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Not so good

Wednesday, 23rd January 2008

The Spectator on the economic troubles ahead

In a speech in Bristol on Tuesday, Mervyn King, the Governor of the Bank of England, confirmed what many of us have felt in our bones for months, but ministers have done their best to deny: that the British economy faces significantly slower growth and above-target inflation, ‘a not-so-good period’ as the Governor put it. Over here, says Mr King, the situation is not so severe as to require Fed-style drastic rate cuts. But still we must expect harder times than we have experienced since the early 1990s — in which, at the very least, household budgets will be squeezed, the feel-good factor conferred by ever-rising house prices will be forgotten, and businesses of all sizes will suffer from falling consumer activity and tighter credit conditions.

The loss of confidence provoked by those factors is already exacerbated by a widespread and profound loss of public belief in the competence of Gordon Brown in matters of economic management — the supposed skill on which he based his entire job application to be Prime Minister. The painful truth now apparent in this respect is that, if the British economy was doing relatively well throughout most of the Brown chancellorship, it was because the global economy was doing relatively well — and that Brown’s tinkering interventions and politically driven spending promises merely took the edge off what might otherwise have been an even better performance. A record net public borrowing figure of almost £17 billion in December alone is confirmation that his financial strategy has spun out of control. This week’s announcement of a ‘rescue package’ for Northern Rock is final evidence that the Prime Minister and his team have no idea how to cope with a crisis that requires a grasp of markets.

The deal they have cooked up, relying heavily on the advice of Goldman Sachs and after long and costly hesitation, is a peculiarly bad one for taxpayers. In the hope of attracting at least one viable private-sector bid for the stricken mortgage lender, Alistair Darling has committed us to an indefinite guarantee of a huge volume of Northern Rock’s liabilities — while we acquire, in return, an entitlement to only 10 per cent of any eventual upturn in the bank’s equity value, allowing its existing or future private shareholders to enjoy the other 90 per cent. Meanwhile, the repackaging of £25 billion of Northern Rock’s mortgage book into bonds to be sold off to investors is both a shallow deceit — since the bonds will carry the government’s guarantee, they make no difference whatever to the taxpayers’ exposure — and a bizarre irony, since it was exactly this kind of securitisation device that allowed the subprime mortgage poison to spread around the world in the first place.

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A child of our time

From the economic and psychological bedlam of the global downturn has emerged a particularly dangerous false dichotomy: namely, that there is somehow a choice for ministers over the next few years between economic reconstruction and the repair of Britain’s broken society, and that the government (whether Labour or Conservative) must prioritise the former at the expense of the latter.

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The Spectator's Notes

Charles Moore

‘A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopter drop” of money.’ So said Ben Bernanke, now the chairman of the Fed, in a speech about how to ward off the ‘extremely small’ chance of deflation, which he delivered in 2002.