are pre-occupied, not with saving the country from the abyss, but
with saving their party electorally. The Opposition seems to half-
understand the situation but not its overriding importance. If the
Tories don’t kick Brown so hard that he acts - out-of-character -
decisively there’ll be nothing but a wreck to inherit.
our media that they can talk of nothing else and of the public for
their obsession with personalities and the ‘celebrity’ culture. The
public are treating a nearing catastrophe as a episode in ‘Big
Brother’ .
Dithering will make Britain the sick man of the global crisis
(newspaper headline)
Gordon Brown must grasp the nettle of the financial crisis (online
headline)
Here they come - the credit crunch cavalry; here to sweep us away
from all this economic misery. In they waft from the five-star hotels
and embassies of Washington, carried aloft on a ribbon of dry ice and
dollar bills.
By Edmund Conway
The crowd swoons with excitement as the silhouettes of Hank Paulson,
Alistair Darling and the rest of the Fantastic Seven heave into sight.
If the image is ridiculous, it is perhaps not so far from reality as
it once was. This week the Group of Seven (G7) leading finance
ministers descend on the capital of the free world.
The air is already swimming with fevered speculation about a new
world financial deal: a Bretton Woods for the 21st century; a
blueprint for tomorrow's financial system; an inspirational plan for
an international financial regulator to ensure that nothing like this
happens again.
Such excitement is to be expected. It is also misplaced, although
this hardly matters - the week that has just passed was a turning
point, perhaps the most important since the financial turmoil began.
They may not be superheroes, but last week finance ministers finally
faced up foursquare to the credit crisis.
There were the now obligatory bank collapses, panicked traders,
record slumps in equity prices and sweating central banks, but far
more important was that the biggest, longest-lived and most dangerous
misconception of all died: that governments could get through this
without forking out billions of taxpayer bucks to rescue the
financial system.
It is a terrible prospect, whatever your political stance. After
Friday's Congressional vote, the United States has, in one fell
swoop, increased its national debt by about the same amount the Iraq
war has cost.
Almost all rich countries will have to borrow massively to get out of
this hole. As a result, there will be less money to spend in the
coming years. All those bold proposals by Obama and McCain may have
to be rethought - the US has just smashed open the piggy bank it was
saving for the next decade.
Horrifying as it all is, it beats the alternative: a rerun of the
1930s. We have only just realised on both sides of the Atlantic how
close we have come to the edge. The atmosphere has been febrile
enough since last August, but not until the past few days did banks
face a widespread run, as everyone from savers to hedge funds to
companies to pension funds pulled their money out of the system.
What was new was not just the virulence of the infection but the way
it struck the US and Europe at the same time. The lie that this was
specifically an American or even an Anglo-Saxon problem has been laid
to rest - in fact, it turns out that the banks in Germany and France
were the biggest buyers of US sub-prime mortgage securities, the
financial weapons of mass destruction at the heart of the crisis.
Since the start of this turmoil, politicians have been able to
advance an easy excuse for the absence of decisive, comprehensive
action: there was no obvious solution, since it was not clear what
was happening. Now that excuse no longer washes.
The problem is quite simple: vast swathes of the banking system are
close to insolvency. Following the collapse of major parts of banks'
life-support system - the securitisation and money markets - they
fell victim to a double run as first shareholders and then depositors
abandoned them.
For all its sound and fury, the Paulson plan only goes some of the
way towards resolving this. By providing banks with a toxic dump for
their nastiest securities, the US taxpayers' $700 billion (£400 bn)
helps cleanse the system.
But it will not prevent more banks from collapsing.
More money will probably have to be injected. Ken Rogoff, professor
of economics at Harvard, reckons the eventual cost could hit an eye-
watering $2 trillion (£1,100bn).
The rule in this situation is simple. The sooner you fork out the
cash, the less the eventual cost will be. To see why, you only have
to look back to the early 1990s, when the world suffered two banking
crises: one in Scandinavia, the other in Japan.
The circumstances were much the same as those we face now, a debt-
fuelled binge followed by a slump in housing and equity prices and a
decimated banking industry. The Nordic crisis was short-lived, but
Japan suffered a Lost Decade of stagnation, deflation and falling
house prices.
What was the difference? The Scandinavian governments acted
decisively, slashing interest rates and bailing out the banking
system. Japanese policymakers, on the other hand, took too long to
face up to their problems. They cut rates too slowly and, reluctant
to pump taxpayers' funds into the banking industry, kept banks on
life support without giving them the surgery they needed.
It now looks very much as if Paulson is heading down the Nordic
route. So too are a number of European countries, although judging by
the emergency summit called by President Sarkozy in Paris, they still
haven't made up their mind whether to launch a co-ordinated rescue
plan or tackle the crisis state by state. Most likely they will fall
on the latter.
It is difficult enough to justify spending public money on a domestic
bail-out, let alone one for another country.
Which brings us to the UK. As eyes sweep round the table in
Washington this week, they will undoubtedly pause when they reach
Alistair Darling.
He and Gordon Brown have stuck out like a sore thumb for their
relative inaction. Before last week this might have been applauded as
sure-footedness, but not now.
The British economy is arguably among the most vulnerable of all, and
yet its policymakers have done less than almost all their peers to
try to mitigate the disaster.
Already the effects of the credit crunch are apparent. House prices
and mortgage lending have slumped more dramatically than in recorded
history; unemployment has started to rise; the economy is almost
certainly slipping into recession.
Most worrying of all, this has happened before the impact of the past
few weeks has fed into the system.
Almost every measure implemented by Brown has been more sticking
plaster than surgery. His proposal yesterday for a £12 billion pan-
European fund for struggling small businesses is a typical example.
It is neither big enough to make a significant difference for
businesses, nor will it do anything to solve the banking crisis. He
promised "global solutions" for the turmoil but, as the Paulson plan
shows, sometimes countries have to act unilaterally.
The longer he holds off radical reforms, which means throwing a
significant chunk of money (£50 billion, perhaps more) at failing
banks, the worse our prospects are for the coming years.
It is shocking that, given David Cameron is likely to inherit this
mess, neither he nor George Osborne has lobbied the Government
publicly to do more.
The Bank of England is likely to cut interest rates this week -
perhaps even by a half percentage point. However, lower borrowing
costs are not enough.
Unless something radical is done soon, Britain faces its own Lost
Decade of high unemployment, stagnation and possible deflation.
Worst of all, it is an eventuality that is avoidable. But only if the
Government grasps the nettle, and does it soon.
Sunday 5 October 2008
This is the reality that nobody wants to face. Labour politicians
It is also a measure of the complete irresponsibility of
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