I’ll argue that the 2008 financial crisis was primarily caused by a failure of a socialist policy and exacerbated by socialist economics.
Mr. Miliband and Mr. Balls of the UK Labour Party believe that the 2008 financial crisis was primarily caused by a failure of capitalism. To an extent this is true, but then few of us believed that capitalism is a perfect system, just the best system currently available.
But it was not Labour’s lack of regulation of the “casino banks” in the UK that started the economic crisis, although they may have accelerated its effects. The initial spark was provided by the policy of “sub-prime” lending in the USA. A policy of which Mr. Miliband and his socialist colleagues would have been proud.
In 1999 President Clinton effectively reversed the Glass-Steagall Act opening the way for the credit unworthy to engage in the property market. For the Democrats it was positive discrimination; social engineering. The left had long complained that the property market was allowing the already wealthy and Middle Class to profit from the property market boom. By allowing the poor and economically unreliable to borrow money and buy their house was considered another blow for equality. A huge amount of debt built up in a part of the economy that couldn’t afford the interest payments. When asset prices started to fall many people defaulted on their loans leaving the banks with properties that were worth less than the value of the mortgage debt.
So Sub-prime lending was the spark. It caused a brief economic downturn in many countries. However in many left-leaning economies, which borrowed billions to spend on social engineering experiments, it went on to cause a crash.
Let’s be clear about the economic legacy left by the last Labour Government. The deficit was a whopping £155,000,000,000 in one year! Whilst I have heard many Labour politicians responsible for this eye-watering number blame it on extra spending required to avert an “world-wide financial crisis” created by bankers, the facts do not support this defence.
It was not a “world-wide” crisis as it affected only countries that ran up huge Government deficits (Greece and the UK being prime examples) or massive private deficits (Ireland). This includes the US who refused to raise very low tax levels to meet spending obligations, and the EuroZone who cannot put taxes up any higher to match their totally out-of-control spending plans. Many countries, including Canada, Australia, Saudi Arabia, China, Sweden Germany and much of South East Asia all avoided the worst of the crisis because their spending was more-or-less in line with their tax revenues. Labour must take its share of the blame with the bankers, as it was them that ran up Government debt.
Also, Labour turned on the spending tap long before the 2008 – 09 financial crisis.
http://www.ifs.org.uk/bns/bn99.pdf (see Fig. 4.1 on page 10)
Labour spending went from 36% of GDP in 1999-2000 to 42% in 2005 -2006 whilst revenue was broadly flat at 37% of GDP over the same period. Increasing Government deficits is not new and the size of this early deficit was not unusual by historical standards. But the key difference here is that Labour increased spending and debt during the boom which started at the end of John Major’s government. We expect Governments to increase spending and deficits during a recession. This is essential to cover increased unemployment benefits and lower tax revenues and smooth out the economic shocks that inevitably hit the most vulnerable citizens. However, prudent Governments will then pay down debt during the boom times to allow more future borrowing when the economic cycle inevitable takes a turn for the worse.
Remember that the deficit is given as a percentage of GDP, which is much higher during a boom therefore the deficit is proportionally bigger. Also, the last boom lasted for a long time, an unprecedented 16 years, allowing massive debt to build up if you were foolish enough to continue to borrow during this time.
The reason that Labour felt they could borrow with impunity, even during a boom, was it believed it had banished “boom and bust” economics. Gordon Brown famously made this statement in the House of Commons. The world’s finances were linked for the first time by technology and Labour believed the massive global market could spread financial risks. Labour bet the country’s financial health on a belief that asset values would continue to rise, allowing borrowing against those assets. Finally, Labour selfishly expected our disenfranchised children and grandchildren to pay back the debt sometime in the future, believing this was acceptable because it assumed the economy would be much bigger by then and they could afford it. This is undemocratic and immoral. The consequence of all this is that Labour foolishly and arrogantly believed there would never be another downturn so could continue to spend above tax receipts.
Labour was wrong on all counts. The connected global markets did not spread the risk, it spread the contagion, asset prices fell and the economy shrank increasing the debt to income burden.
So because Labour arrogantly believed there would be no more downturns they increased their profligate spending rather than pay down debt. Consequently, when the financial crisis hit in 2008 there was no more credit available, which left the UK economy unusually exposed.
So, a socialist policy started an economic downturn, which socialist economics turned it into a crash.
Thanks to Labour the incoming coalition government had the unique problems of solving a massive economic slowdown with no ability to borrow more to smooth the worst effects. They had to reduce spending when there was more need for the extra money. An impossible task without causing major hardship.
Whether the coalition policies produced the best possible outcome given the disastrous economic hand they were dealt by Labour is difficult to judge. This remains to be seen and history will be the judge.
Labour’s election prospects do not lie in trying to talk down the coalition economic performance or in justifying its recent economic mismanagement. To win the next election they must address one key question: Which party will best manage our new economic reality?
We have over a trillion pounds of debt, which is still rising due to an annual deficit of over 100 billion pounds. All this must be paid down. Combining this with an older population (with their large pension and healthcare needs) means we will have no more spare money for at least a generation. We must earn what we want to spend. We cannot continue to borrow what we spend. Increased taxation can get nowhere near lowering the deficit, let alone the debt.
Massive public spending cuts are inevitable.
Labour must now convince the country that they can move from a party which financially supports in-work welfare benefit and uncontrolled public spending to one which puts financial prudence ahead of its social engineering experiments i.e. manage the country’s massively reduced public spending capacity for the foreseeable future.
The Labour front bench may believe they can do this, but I doubt that their political paymasters (Unite and the GMB unions) or the socialist Labour backbenchers will let them. They have a social agenda not an economic one. The country may feel that there are other political parties with a longer history and proven innate instincts of supporting a smaller State and lower public spending.