The upturn in his political fortunes was accompanied by the rewriting of almost every economic axiom he had preached for more than a decade. His ‘golden rule’, which said borrowing should never rise above 40 per cent of GDP, had long been bent. In late October, Alistair Darling officially announced it was being altogether abandoned.14 The Chancellor Brown who once extolled ‘prudence’ was now the Prime Minister Brown who toured the world arguing for a global spending spree financed by massively increased borrowing to sustain the economy. The man who once eviscerated opponents for the ‘black holes’ in their plans now promoted unfunded tax cuts as the ‘fiscal stimulus’ that would save the world. The leader who procrastinated for months over nationalising one relatively small northern bank now staked hundreds of billions on saving several of the biggest banks. This Moses was taking the tablet of stone and rewriting all the economic commandments. The man who put Adam Smith on the banknotes was a born-again Keynesian. As the impossible and the incredible became almost overnight the inevitable and the orthodox, there was a stunning inversion of many of the original economic maxims of New Labour. He championed measures that he had once taught his party were economic lunacy and political suicide.
Justifying this dramatic shift in a speech to the CBI in November, he argued that ‘leaving behind the orthodoxies of yesterday’ was the only way to avoid a repeat of the Great Depression. ‘A new approach is needed if we are to get through this unprecedented global financial recession with the least damage to Britain’s long-term economic prospects.’15
He took a similar message abroad, telling an audience of panjandrums in New York: ‘The cost of inaction is greater than the cost of no action.’16 This speech was funny. It was fluent. He was confident enough to speak without notes. He quoted presidents, economists and the poet Shelley as he developed his theme that extraordinary times demanded extraordinary action. When he took questions from the audience, one of them addressed him as ‘Your Excellency’.
The reborn Brown took the breath away, especially of the Conservatives. To their collective bewilderment, he was presiding over the mother of all economic crises and yet closing the opinion poll deficit as voters leant back to Labour. The Tory lead shrank to low single figures, falling to a mere three points in one poll in mid-November. The Conservatives fluttered with anxiety when their lead shrivelled to just a single point in a poll at the end of that month.17 David Cameron struggled to look relevant as banks crashed and markets convulsed while Brown travelled the world looking decisive and statesmanlike. The Conservatives feared a snap election and started to put together a manifesto.18 The Tories’ youth, inexperience and privileged backgrounds also worked against them during this period. George Osborne, the Shadow Chancellor, was trapped in a poisonous dispute about an encounter with Oleg Deripaska, a Russian metals magnate, during an August holiday at the Corfu villa of Nat Rothschild. Osborne’s other dangerous liaison was with Peter Mandelson, also present in the eastern Mediterranean over the summer. A version of their private table talk at a taverna was leaked by Osborne to Martin Ivens of the Sunday Times. Osborne claimed plausibly that Mandelson ‘dripped pure poison’ about Brown.19 It was the Shadow Chancellor who got served with the strychnine cocktail for crossing the Dark Prince. Rothschild retaliated and Osborne was ensnared in a thicket of accusation and counter-claim with his Oxford contemporary about who said what to whom about a donation to the Tory party from the Russian tycoon.20 Consorting with a billionaire on his super-yacht jarred with the mood of national austerity. More damage was done by photos of Osborne and Rothschild as undergraduates, including one of Osborne in plus fours at a shoot and another of him in the Brideshead rig of the Bullingdon Club. The Tory responses to the financial crisis were inconsistent and unconvincing. More than half of the public thought that Brown was the right leader to deal with a recession while less than a third favoured Cameron.21 Voter scepticism about the callowness of the Tory team worried Cameron so much that he would soon recall to the Opposition frontbench the 68-year-old former Chancellor, Ken Clarke.
