A JOURNEY

by Blair, Tony

  Second, government also failed. Regulations failed. Politicians failed. Monetary policy failed. Debt became way too cheap. But that wasn’t a conspiracy of the banks; it was a consequence of the apparently benign confluence of loose money policy and low inflation. The responsibility for the crisis should be shared, not borne by the market alone or even by the banks alone.

  Third, the failure was one of understanding. We didn’t spot it. You can argue we should have, but we didn’t. Furthermore – and this is vital for where we go now on regulation – it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn’t have said: There’s nothing we can do about it until we get more regulation through. We would have acted. But they didn’t say that.

  Fourth, financial innovation is not bad per se. Actually, very often it is good: it increases liquidity and boosts economic activity. The danger lies in innovation that has consequences we don’t understand, and effects which we therefore can’t track.

  Fifth, when a crisis occurs – and I suspect this may be true of any significant economic crisis today – its consequences are magnified beyond any comparison with days of old by the supremely interconnected and interdependent nature of the modern global economy. It impacts in its own right; and then the impact is multiplied through that elusive but profoundly powerful force called ‘confidence’.

  I am not suggesting confidence is just some airy sentiment unconnected to the facts. The arithmetic, naturally, determines the fundamentals of the confidence. But the swings in confidence derive, in part, from the psychology of how the arithmetic is being handled, and that depends crucially on the politics. The equation revolves around the interplay between arithmetic, psychology and politics. So the arithmetic remains uncertain, the politics unclear, the psychology therefore troubled, and confidence therefore erratic.

  When I say we have to disentangle the conventional wisdom, I mean this: it is absolutely right that the state intervened at the outset of the crisis – not to have done so would have been ideologically blind and practically stupid; the problem, I would say error, was in buying a package which combined deficit spending, heavy regulation, identifying banks as the malfeasants, and jettisoning the reinvention of government in favour of the rehabilitation of government.

  Funnily enough (or perhaps predictably enough), the public has got this more than many politicians and commentators, which is why the great lurch leftwards has not materialised. The public understands completely the difference between the state being forced to intervene to stabilise the market and government back in fashion as a major actor in the general economy. The role of government is to stabilise and then get out of the way as quickly as is economically sensible. Ultimately the recovery will be led not by governments but by industry, business, and the creativity, ingenuity and enterprise of people. If the measures you take in responding to the crisis diminish their incentives, curb their entrepreneurship, make them feel unsure about the climate in which they are working, the recovery becomes uncertain.

  This is even true of the financial sector, however heretical it sounds to say it. Of course there should be a regulatory overhaul, but most of all there should be systems of national and global supervision that enable us to understand this new financial world and to track it, so that we can intervene where the risk of systemic failure demands it. What there should not be is a wholesale attempt to predict every potential crisis and construct rigid rules in advance to prevent it. That way we risk flattening our financial system, squeezing the innovation out of it, trying to return it to the world of yesteryear, which is neither sensible nor economically productive.

  One result will be that as the banks do less, the state will have to do more. At present, we have gone from irresponsible lending to the other extreme whereby even worthy businesses and customers are refused credit. Indifference to risk should not be and need not be replaced by aversion to risk. For example, credit default swaps and derivatives are not in themselves a bad thing. On the contrary, properly used and understood, they can be immensely helpful. So understand them, supervise and regulate them when necessary, but don’t treat them as a consequence of greed. Treat them as what they are: new financial instruments to be used with care.

  My preference is to approach regulation with caution, not to deny the financial sector a say in putting it right since it was the author of the wrong, but to deal with it as a partner in trying to achieve the correct balance between supervision and regulation, global and national action, and diminishing risk while allowing innovation.

  As for the state itself, and the role of government, that also should be regarded as suitable material for reform, as part of the problem and not just part of the solution. For one thing, the fact that anxiety over the economy has shifted from banking practices to sovereign debt should illustrate how foolish it is to ignore government and state responsibility for what happened.

  The eurozone crisis has not created the sovereign debt issue; it has merely exposed it.

  The truth is that over an extended period of time, the developed world has been moving – but with far too much hesitation – towards reform of their welfare, public service and governmental organisations. Ageing populations, declining birth rates, greater expectations and changing social conditions have been confronting us, ever more insistently, for decades. The economic crisis should have been (and indeed still can be) the moment when, instead of lazily succumbing to the idea that more state spending dressed up as fiscal stimulus is the sole answer, we took the opportunity to accelerate and sharpen reform. Getting value for money in services like health care, opening up competition in areas like education, radically altering welfare so that it becomes a genuine safety net for those who need it and a leg up for those who can and should stand on their own feet, and at every point questioning, reassessing, changing, not so as to abandon social solidarity but to make it effective in a changed world; that is what we ought to be advocating as progressives and embracing as nations.

