The final nail in the coffin of New Labour seems likely to be the looming recession. How serious that will be is not yet clear, but it is on its way. The Central Bank's panicky injection of £50 billion into the banking system is evidence that there is a problem, and a big one, another crisis for the global capitalist system.
Gordon Brown's old slogan of 'no more boom and bust' will come back to haunt him and suggests sadly that he does not really understand economics. That being said, neither do the monetarists, the neo–liberal economists, or the world economy would not be in such a precarious state.
John Maynard Keynes explained how capitalism should be managed, and for about three decades western governments broadly followed his advice. Then the monetarists took their revenge, and the Keynesians were cast out and condemned as dangerous leftists! The great Keynesian J K Galbraith was attacked by the monetarists/neo–liberals (flattered by the description of neo–classical economists) for 'not understanding' their arguments. Gal–braith countered saying that he had read all their literature and they were simply wrong.
So how did it all go wrong for Gordon Brown? The seeds of Gordon Brown's current problem started with the last crisis, the disastrous ERM strategy of 1990–92 which, it will be remembered, was supported by New Labour as well as the Tories. The Major government was forced to raise interest rates again and again to sustain sterling's parity against the deutschmark. This led directly to a house price collapse, millions in negative equity or having their homes repossessed, a deep recession and a million more workers on the dole.
On 'Golden Wednesday' in September 1992 the pound was forced out of the ERM, interest rates were cut massively and the pound depreciated by a third, giving a gigantic kick to the economy as consumer demand rapidly recovered. The experience destroyed the Tories' credibility and Labour was elected in 1997 despite the fact that recovery was well into its stride by that time. That surge continued into the New Labour years with rising house prices, falling unemployment and buoyant consumer demand.
Gordon Brown inflicted crushingly tight controls on public expenditure during his first two years as Chancellor and when he was finally forced to relax spending, especially on health, this served to keep the economy buoyant and growing despite a serious downturn in the stock market. Homeowners continued to spend, in effect borrowing against the rising values of their houses. Year after year the process continued and an enormous mountain of consumer debt was accumulated which now threatens to come crashing down following the sub prime lending crisis in America.
The US, like Britain, has become addicted to rising house prices, and if house prices fall the economy turns down as consumers spend less. To keep house prices moving upwards, US financial institutions lent vast sums to poor people to buy homes. Some of this sub prime lending was laid off around the world to some British banks among others. What inevitably happened is that many of those poorer people defaulted on their mortgage payments and the banks who had lent all that money suddenly found themselves in difficulty. Northern Rock was the first bank to be engulfed by the crisis, but it may not be the last.
Whatever happens, the housing market is going to weaken and slow, which will feed into the wider economy on both sides of the Atlantic. The serious danger now is of a full blown recession in Britain. If house prices fall substantially, millions of consumers will stop borrowing against their homes, stop spending in the shops and start trying to pay off their debts. A substantial drop in consumer demand will generate rising unemployment. People losing their jobs will have substantially less money to spend so reinforcing the downward spiral into recession.
To avert recession or at least to minimise the downturn, interest rates should fall, the pound should be depreciated against other currencies and public spending must be sustained. The danger is that the Treasury and the Bank of England will do the opposite of what is needed because of misplaced fears about inflation. Falling consumer demand is bound to put downward pressure on prices in the shops.
The likelihood is that the Treasury and the Bank of England will take too little action too late and that in the coming months recession could hit hard. Gordon Brown, Alistair Darling and the Governor of the Bank of England must be persuaded to change direction now or to face the likelihood of a serious recession in the lead up to the next general election. Gordon Brown's reputation for brilliant economic management – which was always spurious – will then be destroyed, leaving Labour with a desperate fight to win the next general election.
The lesson of all this is that a globalised, unfettered financial market is inherently unstable and a threat to workers everywhere. It is time to re–establish the role of government in the economy, with controls on finance, more public ownership and economic planning – more socialism in fact. A good start would be to nationalise Northern Rock.
Kelvin Hopkins MP
