Unlike America, Britain is failing to meet the scale of the financial problems facing it. A severe crash became more likely after last week’s dishonest, electioneering budget. The Labour government’s love affair with the bankers is to blame for this sorry state, and anyone who has the means had better start preparing for rationing and blackouts as early as winter 2010.
The key problem is that Britain is handing huge sums of our money to the bankers, almost none of whom have been fired for incompetence. They can keep paying themselves excessively and unlike the US, the UK has not extracted any concessions or structural changes from the banks, other than a tiny share of the profits in the event of a (miraculous) recovery. No major structural reform, no increase in lending, no investigations into falsely declared profits such as those at Lehman Brothers.
The risk is that the government’s bailout money will be spent, and then at the next sign of crisis, no further cash will be available from the markets and the UK will have to go to the IMF for a high interest loan. However, the agreement,brokered by Brown at the G20 summit, for a $1Tr crisis fund, has fallen apart, and the IMF will have no money.
Whether its caused by a major default (eg Russia or Latin America), a rise in oil prices, a terrorist bomb or a weather related event, the country’s economic survival is dangling by a gossamer thread.
In last Wednesday’s Budget statement, UK Chancellor Alistair Darling acknowledged that even on his optimistic assumptions a decade was needed to repair Britain’s public finances. The Financial Times gave two reasons: the government failed to deal effectively with the reform of public services, and an indecent love affair with the financial services industry.
Britain’s public finances are the worst of any rich country. It is likely to have a bigger deficit in 2010, as a percentage of GDP, than even Italy. As a result of the collapse in earnings, tax revenues have fallen just as social spending has increased. Now the UK needs to tap the markets for £175 billion ($254 billion) in the current fiscal year and the same the year after. There is now serious talk of the country losing its AAA credit rating which would push up interest rates just when money for repayments was hardest to find.
The financial services sector boomed from 1998 to 2000 and the UK benefited from a surge of revenues. The tide then receded. But the earlier revenues were used to offset the later splurge in spending.
We now know that many of the banking profits of that period were illusory. But they generated substantial revenues from corporation tax and income tax on bonuses. The real funding gap was wider even than it appeared.
But the illusion was at its most influential at the highest levels of government. The Financial Times says: “Investment bankers had become the most powerful political lobby in the country and there was … action to restrain City excess. Light touch regulation was not just a matter of policy but a matter of pride.
What would have happened if the Financial Services Authority or Bank of England had sought to block the competing bids from RBS and Barclays for ABN Amro – a contest which, we now know, would bankrupt the bank that won the race? The phones in Downing Street would have been ringing insistently and it is easy to imagine the government’s response.
Little has changed. The government continues to see financial services through the eyes of the financial services industry, for which the priority is to restore business as usual. For a time in 2008, it seemed possible to argue that a package of temporary support for the banking industry, combined with substantial recapitalisation of the weaker players, might stabilise the financial sector and prevent serious knock-on effects.
But the problems of banks are much deeper than were then acknowledged and the destabilisation of the real economy has happened anyway. Government now provides taxpayers’ money to financial services businesses in previously unimaginable quantities. But there is no control over the use of the money, no insistence on structural reform or management reorganisation, no safeguarding of the essential economic functions of the financial services industry and no accountability for the damage that has been done.
It is as though the teenage children and their friends were to wreck the house and then demand that the grown-ups clean up before the next party. Their parents are too intimidated to do anything more than ask Uncle Adair to keep an eye on them and excoriate the hapless Fred who made off with some of the silver.