The politics of the banking collapse
The TUC welcomed yesterday’s government moves to repair the banking system. It all adds up to a substantial set of proposals that should make at least some difference, even though it’s probable that further action will be required. Indeed some unlikely suspects are now calling for full nationalisation.
But the politics of this are far from straightforward. The financial collapse last year was good for the government’s poll standing. Gordon Brown got his mojo back as he was able to put his experience as Chancellor to work putting together his subsequently much copied banking rescue package. Active government was clearly what was needed, and that comes from the left of centre. The Conservatives lost momentum as Labour was once again setting the agenda, and while the Lib Dems saw Vince Cable elevated to a national wise elder, this did not deliver much in the way of poll support.
There are now signs however that the government’s bounce back is starting to falter. In some ways this is not surprising. As the recession bites and more and more people either lose their jobs or start to have real fears about their future they are going to want someone to blame. And government is always a likely contender in any blame game.
Ministers have an additional problem. Whether we like it or not the UK is in recession. Unemployment will increase, possibly to more than three million. Others will be hit by big holes in their savings and the collapse of the housing market. There is nothing the government can do to stop this happening. The best it can manage is to make the recession shorter and less deep than it would have been if no action had been taken.
Yet this is very hard to measure. The only way to really tell what difference the government makes would be to set up a duplicate UK economy run on a non-interventionist basis as a control and then compare unemployment and repossessions in three years time. A government message that says it’s awful, but it could have been worse, is not an easy sell.
This is a not a unique example of this kind of problem. Many issues – such as crime – are similar. There will always be a crime problem but it is hard to tell whether government action is making them better or worse. But this is the big one, and in recessions economic issues dominate at the ballot box.
Yet governments can get re-elected during recessions. Mrs Thatcher did, even though her policies were making it worse not better. She managed to do this by having a strong narrative about why the recession had happened and even more importantly carefully choosing someone else to blame – a list that included unions.
Labour needs to do the same, otherwise it will get the blame itself. Simply blaming the US sub-prime crisis will not wash. That, just like the problems that are still coming out in Britain’s banks, has been a direct result of the deregulation policies followed since Mrs Thatcher and President Reagan destroyed the post-war consensus and gloried in a big bang deregulation of finance.
The problem that Labour has is that acceptance of much (though of course not all) of this ideology is central to new Labour (and for that matter pre-Obama new Democrat). Deregulation and disdain for sclerotic Europe was a central pillar of Treasury thinking while Gordon Brown was Chancellor. There is such fear of losing this bit of new Labour DNA that the government has often been slow to move. You can see this with the delayed nationalisation of Northern Rock and the refusal to use the Rock and B&B for public policy purposes once in state ownership. Arguably the same thing is happening now with further bank nationalisation.
This hang-up appears to have stopped ministers coming forward with an explanation for the recession that resonates with the public and gives them someone else to blame. Yet that is not hard to do. It started with the big bang and intensified as deregulated banks and financial institutions build up an asset bubble based on dodgy loans. Today’s papers are full of hostility towards the banks and Sir Fred Goodwin, the RBS ex-boss in particular. It does not matter that this government knighted Sir Fred if the argument is that we were all being deceived by the banks – certainly their auditors fell for it.
There are some signs that more junior ministers understand that we are now in different times, when the dominant political ideas undergo a fundamental change (note how I’ve managed to avoid saying paradigm shift here.) Some of this was seen at last Saturday’s Fabian event. There are even some changes at the top. The Prime Minister talked of his anger yesterday. Picking up the TUC’s call for a public inquiry into what went wrong with the banks would help here.
If government does not get this strong narrative and identify the guilty men and women, it is easy to see voters agreeing with the emerging Conservative argument that all the government is doing is throwing money at the problem and making no difference. It is after all a line they have already used to some effect with public services, where again the government has been ideologically hobbled – this time by its suspicion of the public sector and preference for private sector solutions.