President Obama launched yesterday, a strong attack on bankers and their role in the financial crisis and its aftermath. On both sides of the Atlantic, politicians should probably think, too, about their decisions and what they can learn.
There are few signs of that at the moment, though, and most are hoping that the recession may be over. Official statistics have yet to confirm this is the case and there are those that suspect it may get worse once again, but for now, sentiment is up and the outlook looks rosier than it has for many months.
If this turns out to be correct, then many will feel that it did not work out as badly as might have been expected. Anecdotally, many of my friends in business and finance read the runes, saw sales drying up and started preparing for a storm that never quite hit as hard as they had feared. So given the dire predications that were made twelve months or so ago, how has this come about?
There are two possible arguments. The first is that it was never going to be as bad as some feared and that the media over-blew things. There is probably some truth in that but it is not enough to explain the lack of short-term pain on its own.
The second possible conclusion is that some of the moves made by the government, including tax cuts, increased government spending and quantitive easing, actually worked to hold off the worst effects on individuals. Then again, that would not be any kind of a surprise. As my friend Andrew Lilico has pointed out,
"I don't think anyone serious should have denied that cutting interest rates by more than 5%, more than doubling the monetary base, providing £1.5 trillion in support to the banking sector, increasing spending by £120bn in three years, and running a £175bn-£200bn deficit would lead to at least one or two quarters of improved performance in the economy. If that didn't do it, then the economists might as well have gone home."
Whether or not this turns out to be sustained growth or not, the effects of this effort are now starting to become clear in ways that the general public will soon understand. Brown's Labour government has effectively nationalised the recession.
Taking a large slice of the banking sector into public ownership is an obvious example of this, as is extending the public sector just as others are shedding jobs to increase the overall share of the economy that relies on the state to levels last seen in the former Soviet Bloc. The fiscal stimulus was almost certainly necessary, but the scale of what has actually been done is not easily absorbed.
But a nice little graphic on the BBC website illustrates the point extremely well. It shows the percentage of GDP that will be public sector debt for the G20 countries over the next three years. Slide the indicator at the bottom along to 2010 to see that the UK will have the biggest public sector budget deficit in the G20, larger than all of our major economic competitors and huge, emerging countries such as India, China and Brazil. What is worse, the UK and Argentina will be the only two countries that will not still be delivering recession-busting activities. Our debt will already be sitting there as the price paid for follies past with no new stimulus being delivered.
The government has effectively nationalised the effects of a recession by taking on the debt that in the past would have hit individual businesses and households. That might sound like a good thing, but that negative impact is the price that should be paid by businesses that are inefficient and by households that have spent more than they could really afford to. It is part of the cycle of creative destruction, whereby bad behaviour is punished and assets are reallocated to where they can do more good. It is a larger scale version of the problem that many are now describing in the financial sector, whereby risk-taking can be carried out without fear of consequences, in the belief that the heavy-hand of government will always step in if things get nasty.
So, in addition to banks and the railways, this government has nationalised recession and we will all be paying for it for decades to come.
Of course, to some degree, this was the idea. Ben Bernanke, who is an expert on the Wall Street crash, was anxious to avoid the policy mistakes made by the USA in the 1930s and by Japan in the 1990s. He has pushed the US to cut interest rates to avoid a situation similar to those. This now seems over done and has triggered a 1970s situation instead. Remember, the 1970s recession was worse for the UK than the Great Depression. That means we are likely to face a longer-term set of problems than the recessions of recent years, something that the general public will see mostly in house prices, which will almost certainly see no significant real-term rises for the best part of a decade, as the Item Club reminded us, yesterday.
The next set of problems stem from the enormously high level of debt, public and private, that has been taken on. Once the stimulus package is over and the quantitive easing has been hauled back, say 2011-2012, we face a picture dominated by strong inflation that will trigger the next downturn much sooner than the normal cycle of boom and bust would lead us to expect. Only then will we discover whether households and businesses have learnt any kind of lesson, paid down their debts and prepared for more hostile times. The next government will have to deal with this mid-term crisis. Labour is wrong, therefore, to be putting off the cuts that are needed as Lord Mandelson suggested, yesterday morning. The wider public knows that cuts are needed now to stave off the worst effects of the debt mountain. Conservatives can take courage from that and state the obvious.
Sadly, whatever colour the next government is, the worse may well be yet to come.
