Vince Cable on “one of the great acts of economic vandalism in modern times”

Yesterday Vince Cable gave a sweeping speech about the current state of the economy, lessons from the 1930s and the way forward.

The parallels with the 1930s are in some ways obvious, but as Cable pointed out there are important differences. In particular, in the 1930s there was no similar financial crash in Britain to mirror what happened this time. However, in another major respect this time round looks somewhat better than the 1930s as unemployment has not soared in a similar way, helped by the double-edged flexibility of wages. This time round, real wages have suffered, spreading the pain more widely but keeping more people in work. 

Turning to policies for the future, Cable signalled strong support for a weak pound, talking of the benefits that devaluation had brought Britain in the last few years:

The 25% devaluation in the recent economic crisis stems from a very different cause [from the 1930s devaluation]: it was a consequence of the perceived weakness of the economy and the UK’s acute vulnerability to a growing financial crisis.  But as in the early 1930s, devaluation prevented the UK economy deteriorating ever further, and from 2009 started a tentative rebalancing towards manufacturing and exports.

It is important that this incentive remains. Any prolonged appreciation of the currency will undermine the hope of recovery. This is one, but not the only, reason we need to retain a loose monetary policy.

The path to recovery is one paved with more lending and more houses according to Vince Cable:

 The destruction of the British building society movement – or much of it – in the two decades after the late 1980s … was one of the great acts of economic vandalism in modern times. And the commercial banks largely abandoned locally based relationship banking in the decade before the recent financial crisis. There is now no institutional structure in place to offer countercyclical lending, particularly small and medium sized businesses, in place of the banks. A major and urgent task of government today is to ensure that we have banks that meet that requirement, alongside counter cyclical regulations and liquidity measures of the kind set out at last Thursday’s Mansion House speeches. We now look enviously at Germany where the Sparkasse and KFW underpin a business and mortgage lending system which works…

One sector where progress could be made rapidly is in housing. The main vehicle for social housing for rent (as well as shared ownership) is housing associations. These are independent, not for profit, institutions which can – and do – borrow in capital markets. There is large unmet demand for social housing which may be self-financing if built, in conjunction with private housing. Indeed, some major UK contractors are doing just that with access to long term – 10 years plus finance – with access to guarantees.  This activity could be multiplied.

There are now some interesting ideas out there for government guarantees could trigger a significant volume of housing investment, replicating the recovery model of the 1930s and leading hopefully to a virtuous circle of new building lending to increased affordability and also increased private demand. Construction products account for 20% of manufacturing. Insofar as these ideas reduce uncertainty, they can encourage significant investment from the private sector. Recovery requires a big expansion in social and private house building.

That emphasis on housing echoes comments Nick Clegg has made, including laying great stress on building more homes when he spoke to the party’s Federal Executive in the wake of May’s elections. The level of importance that senior figures such as Clegg and Cable are giving to housing is unprecedented in the party’s history. The real test, however, comes from counting the number of homes that get built.


* Mark Pack is Party President and is the editor of Liberal Democrat Newswire.

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  • Today’s inflation figures set the way for further QE soon. The original remit of QE was to buy “government bonds and high-quality debt issued by private companies”. So far as I know QE has only ever been used to buy gilts – if they’ve ever bought corporate bonds then it’s news to me.

    Given the well documented issues with banks using QE money to increase tier1 capital, or pay bonuses or just simply not manage to find borrowers to lend it to, then why don’t we get the money directly into the hands of the social housing sector by getting them to issue debt and the bank directly buying it?

    There is an interesting charity – called arcubus – that has recently been set up in The City of London by the Diocese of London and business leaders. You give them an amount of money – say £1K – and they give £800 to social housing charities and £200 to micro-business ventures in Africa. The latter is effectively a gift. After 5 years you get back your original £1K due to the 4% coupon on the (AA-rated) social housing bonds that you’ve bought. So you make nothing but your money has been doing a lot of good.

    Government could learn something from this type of model.

  • I am not – even remotely – any kind of ecomomist. But this sounds very semsible to me; more house building = more construction jobs, more manufacturing jobs, more service jobs but most importantly MORE HOMES, hopefully lots of reasonably priced rentable, or ‘affordable’ ones for sale. As the man says, it sounds win win. Make it happen Mr Cable.

  • Richard Dean 19th Jun '12 - 2:18pm

    It does seem godd to clarify major differences between now and the 1930’s. Old solutions won’t necessarily fit the new problems. But then “replicating the recovery model of the 1930s” seems inconsistent with this!

    If “there is now no institutional structure in place to offer countercyclical lending”, and if one is needed, then why doesn’t the state set one up as a nationalized enterprise? It might evgen be saleable later, in the usual way, at a profit!

