In days of old, when Brown was bold (well, in 1992 anyway) he gave a stirring speech, as Shadow Chancellor, calling for a “powerful alternative to free-market thinking”. He clearly explained why regulations and strong institutions were needed to bring the City under control. Then, five years later he was catapulted into power by the Labour landslide, becoming Chancellor of the Exchequer in Tony Blair’s government.
Tony Blair naively developed an undue admiration for what he romantically saw as the swashbuckling and flamboyant world of supposedly successful entrepreneurs, whose company he found flattering. Gordon, alas, similarly fell for a charm offensive launched by the very people he once felt needed to be more tightly controlled.
How could he have been so wrong in 1992 about these talented and productive people? How could he have fallen for Prudence, the way he did? No, no longer would he play the dour, stern Scot holding back this glittering powerhouse of the British economy. If their energy and flair were so successful, then they could be the more so when freed from stuffy restraints.
So Brown cut taxes, with corporation tax down from 33% to 28% and from 24% to 19% for smaller companies – and for Middle England the basic rate was down from 23% to 20% with a special 10% band for the deserving poor. And he rewarded his new-found friends too – by handing their regulation to the new floppy, sloppy FSA – so they could do more exciting things and pay less tax when their increased profits rolled in. He looked upon what he had done and, behold, it was very good.
Indeed it all was very good for a surprising number of years. The bankers were enobled and their “wisdom” sought as advisers. We had Sir Derek Wanless (from Northern Rock) on the NHS, Sir Fred Goodwin (from RBS) on a welfare-to-work scheme, Sir James Cosby (from HBOS) on ID cards and (God, help us!) on the mortgage market, and finally the US citizen (so can’t have a title) Glen Moreno (from Citibank and the notorious Liechenstein Global Trust) was put in charge of UKFI. This manages the enormous and involuntary government investment made on our behalf in the failed UK banks RBOS, Lloyds, Northern Rock and Bradford & Bingely.
But the banks had got into the way of lending money to people who could not pay it back and, worse, borrowing short and lending long while they let the banking ratios deteriorate. And to compound this recklessness they dramatically expanded their pay and, especially, their bonuses. These rose from about £2bn a year for the City of London in the late 90s, to £10bn in 2005 and on to a peak of £12bn in 2007. In 2010, 2011 and in 2012 they are expected to be steady at £7bn. When the collapse came there was a significant (ca. 6%) destruction of assets followed by a sharp recession and a corresponding collapse of tax revenues. Gordon cranked up government spending in some desperate Keynsian compensation but it was too late. Far from helping, his friends, the banks – the architects of the disaster – responded by denying credit to sound businesses, while paying themselves large bonuses of still more than half of the pre-crash peak levels.
It is now quite clear – people who work in banks do not exhibit any special wisdom or competence in judging risks. Dr Gordon Brown PhD is not a stupid man – he certainly knew the score in 1992. However, along the way to his electoral defeat last May he forgot both his earlier insight and his idealism.
Let us hope that Cameron, Clegg and Osbourne are more careful about the friends they make – and do not follow the same primrose path that leads, so we are told, to the eternal bonfire.
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14 Comments
I am amazed that you write ‘ . . Dr Gordon Brown PhD is not a stupid man . . ‘ . All accounts of him agree that he has no ‘practical intelligence’:
‘ . . Professor Robert J. Sternberg of Yale University defines Practical Intelligence as – ‘ . . the ability to adapt to, shape, and select everyday environments – it is our common sense – the knowledge acquired doing everyday activities through various means. This knowledge cannot be imparted. It is the art of doing the right thing and the right time, or saying the right thing ant the right time to the right person, or applying the right knowledge at the right time . . ‘
http://brajeshwar.com/2009/practical-intelligence/
So it seems fair to describe him as ‘practically stupid’ – like many clever people.
A good article. I would add that it was not just that handing regulation to the FSA was a bad idea; it was that Brown favoured light touch regulation which would have caused problems with whoever was in charge. It is the Tories who blame the FSA in order to sidestep this point.
