by Iain Martin
Brown also started to wonder about the possibility of giving away control over interest rates, in order to prove that a new government would be committed to continuing the fight against inflation. Alan Greenspan, the chairman of the US Federal Reserve and by then already regarded as the world’s most impressive central banker, certainly thought that it was a great idea. In March 1997, just a few weeks before the May general election, Brown met Greenspan on another trip to the United States and sought his counsel.6 Would it be wise, Brown asked the man who would become his guru, to make the Bank of England independent? Greenspan was enthusiastic, and pointed to the success of the arrangement in America where politicians could not interfere in the setting of interest rates. The endorsement of so widely respected a figure helped convince him.
In opposition Brown had been turning this matter over in his mind for months, and discussing it in great secrecy with his young economic advisers Ed Balls and Ed Miliband. If New Labour won the looming election, he was looking for ways to emphasise that he could be trusted to avoid manipulating interest rates for political advantage, something previous governments of both major parties had tried. Granting the Bank of England independence on interest rates would reassure the voters and the markets. The wider City of London did pose a problem for Brown, however much he and Balls knew that it had to be wooed and neutralised as a source of opposition. Labour had been seeking to do this since Smith’s leadership with a series of missions known collectively as the ‘prawn cocktail offensive’, so named because Labour’s shadow ministers would travel to the ‘Square Mile’ and break bread, or consume canapés, with senior City figures. This was designed to emphasise that the Labour leadership was not composed of radical socialists hell-bent on nationalising either the Stock Exchange or the banks.
Despite these efforts, the Presbyterian Brown seemed initially distrustful of the City’s culture. A little like his fellow Scot George Mathewson at the Royal Bank of Scotland, the Chancellor was an outsider in that world and correctly detected the hand of various old-boy networks. If New Labour won power there would have to be changes in the way the City of London and financial services were regulated, in order to make them fit for Brown’s new era. City scandals certainly suggested change was necessary. In 1991 BCCI, the Bank of Credit and Commerce International, the London-based international bank, imploded. Then the historic merchant bank Barings (founded 1762) was brought down in 1995 by the ‘rogue trader’ Nick Leeson. The answer, Brown concluded, was a dose of New Labour modernisation, and a shift to new systems and regulators not dependent on what he saw as the dominance of the old school tie and suspect connections.
On Tuesday 6 May 1997, the new Chancellor made his first move. Less than a week before, Blair and Brown had not merely defeated a tired Tory Party contaminated by allegations of sleaze. They had eviscerated their enemy. New Labour enjoyed a majority of 179, the bedraggled Conservatives were in shock and Brown’s native Scotland was now a Tory MP-free zone. Brown was eager to get going. He wanted his first major announcement, on granting the Bank of England independence, to be a coup de théâtre, and when it came on the Tuesday after a weekend of intense work it certainly wowed the press and impressed the financial markets. It had all been agreed with Blair, at a meeting held on the Sunday after the election in his Islington home as he and his wife, Cherie, packed for the move to Downing Street.7 Blair loved the audacity of Brown’s grand gesture on the Bank of England. Number 10 civil servants who offered to work up papers examining the potential consequences and implications were rebuffed. Blair simply asked Brown if it was the ‘right thing to do’. His Chancellor responded that it was.
On Monday 5 May, Brown squared ‘Steady Eddie’, the Governor of the Bank of England, Eddie George.8 The Chancellor handed him two letters, the first dealing with central bank independence. The chain-smoking George, a Bank of England lifer who joined in the early 1960s, was delighted as it meant a strengthening of powers for the institution he loved. He paid less attention to the second letter.
The other letter would eventually have grave consequences many years later, in the period running up to the financial crisis of 2008. Brown told George that he wanted to remove from the Bank of England its powers to supervise the UK’s banks. At the 6 May meeting Eddie George sought – and believed he had received – assurances that this would not be rushed. He told his staff at Threadneedle Street that he would be fully consulted if Brown proposed any further changes.
