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Gordon Brown should beware the shade of Greenspan

Fraser Nelson

Friday, 2nd May 2008

The Prime Minister has successfully massaged the public’s perception of his role in
the current crisis. But he may not get away with it forever.

Gordon Brown’s proudest achievement is not so much the economic progress of Britain over the past ten years, but the country’s perception of those ten years. Rising employment, low mortgages and inflation were successfully portrayed as the result of the tough decisions taken by this Labour government – rather than a flood of cheap and reliable Chinese imports and foreign labour. Compare today’s stability with Black Wednesday under the Tories, argued Labour strategists, and his case for re-election will be closed.

This is why the Prime Minister should be looking with special anxiety at how Alan Greenspan is now perceived. For his two decades, as chairman of the US Federal Reserve, he was lionised. Now, when house prices are crashing, his name is mud. What should terrify Mr Brown is how quick Amercians are not just to reassess their current situation, but also the past. What they thought was stability was just a Greenspan-hosted party, funded by borrowed cash. They blame him for their hangovers.

As a result, Mr Greenspan – or Sir Alan as he became, honorifically, at the height of Mr Brown’s admiration for him in 2002 – is being blamed for the credit crunch and the fallout. He used a dodgy set of inflation statistics, it is argued, and as such, American interest rates were set at an artificially low level. This meant artificially cheap credit which, as surely as night follows day, leads to an asset boom. He failed to spot or stop this and other share prices and property headed to the stratosphere.

America is about nine months to a year ahead of Britain in the credit crunch, so the analysis now being applied to Mr Greenspan could well be applied to the Prime Minister by the end of this year. Both were the leading economic figures of the past ten years, and both used the same tactics and ended up in the same situation.

Mr Brown also used an inflation targeting system inherited from the Conservatives. As architects of this system will tell you, it is not designed to detect or puncture asset bubbles. Mr Brown later instructed the Bank to disregard the Retail Price Index (which includes housing costs) and switched to the Consumer Price Index. Rather than draw the Bank’s attention to the housing bubble, he instructed it to look the other way. Britain followed America’s credit bubble.

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