Gordon Brown should beware the shade of Greenspan

Fraser Nelson

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.

On both sides of the Atlantic, people borrowed against the new, inflated value of their property. The phrase ‘equity withdrawal’ re-entered common parlance as householders used their property as a credit card on steroids. Except it was not seen as debt, but ‘withdrawing’ credit. Equity withdrawal hit 7 per cent of post-tax income – peaks only touched before the crashes of the early 1970s and late 1980s.

The warning signs were flashing red. But both Brown and Greenspan were relaxed, saying this was a one-off adjustment to a new era of cheap credit. Greenspan would wax lyrical about how a step change in productivity justified the increases in both equity and asset values. Expectations of ever-increasing asset prices led banks to offer 125 per cent mortgages. The UK household savings rate slumped to 2.7 per cent of GDP, the lowest since 1959.

House prices hit three times annual post-tax income for the first time since the Lawson boom. When Mr Brown or Ed Balls, his lieutenant, were asked about these warning signs, they would angrily slap down suggestions of a bubble. Look at Britain’s debt-to-

asset ratio, they would say – perfectly healthy. This was the kind of relaxed attitude that drove Mervyn King wild. His Monetary Policy Committee had no remit to deflate the bubble, but he would give what warnings he could. ‘House prices are a matter of opinion,’ he famously said, ‘whereas debt is real.’

Of course, HM Treasury’s coffers were flowing full of stamp duty receipts – money which usually came straight from the mortgage lenders. The crazier prices became, the more stamp duty found its way to the public purse. So Mr Brown had a good reason to look the other way. House prices were keeping up the British economy – and cheap debt was keeping up house prices. Mr Brown’s government was borrowing with just as much abandon. Instead of building a Clintonesque surplus in the cycle, the financial year just ended saw Britain with a twin boast: largest government deficit and household debt-to-income ratios in western Europe.

So rather than be well placed to weather a credit crunch, as Mr Brown claims, Britain is precariously exposed to one. Yet while in America there are recriminations over the Bush administration’s profligacy and anger about the plunging dollar, the (borrowed) penny is only beginning to drop in Britain.

Mr Brown will know the picture will become both clearer and uglier in the following weeks – and his strategy is to blame America and hope the Conservatives attack will lack focus.

So far, the Prime Minister is having some success. Banks being summoned to Downing Street like naughty schoolboys is designed to send a message to consumers that financiers are to blame. His recent trip to America helps him mould his narrative – that he will steer Britain through an economic storm which has made its way across the Atlantic.