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Brown's bonds

Wednesday, 23rd January 2008

Leo McKinstry has an excellent column in today's Express on the Northern Rock fiasco:

Brown has long portrayed himself as a financial genius but the mess of Northern Rock exposes him as a hollow fraud. The Prime Minister has not only presided over the first run on a British bank since 1866 but he has also put public funds at risk on a colossal scale.

The only reason the Brown administration has been so obsessed with Northern Rock is that it is based in the Labour heartland of the north-east, where Labour holds 28 of the 30 Parliamentary seats.
With a general election looming last autumn, Brown was terrified of the political consequences of seeing Northern Rock collapse, with the possible loss of around 5,000 jobs. So he dithered, indulging a kind of fiscal McCawberism, hoping that “something will turn up”.
It hasn’t. Now each of those jobs is costing £10million in Treasury loans and guarantees. Rather than propping up Northern Rock, it would have been far better to let the company find its own private sector solution. If the bank could not, then there was no point in setting up a life support system funded by the taxpayer.

Leo has kindly alerted me to some information which, as far as I can see, has yet to have been reported. Back in 1998 and 1999, Gordon Brown was engaged in a long, public and bitter battle against Ken Livingstone, the then Mayoral candidate for London, over the question of issuing bonds to raise funds to improve the London Underground.

Livingstone was hugely enamoured of the idea and seemed almost evangelical in his attempt to sell it to the public and to force Mr Brown to approve it. The then Chancellor argued that the issue of bonds would, on the contrary, saddle Londoners with huge debts and was something to be ruled out ab initio.

Here's how he put it when he gave evidence to the Treasury Select Committee on 14th December 1999, in response to a question from Brian Sedgmore:

One proposal is that the Mayor should issue bonds, that he should issue bonds to the tune of billions of pounds......It would be a huge cost for London, it would be a huge additional cost for families. You would have to question whether the London authority could bear the burden of this. Under the present rules it could not. It could put the whole financial basis of the London Authority at risk. I think the more the information comes out about what the proposal involves in its present form—the freezing of fares, the bond issue and the Mayor's credibility—the more you can see that it is actually a costly exercise that is misleading people about what it could achieve. As I say, it could be higher than £3 billion; it could be a lot more than that, but it is a very expensive proposition for every citizen of London.

It's a rather different story today. As PM, Mr Brown wants to issue bonds of far greater value than anything envisaged by Mr Livingstone. Explain this: why did he think in 1998 and 1999 that £3 billion bonds would be a disaster, but in 2008 bonds worth eight times more are a wonderful deal for the country?