Striding on and off aeroplanes for international summits, Gordon Brown looked like a man who had finally found his vocation as a leader and a global stage on which to perform. Yet his feet were unsteadily balanced on a very thin tightrope strung over a chasm the bottom of which could not be seen. The financial crunch was now biting deep on the real economy. Unemployment surged. House prices tumbled.22 Retailers – Woolworths being one sentimentally mourned example – went broke. This was the bleak context for the Pre-Budget Report – in reality, an emergency Budget – which was unveiled on Monday, 24 November. The Prime Minister and Chancellor quarrelled in advance about the extent to which they could afford to spend to avert a depression. The Treasury did not agree that every rule in the fiscal book could be torn up. Officials were increasingly alarmed by the size of the deficit, which they could already see soaring in excess of £100 billion in the coming year. They were also apprehensive about the fragility of the currency as sterling slithered towards parity with the euro. ‘Gordon would have gone for a bigger stimulus, but he was resisted by the Treasury,’ says John McFall, the Labour chairman of the Treasury select committee. ‘They got very frightened about the amount of red ink.’23 One Treasury official describes the arguments between Prime Minister and Chancellor as ‘comical’ because of the way roles were reversed. To Brown’s demands for more spending, Darling would reply: ‘Where is the money coming from?’ This was precisely the line Brown used to take as Chancellor when he was rejecting spending demands from Tony Blair.24 They compromised on a package which was less than Brown wanted but larger than the cautious Treasury regarded as prudent.
There was also a long and ferocious internal argument about the best way to put money in the pockets of voters. Brown, backed by Ed Balls, James Purnell and most of the Number 10 Policy Unit, wanted to make tax credits more generous. Darling, supported by his officials at the Treasury and Jeremy Heywood at Number 10, argued that it would be technically simpler, get quicker results and produce headlines everyone could understand to announce a cut to VAT. That battle was won by the Chancellor.25 The main measure was a cut in VAT from 17.5 to 15 per cent for the next thirteen months. The cost was £12.5 billion a year. Reaction was mixed. Frank Field scoffed that ‘it would be better to throw the money up in the air in Birkenhead market.’26 Digby Jones, the recently departed Trade Minister, was another sceptic of the value of ‘two and a half per cent off five quids’ stuff from Marks and Spencer’.27 It had a ‘negligible impact’ on a crucial sector like the car industry because dealers were already offering hefty discounts.28 The presentation was undermined by the accidental publication on a Government website of an internal Treasury discussion paper about a later claw-back by hiking VAT to 18.5 per cent. This fomented the suspicion that the Chancellor’s figures were fudged to mask the growth of the deficit. The press was almost unanimous in depicting it as a gamble for which the country would pay later. The Independent: ‘Brown goes for broke’.29 The Guardian: ‘The £21 bn tax gamble’.30 The Daily Telegraph: ‘Middle-class tax time bomb’.31 ‘Into the red’ was the interpretation of The Times,32 which stressed the explosion in borrowing. George Osborne recovered some of his confidence and hit an exposed nerve when he jibed: ‘In the end all Labour Chancellors run out of money and all Labour governments bring this country to the verge of bankruptcy.’33
It was certainly true that this was the definitive end of more than a decade of healthy growth, rising incomes and low unemployment built on the property boom, finance, cheap labour from migration and public spending. When headlines interpreted it as the death of New Labour, Mandelson – in his role as the keeper of the Blairite flame – was sent out to argue otherwise. So did Brown when he rang round newspaper editors. There was no denying that it was the last rites for the years of easy prosperity that had underpinned New Labour as an electoral project.
