Bursting Brown's Bubble
Fraser Nelson 2:18pm
Brown's Bubble: these two words should come to sum up the last seven years of British economy. Today, George Osborne used the phrase. But it should become more than a soundbite, it should be a forceful and coherent analysis explaining how and why the economy has got to this point. That the "prosperity" of the Brown years was not real, but an avalanche of funny money, borrowed against made-up house prices. The pain Britain feels now is that of a bubble bursting.
My brief analysis: Brown kept to Tory spending plans at first, giving Labour cover to win a second term. Magicians refer to this stage as "the pledge" when they show you something like a solid hat, or a rabbit. Then comes the trick.
The Brown trick started in 2001/02 with a policy of profligacy, encouraging a debt binge led by government. Stamp duty diverted much of the borrowed money into government coffers, so he didn't worry about the housing bubble. So we had the biggest orgy of speculative debt creation that Britain has ever known. Brown deployed a range of debt concealment vehicles to hide the extent of this. PFI deals were used with the abandon that Enron used off balance sheet subsidiaries.
The result is that, as the IFS points out, if you include PFI and public sector pension liabilities then British national debt is over 100% of GDP, making a joke out of Brown's 40% limit.
That is just government debt, though. The national accounts for last year put household debt at a staggering 178 per cent of household income. As I say in the political column for this week's Spectator, this is not just the highest in the G7 but the highest any G7 country has ever known.
Responsibly-run countries pay off government debt when households get leveraged up, thus providing a cushion when the bust comes. Browns error, for which we will all now pay dearly, was to believe he had abolished the cycle and "ended boom and bust". So he borrowed from the City, thinking future generations could easily repay the debt or that he could string things along until he won an election.
Then, it happened. The bank bust meant tighter credit, which meant lower house prices, which meant less "equity withdrawal" funding consumer spending, which means recession which means more unemployment. Meanwhile Britain's rapidly deteriorating public finances meant a Callaghan-scale devaluation of the pound, which jacked up inflation. Brown blames a global downturn, but Britain is the most exposed country.
This is how the Brown bubble was blown up, and how it burst. Today's GDP data, to which Osborne refers, shows zero growth in the second quarter so a recession has probably already started. Though we wouldn't know for sure until the spring, such is the data lag. And the pain is only just beginning.
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Comments
Short the UK
August 22nd, 2008 2:49pmIf you think the economy is tough now you should seek out an interview with Satyajit Das, an expert on derivatives, that he gave last September to The Street. It is time to be scared, really scared.
Lance Corporal Jock McJock VD and S.C.A.R.S
August 22nd, 2008 3:03pmIt is now time for Gordooooms' fatuous claim to have ended Boom and Bust to be rammed down his throat at every given opportunity by the opposition parties and the MSM (though I don't hold my breath on the latter!).
Brown and his lackies repeatedly regurgitated this scurrilous lie in order to perpetuate the uncontrolled escalation of personal debt. They were deliberately giving a false sense of security to people only to happy to gorge on the available money without understanding the consequences of their profligacy.
All to enable this vile man to pursue an unattainable socialist Utopian agenda.
How many times must we endure this cycle before we eventually learn?
Frank Pulley
August 22nd, 2008 3:03pmJeez! Steady on Fraser; that hangdog picture of him even raises a scintiila of sympathy in me; and my cynicism is of the 24 carat gold with platinum reinforcement variety, so God only knows what it does to the erstwhile supporters - or the undecided. You're not a double agent are you, by any chance?
Burton
August 22nd, 2008 3:04pmI quite agree. Brown employed policies to exaggerate the economic cycle, rather than flatten it. Look at his first budget speech in 1997:
"Volatility is damaging both to the housing market and to the economy as a whole. So stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery."
He proceeded to do exactly the reverse!
But let's admit that if he hiked stamp duty further or tried to control mortgage lending, many here would have been screaming with rage.
Ideally, he should have been more prudent when it came to spending. But he's a politician and hoping for fiscal discipline, it's like hoping a snake won't bite: it's in their nature.
The Iron Chancellor is a rusty memory and he's now sliding into the select club of "Worst Chancellors Ever". Tragically, he's also joining that hapless group of "PMs who never won an election" too.
mitch
August 22nd, 2008 3:30pmTwo points spring to mind
1.did he understand what he was doing and if so he should be prosecuted for treason.
2.If he didn't understand what the hell is he PM for? and the Labour party should be prosecuted, either way he has ruined the UK for years to come.Back to 1979 again and no Maggie waiting with a plan.
Nicholas
August 22nd, 2008 3:34pmStrange that a nasty, festering boil on the bum of Britain and in dire need of lancing should be responsible for a burst bubble.
Perry
August 22nd, 2008 3:49pmYup, - sums it up nicely!
A bubble
Funny money
And a load of fools who believed in it.
Worse, - so many glittering commentators were sucked into the fantasy.
kinglear
August 22nd, 2008 4:57pmI have said ever since blogs began that Brown, Blair and anyone else you care to mention in the panoply of failed Labour politicians have
a) no undersdtanding of economics
b) how markets work
c) how money works
d) how human beings work.
e) or have any principle other than the appalling one of wanting power for power's sake.
It is no surprise that a party with no principle and no expertise now finds itself adrift and heading to oblivion.
john miller
August 22nd, 2008 5:13pmRead the excellent Alice at UK Bubble.
TGF UKIP
August 22nd, 2008 5:55pmSeems a bang on summary to me, Fraser, but can I make one or two points.