  Take two examples: procurement and pensions. With the first, there is no doubt we could get far better value if we adopted practices the private sector has long regarded as axiomatic. But we still confuse the aspects of public services that are genuinely different in scope and purpose from private services, with means of doing things common to both, and where they are done either efficiently or inefficiently. Procurement during my ten years came a long way, but it is nowhere near where it should be and could be.

  In respect of pensions, I favour the link between earnings and pensions because of National Insurance contributions. But as a society we need to ask ourselves what we really mean by retirement now. In our developed world, people expect to be still energetic in their late sixties and beyond. Maybe I am an exception, but I would regard the idea of stopping work at sixty as absurd; horrifying, in fact. Now we can change gear, even change job, so it makes no sense to analyse the world of 2010 through the eyes of my grandfather.

  Step by step we have been feeling our way towards a new paradigm of the state and the services it provides, how technology can save money through new ways of working; flexibility in professional demarcation; outsourcing, and so on. But the crisis simply brings home to us the need to speed it up.

  Which brings me to the related issue of deficit spending. Again there is no doubt that in the event of the sharp contraction and credit crunch of 2009, governments needed to stimulate domestic demand. However, there are two important qualifications on such action. The first is that when a historical analysis of stimulus packages is conducted, I think we will find that it is the specific and targeted measures, e.g. for the car industry, that were most effective.

  The second is that the operation of such deficit spending needs to be calibrated with immense care in the circumstances of the global economy of 2010.

  Keynes was a great man
, a revolutionary thinker, a rare example of an outstanding intellectual who could give practical advice. I bet he would be surprised at how his theory is being applied today.

  In the 1930s, the amount of public spending relative to GDP in the UK was 26 per cent, in the USA 19 per cent. In 1950, after a world war, it was 34 per cent and 24 per cent. Today, it is 47 per cent and 45 per cent.

  Of course there was a need to have a fiscal stimulus as demand dropped sharply in 2009. Keynes’ insight was that the state should act to lift demand if the consequence of contraction was a spiral downwards of shrinking growth, cuts to spending, resulting in even less growth and so more cuts. But it was never clear that the effect of 2008 was going to be a savage fall in growth that continued over years. The savage fall was itself partly due to the psychological collapse of the markets after Lehmans, leading to a collapse in confidence, leading to people deserting the market, cancelling investment and retreating to the bunker. What I noticed in 2008–9 was that even those with money were hanging back. Once the market stabilised, they came out of the bunker and recommenced activity.

  The danger now is this: if governments don’t tackle deficits, the bill is footed by taxpayers, who fear that big deficits now mean big taxes in the future, the prospect of which reduces confidence, investment and purchasing power. This then increases the risk of prolonged slump. So yes, fiscal consolidation has to proceed with care. I agree entirely that a precipitate withdrawal of stimulus packages would be wrong. This is a judgement that is, if you like, one of right vs wrong, not right vs left. There is a need to balance the opposite impacts of deficit reduction: less overall demand, because of a contraction of government spending on the one hand; more confidence among consumers and businesses due to reining in the deficits on the other. There is a judgement to be made. But if we fail to offer a convincing path out of debt, that failure in the global economy of 2010, as opposed to that of the 1930s, will itself plunge us into stagnation.

  The other vast difference today is the position of the emerging economies. They are a wholly new dimension and have their own fragility, but essentially they will keep on pushing forward. Ironically, they will continue to embrace liberalisation at the very point we seem to lose faith in it. Their risk is failure to implement their own government reform (e.g. India) and/or that through policies that stagnate growth we curtail the market for their goods (e.g. China).

  So, if we take Europe, what Europe needs is a package of measures: a carefully calibrated deficit reduction plan; the fundamental reform of the European social model, the need for which the crisis has highlighted, not created; regulation that tracks systemic risk but does not suppress innovation and enterprise; and, for the eurozone, the fiscal coordination that a single monetary policy was always going to require.

  But it is a package. Do one part and not another and we risk a worse crisis. In particular, cut the deficit and reduce incentives, or fall short on true structural reform, and the imbalance in measures will cause the package to fail, or at least significantly reduce its effect.

  Consider the issue of Greece or Spain. If they have, as I hope they do, credible policies to sort out, in the former case the deficit, and in the latter the financial health of their banks linked to the deficit, the euro will stabilise if accompanied by far-reaching reforms. The market will recover and the reforms, necessary in any event, will make both countries more competitive. The result will not be to change the fundamentals of the economy the West has been developing over many decades, but to provide adjustment and reform to make them work more effectively.