Two weeks later, Brown summoned George to another meeting in the Treasury to inform him that he was pushing ahead and would announce legislation the next day. The Bank of England would be stripped of all its powers on banking supervision and a new super-regulator established, on the foundations of the existing Securities and Investment Board (SIB). A spectacular bust-up in Brown’s office ensued, with George raging that he had been betrayed. In the car on the way back to Threadneedle Street, George began dictating a resignation letter. It seemed as though Brown’s modernising zeal, which was meant to show how New Labour could be trusted on the economy, was going to result in the resignation of a widely respected Governor of the Bank of England only three weeks into the new government. Blair was appalled. Senior civil servants in Number 10 and at the Treasury – including the Permanent Secretary Terry Burns, who Brown was keen to push out – attempted to calm the situation. Eventually a compromise was brokered that would allow both George and Brown to save face, with Alistair Darling, the emollient chief secretary to the Treasury, smoothing the way.
The eventual outcome was an awkward division of responsibilities on banks and financial stability. The SIB, or the Financial Services Authority as it became, would do the day-to-day regulation, which meant checking that the banks’ products complied with consumer rules and ensuring that bank bosses were running their affairs in line with the rules laid down by the regulator and set by Parliament. But the Bank of England would after all retain overall responsibility for the loosely defined stability of the financial system. Government would take an interest, obviously, and the new three-way set-up was dubbed tripartite regulation. The risk was surely that this political fudge might create the scope for a dangerous amount of confusion. If one or more large banks were ticking all the boxes and apparently complying with every one of the FSA’s rules, but still taking big ill-defined risks that might somehow eventually threaten wider financial stability, whose job exactly was it to spot this and intervene? It was never completely clear.
In late 1997 what seemed to matter more was that Bank of England independence was very popular. City and big business leaders in particular were reassured that they could trust New Labour after all, and the changes on setting interest rates were widely welcomed by many prominent Tories, shell-shocked after their defeat. The changes to regulation of banks were more problematic. Ken Clarke, the Conservatives’ recently departed Chancellor, accused Brown of acting too hastily on creating the FSA.9 Lord Lawson, Thatcher’s reforming Chancellor, warned that while he approved of Bank of England independence, the shift on regulation was a mistake. When the Bank of England had banking supervision removed from its control and handed to Brown’s new FSA, the bank would lose its clout. The danger was that the City of London and banks would no longer take its warnings seriously.
The old arrangements had been far from perfect – as various scandals down the decades demonstrated – but it was said that an effective governor could have an impact merely by raising an eyebrow. The City, and the banks, feared his displeasure and tended to look to Threadneedle Street for guidance about the condition of the economy and what was deemed acceptable behaviour. Under the new tripartite set-up, the FSA would be stationed away from the traditional heart of the City in an office down the river in Canary Wharf. Howard Davies, who had been a deputy governor of the Bank of England under Eddie George when Labour arrived in office, was given the task of establishing the new regulator and finding a way to make it work.
In the Commons, the Conservative Peter Lilley, then t
he new shadow Chancellor, one of seven Tories who held that post while Brown was at the Treasury,10 expressed worries about the way the old set-up was being dismantled. On 11 November 1997 he told MPs: ‘We have no objection to the objective of trying to bring greater simplicity and one-stop shopping to the business of financial regulation, but we fear that the Government may, almost casually, have bitten off more than they can chew. The process of setting up the FSA may cause regulators to take their eye off the ball.’
Brown swept aside such concerns. At the despatch box in the Commons he dealt with critics in the manner of someone driving a steamroller armed with a machine-gun. Over the next few years he would perfect this approach. Those opponents not hit by a slew of statistics spewed out rapid-fire style would instead be flattened with extravagant rhetorical claims about the brilliance of New Labour’s economic stewardship. The economic weather was certainly sunny. As the old century gave way to the new, the UK was recording impressive annual growth numbers. It had started under the previous government, but under Brown progress continued and confidence rose. UK GDP grew 4.2 per cent in 2000, 2.9 per cent in 2001, 2.4 per cent in 2002 and 3.8 per cent in 2003.11
In this boom financial services were also prospering. In fact, the success of banks and other financial firms was one of the drivers of the economy’s expansion. This created a slight problem for the Chancellor. The question of how to handle the British banks was initially awkward. In opposition before 1997 he had been keen to present himself as a consumer champion and friend of the disgruntled customer who was tired of being ripped off by rogue elements in the financial services industry. He had been particularly adept at using tabloid newspapers to communicate this message. In 1997 Brown was still minded to encourage much more competition so that the big banks which dominated the market faced a challenge from smaller operators, to the benefit of consumers. In 1998 he appointed Don Cruickshank, a businessman who went on to chair the London Stock Exchange, to prepare a report on how it might be done.