Firstly, "stamp duty diverted much of the borrowed money into government coffers." Quite so, but so did VAT too. Not only all that money borrowed on second mortagages "as advertised on TV" and spent on cars/conservatories/holidays/furniture etc but all the other unsecured loans and credit cards as well. The guy who raised £50K on a second mortage really had only £41,250 to spend with the other £8,750 going to Gordon in VAT. Just think of all those billions raised with second mortagages and all that VAT - it really was one of Brown's biggest stealth taxes. Don't forget, too, that in the tri-partite arrangement in 1997 with the Bank and the FSA, control of credit was reserved to the Treasury.
Gordon stoked and fed the credit boom for his own political purposes and all those poor unfortunates contemplating bankruptcy, repossession or prolonged self denial and frugality should quite rightly be blaming themselves but they should also be blaming Gordon big time as well. The real pity is that if we had a really effective Opposition with a heavyweight convincing and credible Shadow Chancellor he might well be able to skewer Gordon on their part. But we have .........!
The second point is why do the Tories not make more of the real extent of governement borrowing and bring it home to people by expressing it on a per household basis. The only reason I can think of is that if they did Marr/Paxman/Humphrys would immediately respond "but you promised to match the spending that requires that borrowing." You're on the inside, though, Fraser, so is there another reason why the Tories treat this as a taboo subject?
Pete, Scotland
August 22nd, 2008 6:21pmIf the mess we are in is causing pain, what will the cure be like?
Athesius the Facilitator
August 22nd, 2008 7:08pmI thought Marr,Paxman,Humphrys, Toynbee and Company where ousing intelligence. If so they should have spotted years ago that Brown was orchestrating a "cock up". The earlier blogger TGF UKIP has answered his own question. Why do the Tory's not make more of this debacle? The Humphrys and Marrs of this world will not let them because they always persue a line that will not allow the Tory's to drve the point home. I am not a conspiracy theorist but I have smelt a media conspiracy for 13 years regarding this incompitent and self serving government. Mr TGF UKip also asks why Fraser Nelson doesn't give the Tory's a dig and tell them to buck up. I think it's his fellow journoulist that need the dig. The influential pair Mathew D'ancona and Ben Brogan should be the first two to be banjoed by Fraser. They should be calling for Browns head. We deserve an election now not when it suits 'Godger' Brown.
Adam Smith
August 22nd, 2008 7:31pmThe only thing that Mr Blobby did right was to make the Bank of England independent. However I suspect that too many of the B of E Policy Committee were political appointees. They should have put up interest rates last year but were concentrating on a false inflation index. A true banking economist should have seen through it and acted.
John Moss
August 22nd, 2008 9:14pmThe answer to this is clear.
If we cannot cut taxes, borrow more, or reflate the economy by any of the traditional means, with the current spending plans, then the Conservatives, on regaining power, must cut spending.
This could be a relatively swift and effective policy, with a small downside from the 400,000 or so Civil Servants who will have to lose their jobs. Most of the electorate will simply not notice that some bean counter or box ticker has disappeared.
The key thing is to identify things which the Government simply does not need to do any more and to stop requiring them to be done. The obvious is the targetting and measuring of the "performance" of health trusts, hospitals, schools and councils.
If 400,000 jobs go, at an average redundancy cost of say, £10,000, that will cost £4bn, but the annual saving, with each job probably costing around £30,000pa once salary, NI and accommodation costs are included, are three fold and recurring.
If it takes two years for the benefits to be fully realised, that's £4bn of tax cuts in Y1, £10bn in Y2 and £12bn in Y3. That should start punching through in higher growth in Y3 and Y4 of the term and see debt levels falling as tax receipts rise, all in time for the 2015 GE.
As stated above, the key thing is to identify those things which are not front line service delivery. I think it used to be called waste.
bill
August 22nd, 2008 10:17pmI have been horrified by New Labour and their hateful policies since day one. Unfortunately too many arrogant self-regarding fools thought they knew better and/or were prepared to go along for the ride, a ride for which we all must pay now. We should all now be relentlessly reminded of the useless idiots who went along with or worse supported New Labour's dystopian experiment.
Fraser Nelson
August 22nd, 2008 10:18pmTGF, the Tories are anxious about coming across as doom-mongers. Plus the bigger you admit the national debt is, the less latitude you allow yourself in government. So it's a double-edged sword which Osborne is grasping at, but I think he's quickly moving to the right place. Just as Labout was built on a false history of the Tory years, so the Tories must present and narrate the correct history of the last 11 years and the Brown bubble. And Athesius, the Tories are going very quickly in this right direction. Adam Smith, he didn't make the Bank of England independent. That's another Brownie. The Treasury appoints the MPC members, sets the target, chooses the deputy governor etc.
Mad Jock
August 22nd, 2008 10:29pmwe're doomed - DOOMED ...!!!!
TGF UKIP
August 22nd, 2008 11:08pmThanks Fraser. "The Tories are anxious about coming across as doom-mongers." That may be all very well if they were certain of winning but in my book they ain't, not by a long chalk. I do accept, though, that we disagree on that.
Carrie
August 22nd, 2008 11:39pmBut Fraser why can't the Tories articulate what you have in your excellent piece? The public need to know all this and the Tories need to find a simple way of getting it across. I personally like Osborne but I don't think he has credibility on the economy in such perilous times, he has never had so much as a proper job.