There is only one politician who has emerged from the recession with his reputation enhanced. Yes, you’ve guessed right: I’m referring to Vince Cable, the ubiquitous grey-haired, sober-suited deputy leader of the Liberal Democrats. Even many Tories would feel reassured were Cable, who exudes reasonableness, to become Chancellor; broadcasters with little understanding of finance defer to him, with the BBC treating him as a cross between a living saint and a Nobel laureate in economics.
A former chief economist at Shell, he is always at the other end of a mobile phone; journalists know they can count on better copy talking to him than anything on offer from the Tories. Yet as his disappointing new book reveals, his analysis of the crisis and policy recommendations are mundane at best and dangerous at worst. There is little in The Storm that couldn’t have been found in the columns of the Guardian over the past year; it is little more than a regurgitation of the new left-liberal economic consensus.
It is absurd to compare Bob Diamond, boss of Barclays’ investment banking unit, to Arthur Scargill, and to claim that both posed an equivalent threat to stability. In fact, Barclays has successfully avoided taking government money and its shares have jumped more than 200 per cent since their trough. Cable is right to criticise the incompetence of other bankers but misses the biggest story, which is that many of Britain’s banks, including HSBC, Standard Chartered, the old Lloyds TSB and Barclays, were in relatively good shape. It was the Scottish banks and some of the smaller ex-building societies that behaved disastrously; British banks were a tale of two halves.
Far worse is Cable’s misunderstanding of the origins of US sub-prime lending. Huge pressure, including the threat of class action lawsuits, was brought to bear by the authorities on the financial services industry to force it to lend to the very poor. At first, banks were reluctant but eventually made the best of it, a development repeatedly applauded in Congress and the White House and promoted by the state-backed Fannie Mae and Freddie Mac mortgage agencies. But to Cable the only reason banks suddenly started lending to the poor is that they knew they could charge higher interest rates. The truth is that while Wall Street rationalised the new, lax lending policies forced on the industry by Washington, and lenders behaved stupidly and in some cases criminally, the picture is more complex than the now mainstream narrative presented by Cable.
A fundamental weakness at the heart of the author’s analysis is that while he acknowledges the excess liquidity at the heart of the asset price bubble, he focuses his attention on China’s excess savings and largely ignores the destructive loose monetary policies pursued by central banks. Vast purchases of government bonds and other Western assets by China and the Middle East were just part of the problem; the bubble of the noughties was primarily driven by wrong-headed monetary authorities in America, Europe and Japan. They kept interest rates far too low; they refused to take seriously warnings that the money supply was growing too fast; and they kept channeling fresh liquidity into the markets at the first hint of trouble. Private financial institutions are ultimately little more than the conduits of central banks; given that the authorities force-fed bankers with the economic equivalent of cheap booze, they should be held responsible for the crazed rampage that inevitably followed.
It makes no sense to believe, as Cable does, that manufacturing can grow as a share of national income. No developed economy has ever achieved such a feat for any extended period of time; services are the only way forward. In any case, economies reliant on manufacturing such as Germany and Japan are facing a comparable or worse recession than Britain as a result of the collapse in trade.
Predictably, Cable hates tax havens, non-domiciled residents and the fact that the tax on capital gains is lower than that on income. He wants a greater share of social housing and much lower, German-style levels of home ownership. He wants us to learn from the ‘open, social democratic Nordic economies’. The list of traditional leftist prescriptions goes on and on. In other respects, Cable is content to sit on the fence, presumably to see which way the wind blows. He has become more sceptical of the euro but hastily adds that his views will depend on how the region fares during the downturn. And while I can live with the odd typo, ‘Sir Frank Godwin’ is a bit too much, even for me.
It feels almost sacrilegious to criticise Cable. I recently chaired a conference at which he was the star speaker; he was polite, knowledgeable and highly intelligent. That doesn’t mean he is right, however, or that he should be free from intellectual scrutiny. The British media mistook Ed Balls for an economics guru in the late 1990s; it should not repeat that same mistake today with Vince Cable.