Robert Peston has posted an opinion piece recently which gives grounds for optimism. I am not sure why he is as confident in his opinions as he is but if he is right this could be very significant;
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/12/will_the_chancellor_regret_cre.html
As for Brown, John Gray makes the point well in his book review how he is now trying to rewrite history.
http://www.newstatesman.com/books/2010/12/brown-crisis-crash-world
I am sorry, although I would not wish to be indulged with the wisdom of Sir Derek Wanless on any subject matter. It did not require divine prescience to surmise that the Wanless wisdom was duff. For goodness sake, his forte was supposedly banking, yet, he was ignominiously ousted from the only 2 banks he worked for, leaving the taxpayer a bill for billions. Hello – does that not tell us something ? Wanless had not a single days working experience of the NHS. Put simply, he was, and is, a failed number cruncher. The Wanless judgement has proved to be fatally flawed, and all the salient facts are in the public domain. Wanless was the infamous Head of Risk, and Senior Board Director, at Northern Rock. At the quasi Court of the Commons Treasury Select Committee, Wanless was deemed highly culpable for the Rock’s collapse, by virtue of a reckless disregard for sound prudential governance. Wanless also sat on the Rock’s Remuneration Committee, which incentivised the zealous Executive with gilded bonuses, that encouraged ‘Empire building’ without foundations. Wanless was ousted from the Rock’s old Board concurrent with the Treasury (that’s you, me, and unborn future generations) multi-billion pound bailout. Prior to Northern Rock, Wanless was CEO at NatWest, from where he was also ousted in 1999. NatWest was so weakened under the Wanless stewardship that it was handed to Fred Goodwin on a plate – we all know the rest. Ponder for a moment, how banking today may have been without the Wanless factor. Turning to the Wanless 2002 NHS Funding Report. This was commissioned by Gordon Brown as Blair had pledged Euro level NHS spending on the BBC’s Frost program. Close followers of current affairs will recall that Brown sought “intellectual justification” for his proposed tax and NI hikes. Many critics surmised that Wanless was given the report’s conclusion, and asked to justify it. Yes, the NHS funding that followed the report was substantial. Substantial enough to see GP’s, Consultants and NHS Mandarins see their average salaries double in the last 7 years. If only the same could be said for Nurses pay, and front line services. Had prudent caveats been incorporated into the funding report, we could have witnessed a far more equitable distribution of the extra funding, but then prudence is not in the Wanless DNA. All I ask, is that before fawning over Sir Derek Wanless for his views, we first consider the cost to the UK of his judgemental faux-pas to date.
Chris, you’ve got a good point. OK, I’ll buy “practically stupid”. Clearly GB had talent and ability in his younger days – and probably retains it. But equally clearly something is amiss – poor assessment of social relations and situations? My main point (in which I also implicate Blair) is, I suppose, GB’s apparent poor social judgement of whom to consult and whom to listen to.
Odd how the media are now awash with apologia for the financial system as a whole, and amoral bankers within it. We all deceive ourselves when we need to.
Something went wrong with the Brownshirt after 1992….I think it’s called lust for power. Blair, on the other hand, always knew where the money was. (He still does)
But the real problem is that money has gone bad.
http://hat4uk.wordpress.com/2011/01/01/why-contemporary-money-is-unfit-for-human-consumption/
Geoffrey, thank you for your kind remark. Yes, you are right it was the ‘light touch regime’ within which Brown made the FSA operate that was the fundamental problem – p’raps I should have made that explicit. I was disappointed in Robert Peton’s article though – it just seemed to me that he’d spent time boiling down the original problem facing the Banking Commission to…. well, to the original problem. But I hadn’t seen John Gray’s article before – and I thought his comment that “The crisis in banking has mutated into one in which the solvency of states [rather than, as formerly, the solvency of banks] is in question” is very insightful.
John,
Thanks for that useful background. That was why, of course, I put inverted commas around “wisdom”!
