Few would dispute that, in the last fortnight, Gordon Brown has shown why he has been a fixture for so long at the very apex of British politics. His economic model has imploded and his debt pyramid collapsed. The taxpayer is up to his neck to the tune of half a trillion pounds to clear up the mess left by the abject failure of the bank regulatory system Brown personally designed. He has taken Britain into recession, with property prices collapsing and unemployment soaring. And yet still the Prime Minister stands politically triumphant, comparing himself to Picasso and Churchill (among other giants) while soaking up the applause of Nobel laureates for his handling of the crisis.
Lazarus only did it once. Gordon Brown has set new standards. He is back, on form and delivering a message on the economy with such power and clarity that one might almost believe it to be true. His narrative runs as follows: the British economy was strong, yet found itself under attack by a financial virus incubated in America. In addition, venal bankers led Britain’s system to the edge of an apocalypse. We might all have tumbled in, had it not been for the sure-footed action of an expert Prime Minister.
David Cameron is finding himself unable to do much more than sit back and watch the master at work. The battle lines are being redrawn in front of him. From now on, politics will be about state-owned banks, debt, repossessions and trade balances. Mr Brown’s lack of emotional intelligence suddenly matters little as financial acumen becomes the single most important test of leadership. Mr Cameron must master the art of this new war. He needs a discernibly Tory counter-narrative and must set it out with the same brutal clarity that has characterised Mr Brown’s recent conduct. He must fight and defeat the Prime Minister on his own turf.
It is easy enough to do, given the sheer volume of Mr Brown’s misjudgments. When a house of cards collapses, one blames the construction, not the gust of wind. And the first task for the Tories is to argue relentlessly that the crash was the inevitable result of New Labour’s debt addiction. Since 1997, debt for individuals (as opposed to government debt) has almost trebled to £1,580 billion — more than the country’s economic output. It is the highest household borrowing that Britain or any G7 country has ever seen.
So much of what Mr Brown taught us to regard as ‘prosperity’ was, in fact, nothing more than a debt-fuelled illusion. Modelling by the Oxford Economics consultancy shows the extraordinary effect this had on the British economy. Had debt been kept to the levels of most major countries, there would be 470,000 more unemployed, salaries would have risen by half the amount they did and house prices by a third of what they did. This is why debt is pure opium to politicians: it looks, sounds and smells like real prosperity. Asset bubbles make homeowners feel rich. This is economics as narcotics.
Mr Brown has tended to bristle when challenged about this in the Commons. ‘As for debt,’ he once said, ‘there are 1.8 million more homeowners with mortgages but I see that as one of the government’s achievements.’ A fifth of these mortgages were subprime, according to credit rating agency Experian — a clear repossession risk. But the lending carried on recklessly. The undoubted greed in the City was matched by a greed for short-term political capital.
This explains, perhaps, why Mr Brown claimed so many times to have ‘abolished boom and bust’. Thus did he justify the extraordinary risk he was taking with the British economy — by claiming that the world had somehow entered a new era of permanently low interest rates and that there had been a one-off shift to an era of higher borrowing. France or Germany never bought this argument. Neither did Sir Andrew Large, whose contract as Bank of England deputy governor was brought to a premature end after he started making speeches warning about debt. Mr Brown would not listen.
Meanwhile the ‘international early warning system’ Mr Brown now calls for was already sounding its sirens. The Bank of International Settlements argued in June 2004 that the British economy had become dangerously exposed to a credit crunch. Three years before, the International Monetary Fund warned Mr Brown that his behaviour was ‘regrettably pro-cyclical’, which means he refused to save in the good times when the economy boomed. The Bank of England was stripped of its ability to regulate banks, and ordered only to worry about inflation.
And while the banks were engaging in their own orgy of speculation, they did so in parameters set by the government. This was not ‘light-touch regulation’ — the phrase beloved of ministers — but wrong-touch regulation. The banks were massively overstretched, betting — as Mr Brown did — that the bust would not come. The tripartite structure of regulators he set up did not properly monitor how such institutions might find the money. Spain and Canada, which went through a similar lending boom, at least demanded that their banks maintained healthy capital ratios. Yet Britain recklessly allowed its own banks to become the most leveraged of any in Europe other than Iceland. All this was an accident waiting to happen to the taxpayer.
There was another psychological dimension: Mr Brown was scarcely going to criticise the bankers for something he himself was doing as manager of the public purse. Like them, he used complex debt concealment vehicles (like PFI) to circumvent what borrowing rules existed. Like the directors of Northern Rock he had not prepared for a ‘bust’ he believed would never arrive. Ramping up debt in a boom is a recipe for short-term political gain that few other countries followed. Only America took as many risks as Britain. But while George W. Bush has been savaged by Barack Obama, no one is yet taking the fight to Mr Brown.
The Tories are producing dossiers but have failed to produce a clear narrative, or a campaigning message. As Enoch Powell once observed, the electorate like a tune they can whistle and Mr Brown’s genius has always been to give them that tune. His ‘no more boom and bust’ motif has been replaced by ‘we all got the American blues’. The Tories have not yet composed a tune with which to compete. From the wreckage of his economic bubble, Mr Brown has blown a new political bubble and is floating gleefully inside it. It is no good for Mr Cameron to grumble that it can’t last. The thing about bubbles is that one never can tell when they will burst.