, and by 40% in the UK as a whole, since 1997. These rises compared with increases in average earnings of just 10% and 12% respectively. These widening gaps were unsustainable, and must eventually be narrowed by a bursting of the house price bubble, or by a more rapid increase in nominal earnings. The latter would inevitably lead to a faster overall inflation rate, I suggested.
Writing in the Daily Mail on 26th July 2004, I also drew attention to an IMF study published in its World Economic Outlook, April 2004. This study of 14 countries found 20 cases of house price booms being followed by house price crashes since 1970. The median price contraction was 27% and the duration of the crash, from peak to trough, ranged from four to five years. Moreover, house price busts were associated with substantial output losses in the overall economy, averaging 8% of the level that would have prevailed with average GDP growth rates before the bust. Real private consumption and investment in machinery and construction were adversely affected.