John Ward,
Hmm.. Money or power… or reputation? Blair seemed to be after all three (the usual situation) but Brown has never struck me as being interested in money – as a personal possession, I mean. Which is a pity, since this is the only one of the 3 that he’s likely to be left with in the end.
What a confused piece. You say the crisis was caused by ‘lending money to people who could not pay it back ‘ and then complain that the banks ‘responded by denying credit to sound businesses,’
So you think the banks should now start lending money to people they dont think will repay it …..
Nick – another thought on the “wisdom” of Wanless.
You hope that the ‘coalition is more careful’, and so say all of us – but I have to wonder. So, what is Sir Derek doing with a seat on the Board for Actuarial Standards, part of the FRC. Head of the FRC is Baroness Hogg, an appointment made by non other than the coalition’s Business Secretary.
http://www.frc.org.uk/bas/about/board.cfm
Given that said Business Secretary has been laudably vocal about the damage caused by the egregious bankers, one wonders why he has not spotted Sir Derek hiding away on this actuarial board ? Prudent risk assessment is the core competency of every good actuary, making Sir Derek the very antithesis of actuarial competence. Does the Business secretary carry such little sway that he is even unable to to persuade Baroness Hogg to show Wanless where the pasture lies – apparently so !
Confused? Well, Simon, the banks did lend money to people who couldn’t repay – most famously in the US sub-prime mortgage market – as I’m sure we agree. That having happened, and with public investment made to keep the banks afloat, they gave no help to GB’s belated attempt at some Keynsian mitigation since they stopped lending almost entirely for a period, not even lending to sound businesses. I don’t think it was so much as the banks not thinking that the firms would not repay the loans – more that they were in a complete panic to restore the banking ratios that they’d recklessly allowed to stretch.
Yeees.., John.
You’re obviously more expert in Wanlessology than I am. I, too, am beginning to wonder. Perhaps a letter to the good Baroness? Or book a surgery to discuss it confidentially with Vince? I can offer no explanation, myself.
Simon – I believe the article is merely warning against a polarisation of attitude toward bank lending, in other words knee jerk reactions. In broad brush, I believe Nick is simply highlghting the absurdity of going from Northern Rock’s infamous 125% mortgages, to what is a virtual lending freeze.
One could argue that it is prudent and laudable to accumulate some savings, and nobody would disagree. That said, if every one of us, saved every penny, and lived the ascetic life of Diogenes, the economy would simply implode – it is utterly dependent upon the stimulation of consumer spending.
The answer, is sensible moderation in all things. Aristotle taught us in his ‘Doctrine of the Mean’, that moderation was in the sensible man’s judgment, showing neither the rashness of extreme, nor the cowardice of deficiency.
The banks could do worse than consider the sage advice of Aristotle.
Nick – I am no ‘expert’ in ‘Wanlessology’, although I do take a passing interest in those bankers whose crass decisions caused such damage to our economy. Am I the only person who muses over how many aircraft Wanless et al are responsible for moth balling ? What they secretly feel when they see students protesting their fee increases ? Because these are the realities behind their costly mistakes. One considers that they (the bankers) would slink away to their well feathered nests, and keep their heads well below the parapet – apologies for the mixed metaphors. But of course, this takes no account of their gargantuan hubris and ego, which deflects all the slings and arrows, and permits them to continue this delusion of self importance.
‘A letter to the good Baroness’ – well it’s not as if she is unaware is it ? I presume that her priority, above all else, is to spare Sir Derek’s blushes.
‘Book a surgery to discuss it with Vince’ – Yes, although I imagine that the able Doctor is very circumspect these days, as to who he allows into his surgery !!
Nevertheless, given all the hot rhetoric spouted about errant bankers, and how they should be sanctioned, it is quite remarkable just how little has been done. The reckless and imprudent Sir Derek Wanless, preaching prudential wisdom to actuaries at the Board for Actuarial Standards, is but one example of deeds not matching words.