    There are worrying words too … “demand for social housing which MAY BE self-financing ” – not WILL BE? Should we really be gambling that it WILL be? And “leading HOPEFULLY to a virtuous circle “. This does not seem to be satisfying the stated aim of reducing uncertainty- quite the reverse!

    Why only housing? There is a of of infrastructrure to be fixed, and we need to do it now because it’s cheaper now than later, and because we don’t want its problems preventing us from taking full advantage of the recovery when it comes (

    So I’m afraid the speech looks rather disappointing – even confused – though I’ve only looked at Mark’s summary, not the whole thing. I’m afraid I expected something a lot better from someone whose primary working week is presumably spent studying the problem in detail, and who has an army of civil servants andhuge ability to fund academic and other research in order to help find solutions.

  • Interesting speech by Vince and heartening to see the practical focus on the affordable housing sector as a key generator of growth. I think, howver, we need to be careful not to rely solely on monetary policy and price level expectations as a means of engendering an economic recovery.

    Tim Morgan at Tullett Prebon published an analysis last year Project Armageddon questioning the ability of macroeconomic policy alone to deliver a solution to the economic malaise. In common with Vince, he sees the health of the SME sector as critical to economic recovery.

    “Our analysis indicates that the British economy, as currently aligned,is incapable of delivering growth at anywhere near the levels required by the deficit reduction agenda. In the decade prior to the financial crisis, the UK economy became hugely dependent upon debt. Taking public and private components together, debts have increased at an annual average rate of 11.2% of GDP since 2003. The two big drivers of the economy have been private (mortgage and credit) borrowing, and huge (and debt-dependent) increases in public spending. Reflecting the growth in debt-funded activities, three of the UK’s eight largest industries (real estate, financial services and construction), which account for 39% of the economy, are incapable of growth now that net private borrowing has evaporated. Another three of the top eight sectors (health, education, and public administration and defence) account for a further 19%, and cannot expand now that growth in public spending is a thing of the past. This means that 58% of the economy is ex-growth, a figure that could rise to 70% if, as seems probable, growth in retailing is precluded by falling real consumer incomes.

    Together, the severity of Britain’s indebtedness and the challenging outlook for the economy mean that the UK is now mired in a high-debt, lowgrowth trap. Minimising the inevitable damage requires the clearest possible understanding of how this situation came about. Britain’s fiscal and economic problems result from grotesque mishandling of the economy under the 1997- 2010 Labour administration. Gordon Brown’s reform of the financial regulatory system, and his insistence that the Bank of England determine monetary policy on the basis of retail inflation alone, resulted in a reckless escalation in mortgage lending. The ensuing property price boom spurred unsustainable growth in a plethora of housing-related sectors, and underwrote a rapid expansion in consumer borrowing. Believing that this bubble was real growth, Brown spent up to, and beyond, the apparent expansion in the tax base that had resulted from the property driven boom. Real public spending increased by 53% in a period in which the economy expanded by just 17%. As soon as the bubble burst, a chasm rapidly opened up between excessive spending and falling tax revenues. In addition to skewing the economy towards debt and public spending, Brown and his colleagues imposed ever-increasing regulatory and fiscal burdens on business, and simultaneously transferred resources from private industry into a public sector whose productivity was subject to continuous decline. This weakened the overall productivity of the British economy. Labour’s period in office was characterised not just by economic and fiscal mismanagement but also by the promotion of a culture of moral absolutism centred around spurious and selective concepts of ‘fairness’. This culture, and the accompanying sense of individual and collective entitlement, is the biggest obstacle in the way of effective economic reform.

    Courtesy of massive and unsustainable public borrowing, the British public has been shielded thus far from the pain of recession. This exercise in damage limitation was necessarily-time limited. What comes next is going to be unpleasant. The widespread assumption that the right blend of macroeconomic policies alone can overcome Britain’s economic and fiscal problems is fundamentally mistaken. Governments have tried low interest rates (which have been close to zero for 28 months), devaluation, £390bn of fiscal stimulus and £200bn of quantitative easing, all to no effect. The so-called ‘plan b’, which could be better labelled ‘Brown lite’, is not worthy of serious consideration. In the years prior to the recession, Britain borrowed £2.18 for every £1 of growth. Continued high borrowing would be
    nothing more than a pain-deferral exercise leading inevitably to a full-blown economic crisis.