  What should strengthen this belief is that the new economies now rising up the rankings are doing so precisely by following more open economic policies, and faltering when they don’t. China is opening up, and thrives when it does so. India needs less bureaucracy and less state power, not more. President Lula’s success in Brazil is partly because he continued the anti-inflationary macroeconomic policy of his predecessor Fernando Cardoso. The economies in the Middle East, like Saudi Arabia, are focusing today on competitiveness and removing barriers to enterprise, not erecting them. It would be odd if we moved in the opposite direction. And foolish.

  However, we may recover our confidence faster on the economy than on security. I have set out my explanation for Iraq, how it happened, what went wrong and why I still believe the decision was nonetheless right. Now Afghanistan hangs in the balance in a similar way. As in Iraq, we remove a regime that is hated, and do so with good intentions. The citizens of the country seem to intend the same, but we are thwarted by those with the opposite intentions. Over time, the issue ceases to be who is well intentioned and who is not, and becomes the apparent inability to overcome the forces against us and secure a definitive ‘victory’. So our allies lose heart, our public loses faith, and we ask: When and how will it end?

  This is a picture moving fast; and with each evolution of political or military struggle, things can look different month to month, even week to week. So trying to stand back and see the picture clearly is hideously difficult. I will go right back to the first principles and try to put it in simple, even crude terms.

  What is the nature of the threat? It does not derive from something we have done; there was no sense in which the West sought a confrontation. This is a vital first base in the argument. The attacks of September 11 came to most of our citizens as a shock that was utterly unforeseen. Countries like America and Britain were not singling out Muslims for unfair treatment; and in so far as Muslims were caught up in generalised racism towards those of a different race or colour, such attitudes were on the way out, not the way in.

  The extremism we fear is a strain within Islam. It is wholly contrary to the proper teaching of Islam, but it can’t be denied that its practitioners act with reference to their religion. I feel we too often shy away from this assertion, as if it stigmatises all Muslims. But if it is true – and it is – it has to be faced, not just because it is true, but because otherwise we don’t analyse the problem or attain the solution properly. If it is a strain within Islam, the answer lies, in part at the very least, also within Islam. The eradication of that strain can be affected by what we outside Islam do; but it can only be actually eliminated by those within Islam.

  Most problematically, there is a (natural) tendency for us to believe that the best way to empower those within Islam to take on the extremists is to reach out and meet people halfway. Let me explain what I mean by this, because it is at the root of our present policy dilemma.

  The conventional wisdom is that the Bush/Blair position was wrong because it confronted when we should have reached out. It is accepted by many that Afghanistan was a justifiable conflict; Iraq was not. Iraq then ‘caused’ a schism between the West and Islam, it is said, that made it harder for our allies to get traction within Islam to take on the extremists. Our policy towards Israel is likewise seen as one-sided and that fuels the view of the West as inherently inimical to Islam. Turkey’s rebuff from the European Union is seen similarly.

  President Obama’s speech in Cairo in June 2009, which was a brilliant exposition of the case for peaceful coexistence, marked a new approach, and if he is given the support and partnership he needs, it is an approach that can combine hard and soft power effectively. While hanging tough in Afghanistan, he has reached out. The speech was carefully calibrated. The hand of friendship would be offered, even to Syria and Iran. It was in part an apology, and taken as such. The implicit message was: We have been disrespectful and arrogant; we will now be, if not humble, deeply respectful. But join us, if you will.

  The trouble is: respectful of what, exactly? Respectful of the religion of Islam, President Obama would say, and that is obviously right; but that should not mean respectful of much of the underlying narrative which many within Islam articulate in its politics today.

  Here is where the root of the problem lies. The extremists are small in number, but their narrative – which sees Islam as the victim of a scornful West externally, a
nd an insufficiently religious leadership internally – has a far bigger hold. Indeed, such is the hold that much of the current political leadership feels impelled to go along with this narrative for fear of losing support.

  This is a situation with practical consequences. Iraq and Afghanistan are seen as the West’s battles. With a few notable distinctions, this is not perceived as a struggle for the heart and soul of Islam. Yet the outcome is surely vastly determinative of such a struggle.

  I have my criticisms of Israel and my ideas as to how to make progress, set out in earlier chapters. But leave aside for a moment the details of the peace process. As I started to spend more time in Palestine, I was surprised to find it is often easier to raise money for the ‘resistance’ than to fund the patient but essential process of Palestinian state-building. Israel can and should do more to push forward the necessary changes on the ground – the West Bank and Gaza – that can underpin the peace process. However, it is also true that if the Palestinian cause gave up violence emphatically and without ambiguity, there would be a peace agreement within the year. Not enough voices in the Muslim world are asking them to.

  It is America today that leads the challenge to Iran and its nuclear ambitions. But let us be frank: Iran is a far more immediate threat to its Arab neighbours than it is to America. It is of course a threat to us, too, but this is partly because of what a nuclear-armed Iran would mean for the Middle East, rather than as a direct threat.