After months of dodging the question, Gordon Brown has finally admitted he was wrong to repeatedly claim that he’s abolished boom and bust. Jeremy Vine has just asked him on Radio Two if that was a mistake and he replied: “Yes. Of course politicians make mistakes and I’ve got to be honest that we’ve made mistakes.” This goes far beyond a soundbite, and in fact lies at the heart of the economic bomb that has just exploded.
Brown, like Greenspan, thought we’d entered a new era of permanently low interest rates – and that just because inflation had been tamed, it meant we’d hit some kind of economic equilibrium. This is the dangerous folly which made policymakers blind to the massive asset bubble. “Don’t worry,” they all said, “People can afford the repayments of the debt, as a share of income they are low”. But when the credit costs went up, or supply dried up, we were sunk.
This was the fatal error that has tilted a debt-saddled Britain over the economic cliff, along with other countries who used similar rationale. It was good old-fashioned speculation. There was no inflation in the 1920s, but they were followed by the 1930s. There was no real inflation in Japan in the 1980s. Inflation, while important, is not the elixir. If countries incubate a debt-fuelled asset bubble, they sit atop a bomb.
The Tories failed, too. They thought Brown had delivered prosperity, they placed borrowed wealth in the same bracket as earned wealth. The inflation targetting was a Tory idea, right for its time. Perhaps that’s why they bought into Brown’s goldilocks error. Economists did, too. It was a bubble, defined as an error shared by the political and commentating classes.
I failed, too. I didn’t realise the significance of household borrowing trebling over the Labour years, and bought the guff about it being okay because repayments were affordable. I was dazzled by the prospects of gloabalisation, and agreed with that Greenspan miscalculation that we’d made a rare one-off adjustment to higher productivity. I’m no economist, but if I had been I daresay I’d have been excusing it away with slightly more sophisticated rationale. The asset bubble explosion is so obvious in hindsight. But I can’t claim I saw it coming. As far as I can tell, only Jeff Randall can.
It’s a problem for us pundits, of course, because we’re to an extent trying to cover our own arses. This idea of a freak, totally unpredictable economic event suits everyone who got it wrong in the bubble years: most economists, most journalists and most G8 central bankers. It suits us to talk about these terribly complex CDOs, the parcels of debt, the American sub-prime problem, the bankers who disguised debt. But it’s a lie.
The problem was obvious, its just that no one wanted to see it. The Bank of International Settlements – which advises central banks – has been saying it time over. Bill White, its recently-retired old chief economist, told them time and time again: inflation is a false god. The price of all assets – from shoddy housing to fine wine – is exploding and people are borrowing on the back of these made-up prices. It will explode, it will hurt. White was laughed at, ridiculed. Not now. He was one of the tiny number of people who realised what went wrong.
Mankind gets hubristic. We just did it again. Central bankers screwed up the supply of money in the economy, just like they did in the Great Depression and in the 1970s. It was too cheap for too long, we all gorged on it, we all got stung. End of story. Devastatingly simple. And, if you’re a pundit paid to explain economic dangers to the public, embarrassingly simple.
A Cabinet member was telling me the other day who was suggesting the press should be responsible and not talk up gloom. I replied that in my view, the press had indeed failed – but failed to alert the public to this bubble. We had become part of it. The definition of a bubble, of course, is when the commentariat join a false consensus and people like Jeff Randall, Bill White and John Redwood are somehow seen as mistaken, ideologically-driven mavericks. The list of people who got it right is, of course, longer. But it certainly doesn’t include me.
George Orwell once said that to see what is in front of one’s nose is a constant struggle. Too true. So Brown is right to admit he got it wrong. The sooner everyone else does, the sooner we’ll see clearly understand what really happened. And the sooner we’ll get a proper solution to this crisis.
P.S. This is not a paean to Brown: in trying to resuscitate the corpse of the debt bubble, he’s still pursuing the wrong strategy.
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