The opinion polls the following weekend indicated that the Conservatives were gaining again. Voters
were not as impressed by the VAT cut as they were frightened for their future livelihoods. Brown’s personal recovery stalled and then reversed as the recession closed its icy fingers around the heart of the economy. Peer Steinbrück, the Social Democratic Finance Minister of Germany, scorned him for a ‘breathtaking’ switch from laissez faire capitalism ‘all the way to crass Keynesianism’ and forecast that Britain would be left with a pile of debt ‘that will take a whole generation to work off’.34 Brown reacted in characteristic fashion. To his staff, ‘GB sent out a barrage of e-mails demanding a history of the economic philosophy of the SPD.’35 Nicolas Sarkozy then disdained the British VAT cut in a television interview. ‘That will bring them nothing,’ scoffed the French President, adding that the British deficit could ‘ruin the country’.36 The anger this provoked in Downing Street surfaced when Darling next met his French counterpart, Christine Lagarde. ‘Why did your President have to comment on my VAT reduction?’ he demanded. Lagarde responded with a Gallic shrug: ‘We’re not convinced that kind of cut is going to work when prices are going down anyway.’37
The French later partially imitated the VAT cut and the Germans embarked on a fiscal stimulus which was actually larger than the British one. But at the time these criticisms from abroad made the Tories seem less internationally isolated. They were emboldened to make a definitive issue of the ballooning size of the deficit, unveiling one particularly potent poster depicting a baby saddled with debt for the rest of its life. They flipped their economic policy when David Cameron ditched his previous pledge to match Labour spending levels. The Tory leader rediscovered virtues in Margaret Thatcher, the woman hitherto largely airbrushed from history in his speeches. Cameron and Osborne made themselves champions of fiscal conservatism, opening up the biggest divide on economic policy between the parties for more than a decade. Cameron made the break complete in a speech at the London School of Economics in early December in which he attacked Brown for a ‘reckless’ policy of ‘spend now, forget the future.’38
In the Commons the next day, the Leader of the Opposition taunted the Prime Minister about the failure of the bank bail-out to unfreeze credit markets. This provoked Brown into a Freudian slip. ‘We not only saved the world …’ he said and paused for a fatal heartbeat to look down at his notes.39 He meant to say ‘the world’s banks’. His attempt to correct this hubristic-sounding slip was drowned by the tidal wave of hoots and jeers from his opponents. The delirious Tories slapped their thighs and threw their order papers in the air. Many Labour MPs openly laughed. David Miliband gagged with the effort of not joining the chortling.
When the Chancellor began his working day at the Treasury, he routinely asked two questions: ‘How bad is it today?’ and ‘Why is this not working?’40 The bank bail-out had prevented a catastrophic implosion of the entire financial system, but it did not succeed in sustaining lending to home owners and businesses. There were multiple reasons for this. Nearly a third of borrowing by British consumers and companies during the bubble had come from overseas, notably American, banks. They were drastically reducing lending or completely withdrawing it. The British banks – traumatised and still deeply mistrustful of each other – were clinging to whatever capital they had. That hoarding was made worse by the Government’s initial line, taken for political reasons, that they did not intend to hold stakes in banks for long. Those banks borrowing from the government had to pay 14 per cent, a very high premium. ‘Therefore there was a very powerful incentive built in for the banks not to lend but to conserve their resources to pay back the Government as fast as possible.’41 During the frantic negotiations over the bail-out, the banks had not been nailed down to guarantees that they would sustain lending. The agreements ‘had to be pretty generalised because you were doing this at speed’, Darling later argued. ‘To enter into a detailed contract wasn’t possible. You cannot do all that detail over a weekend.’42 The banks were being pulled in opposite directions by the authorities. The Bank of England and the Financial Services Authority pressed them to unwind bad risks and rebuild their balance sheets. At the same time, bank executives were summoned to a string of Downing Street ‘summits’ to exhort them to keep lending. While the Prime Minister made tough noises about the banks for public consumption, the Chancellor and Business Secretary were privately telling bankers they sympathised with their predicament.43 Peter Mandelson, who was spending a lot of his time with bankers, told fellow ministers that they were like men who had ‘just suffered a massive heart attack’.44 Cabinet ministers admitted that the Government was not speaking to the bankers with ‘one voice’ and they were being ‘asked to do two contradictory things’.45
Radical measures designed to boost the economy sometimes had an unexpectedly negative effect on consumer confidence. In the space of just eight weeks, the Bank of England slashed the base rate from 5 to just 2 per cent, its lowest level since the Prime Minister was born in the 1950s. The Cabinet were shown polling suggesting that the public became deeply scared about the economy when the Bank made these dramatic reductions. According to one minister at the presentation: ‘It made people go: “Oh fuck, this really is serious.” ’46