    As Britain’s debt-driven economic misalignment unravels, property prices can be expected to fall sharply, unemployment to remain high, sterling to remain weak, and real incomes to continue to fall as inflation continues to out-pace earnings. An early objective for government should be to put an end to the state of national denial over the true condition of the economy, and to undercut the delusory sense of individual and collective ‘entitlement’ that was fostered in the Labour years. Britain has no automatic entitlement to high living standards or a welfare state. Rather, these benefits have to be earned, not borrowed. With all macroeconomic options exhausted, the best way to restart growth would be to implement supply-side reforms designed to free small and medium enterprises (SMEs) from the
    onerous burden of regulation which blights their expansion. Such reforms, whilst imperative if a full-blown economic crisis is to be averted, will be opposed by interest groups, and will also cut across much of the moral absolutism that was promoted so successfully by Labour. In many instances, choices will have to be made between economic efficiency on the one hand and spurious concepts of ‘fairness’ on the other. The outstanding questions where Britain’s economic future are concerned lie less in the mechanics of reform than in the ability of government to secure support for reforms which both challenge preconceived notions and offend vocal interest groups.

    The best way for government to offset material pain would be to promote a ‘liberty agenda’ which, whilst freeing up SMEs to invest and to grow, would also begin to liberate the public from the results of Labour’s predilection for surveillance and coercion. At present, we see very little sign that the Coalition government is prepared to promote economic growth and individual liberty by tackling Labour’s notions of morality, fairness and entitlement.”

  • Richard Dean 19th Jun '12 - 5:49pm

    “Minimising the … damage requires the clearest possible understanding of how this situation came about.”

    IMHO that understanding has to include Europe. Brown was not the only cause, perhaps not even the main one. What is a “libery agenda”. Is it the same as “you’re free to break your bones if you want to, we don’t care” ?

  • Much of Vince’s analysis drew on Prof Nick Crafts recent CentreForum paper, which you can find here: & you can attend the event that we are running and at which Nick is speaking. (3 July, 18.15 Portcullis House – Full details here:

  • toryboysnevergrowup 20th Jun '12 - 10:02am

    The problem with this analysis is that I don’t think we have reached the equivalent of 1933 yet and are still stuck in the equivalent of the 1920s. If Vince hasn’t noticed much of that 25% devaluation has now been reversed and we have yet to experience the reduction in prices (although commodities on average have fallen by 25% in the past year) that led to the increase in real incomes that was one of the main stimuluses for growth. And perhaps he ignores the stimulus coming from overseas – and this is not just the US with the New Deal but Continental Europe courtesy of rearmament.

    Keynes (and Lloyd George) knew what to do at the end of the 1920s, although the General Theory was not published until 1933, and that is what is missing now as well as then. There is a perfectly good Keynesian analysis of how growth occurred in the 1930s – and although Vince and Prof Craft may wish to pretend otherwise. Perhaps they might also wish to consider the unnecessary misery that occurred before that recovery and how a repeat may now be avoided. Why do they think that Keynesianism was pretty much accepted wholesale after WW2?

    I would also be a little wary of assuming that housing projects will deliver an immediate stimulus – remember that the fiscal stance this year will dampen overall demand and there is a time lag in getting planning approval, making plans, arranging finance etc. My guess is that any positive impact from housing is at least 2/3 years away.

  • The great act of economic vandalism that Vince mentions was the destruction of the mutual Building Society sector. I hope we take the chance in banking reform to re-establish that sector and give us back local/regional banking. There was a great deal of accumalated wealth in Building Societies which was realease and squandered in a generation. Jo Grimond championed the idea of regional mutual banks that would attract savings and invest -for the long term-in local enterprises. The last thing we need is more shareholder owned PLC banks whose chief concern is building shareholder value. Mutual banks with the long term ineterest of their members provide a real alternative and one which Liberals should surely champion.

  • toryboysnevergrowup 20th Jun '12 - 12:31pm

    Iain BB

    I couldn’t agree more the Building Societies Act 1986 has a lot to answer for – if you look at the Building Societies who converted as a result the record has not been a happy one. Of course one of the main motivations in converting at the time was that rather than being tied to all the restrictions on building societies they could become banks which operated in a much more deregulated environment and where the directors/managers could pay themselves higher salaries. I’m afraid I see little in what is currently happening to stop the management of financial institutions moving into activities for which their management do not have the necessary skills – so I’m afraid the same mistakes will continue to be made.

    The problem with having allowed the larger mutuals to convert (insurance companies as well as building societies) please note – it is a lot harder to set up new mutuals with enough capital to seriously compete wth private sector financial institutions – and I’m afraid that where the government does have the opportunity to do something e.g. Northern Rock, the sale of Lloyds branches (they don’t seem to be helping a sale to the Co-op Bank) it seems rather more keen on flogging what we own to the private sector.

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