As the base rate approached zero, that left one unprecedented and uncertain measure. ‘Quantitative easing’ was the unlovely jargon for what was colloquially known as ‘printing money’. When this was first suggested, Brown recoiled in horror. Publicly and privately, he ruled it out.47 ‘Printing money’ conjured up the spectre of the hyper-inflation in Robert Mugabe’s Zimbabwe and in the Weimar Republic during the rise of Hitler. ‘He feared the political fall-out,’ according to one minister close to Brown.48 Yet he was now desperate enough to be secretly contemplating this leap into the unknown. When he left London for his Christmas break in Fife, he took with him holiday reading composed of a large number of papers on quantitative easing.49 The Treasury was also becoming so alarmed about the economy that it began to seriously consider this extraordinary step ‘over the turn of the year’.50
Ex-leaders can often tell truths that incumbents dare not. In the New Year of 2009, Tony Blair broke his silence about the crisis. The former Prime Minister, never very economically literate, did not have a prescription for curing the world. What he did offer was a candid observation about the limitations of politicians and their advisers when confronted with such seismic events. ‘We live in an era of very low predictability,’ observed Blair in a speech in Paris. The ‘best and most honest answer’ about how the future would unfold was ‘we don’t know.’51 The closest that Gordon Brown came to admitting this was in a little-reported speech at the end of the same month at the Davos Summit. ‘This is the first financial crisis of the global age,’ he said. ‘And there is no clear map that has been set out from past experience to deal with it.’52 To audiences in Britain, he could not publicly admit that he was driving in the dark. His self-projection was as the man with the plan even if the truth was that he was a leader busking it through several different plans which were subject to constant revision.
He had over-sold the October bail-out as the definitive answer to the crisis. He said then that he would not ‘come back with another partial proposal and then another partial proposal’.53 Just three months later, the Government was forced to do exactly that. The announcement of huge losses at two of America’s biggest financial institutions triggered a fresh stampede out of shares in British banks on Friday, 16 January. A panic about Barclays saw a quarter of the value of its shares wiped out in just one hour of frenzied trading. That weekend, Alistair Darling, Paul Myners and their senior officials camped out at the Treasury again for another long weekend of negotiations with bank chairmen and chief executives. Left in the arsenal were the last resorts of entirely nationalising the banks or creating a state-owned ‘bad bank’ to buy up toxic assets. At a high-pressure, five-hour discussion on Sunday night which ‘went through a wide range of solutions’ the Government settled on a hybrid, multilayered scheme.54 Gordon Brown touched down at Heathrow at four on Monday mo
rning, having snatched some fitful sleep on a flight back from Jerusalem while Jeremy Heywood worked on how they would present this latest rescue.55 By five, Brown was back in Downing Street for a meeting with Darling to finalise what would become known as the ‘second bail-out’. At nine on Monday, 19 January, Prime Minister and Chancellor appeared at a joint news conference to unveil their latest attempt to put a floor under the banks. The central feature was taxpayer-backed insurance schemes to guarantee new bonds issued by banks and allow them to cap losses on their toxic assets if loans went bad. This approach appealed to the Government because ‘it didn’t require us to end up owning the assets.’56 Both Prime Minister and Chancellor looked absolutely shattered. Brown had eye bags on his eye bags. His voice was like gravel as he called them ‘comprehensive measures’ for ‘extraordinary times’. He expressed fury that the full scale of RBS’s past recklessness was only now coming to light. Several times, he said: ‘I’m angry.’57
There was nothing like the political consensus in support of this scheme that there had been behind the October bail-out. Vince Cable thought Darling was ‘really rather shamefaced’ when the Chancellor appeared in the Commons and had to ‘acknowledge he was going to have to help the banks all over again and this time in a much more questionable form’.58
The Tories demanded that the Chancellor come clean about the risk. That rather missed the point: the problem was that no-one, including the banks, was sure of the exact extent of the bad loans on their balance sheets. The Government was navigating in darkness. ‘We don’t really know whether this will work,’ one senior member of the Cabinet told me. ‘Alistair is just hanging on for dear life.’59 When this bail-out, the earlier one and further measures were accumulated, the sums committed to supporting the banks rose to the highest in the G7. The full taxpayer exposure to the banks could only be guessed at, but reasonable estimates put the upfront costs at a minimum of £289 billion, more than the £203 billion the financial sector had paid in taxes in the five years before the crunch. The total exposure could be as high as £1.3 trillion, roughly equivalent to the value of the whole British economy for a year.60
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