Yet even as Cruickshank was finalising his report on ‘Competition in UK Banking’, the takeover battle at NatWest was approaching a dramatic climax and the industry was heading for much less competition, not more. In mid-February 2000 the Royal Bank beat the Bank of Scotland and swallowed NatWest. Just a few weeks later, in March, the Cruickshank report was published. It suggested the FSA should actively promote much greater competition and stated that banks should be prevented from becoming too big. With the Royal Bank at that moment taking over NatWest it was all a little embarrassing. Brown knew Fred Goodwin, the boss of the newly enlarged Royal Bank, and liked him. Brown said in his Budget speech days later he would implement Cruickshank’s ‘main recommendations’, but some in the upper echelons of the Treasury thought this impractical. Banks were doing well amidst the burgeoning boom and as they grew in size they became even more useful sources of employment and tax revenues. Steve Robson, the Second Permanent Secretary at the Treasury, who was also managing director of the government’s Finance and Regulation Directorate, was credited by some with leading the effort against implementation of Cruickshank’s recommendations.12 Robson later joined the board of RBS.
Whoever killed it off, the Cruickshank report was given a quiet burial against a backdrop of booming banks. A ministerial colleague from that period thought Brown’s reluctance to force more competition understandable in the circumstances: ‘Here in the banks you had the rise of these great national champions, something which, a few big manufacturing businesses aside, we had for a while lacked in this country. I suppose Gordon thought, why knock it?’
Bank profits really were powering ahead now. In 2003 Barclays’ profits before tax were £3.8bn, up 20 per cent from £3.2bn the previous year, while those of Lloyds climbed 66 per cent to £4.3bn. Another star performer was the Royal Bank of Scotland. In 2003 it made a then startling £6.2bn before tax, an increase of 29 per cent on the previous year. Not everyone was impressed. Vince Cable, the Liberal Democrats’ Treasury spokesman, thought that these profits were being made on the back of exploited customers: ‘It is hardly surprising that banks are making such huge profits when consumer debt is approaching a record of £1 trillion,’ he observed in February 2004, when RBS announced its record figures. At £1 trillion, total personal debt still had quite a way to go. This was all the more remarkable considering that consumer debt – made up of mortgages, overdrafts, loans and credit cards – had been below £500bn as recently as 1996.
This was only a problem, of course, if there was any prospect of cheap credit ending at some point, but that wasn’t deemed particularly likely. Even though interest rates might go up a little, the environment was benign, with low inflation. Consumers could afford to splurge. Could it really be that the end of boom and bust was in sight? Used remorselessly, the claim – ‘no return to boom and bust’ – became Brown’s catchphrase as quarter after quarter – with only a few minor deviations – the economy carried on growing strongly. On Monday 27 September 2004, in his speech at the Labour Party conference, he declared that the UK was: ‘No longer the most inflation-prone economy. With New Labour, Britain today has the lowest inflation for thirty years. No longer the boom-bust economy, Britain has had the lowest interest rates for forty years. And no longer the stop-go economy, Britain is now enjoying the longest period of sustained economic growth for 200 years.’
In these circumstances, it was deemed safe for the government to start spending much more on public services. In 2000 to 2001, annual total UK government spending was £341.5bn. By 2007 to 2008, as the financial crisis got under way, the government was spending £583.7bn. During this period some commentators attempted to challenge the orthodoxy and suggested that the economic miracle of the moment might be a mirage, but they didn’t get very far. New Labour easily won another landslide majority of 167 in June 2001, squashing Tory leader William Hague in the process. Subsequently the party secured a much reduced but still healthy majority of 66 in May 2005 in Tony Blair’s last election as Labour leader.
It was hard to get a hearing for scepticism when house prices continued their giddying rise in a manner that was so gratifying, at least for those who already owned houses or could afford to buy. The leitmotif of this period was the emergence of the property show on television. Location, Location, Location – the movement’s signature show – first aired in 2000, with its upwardly mobile presenters scouring the country for properties on behalf of the aspirational and ostentatious. Yet somehow the show Grand Designs, which first aired in 1999, managed to eclipse its rival in terms of boom-time smugness. If the worthy intention was to celebrate good design and highlight beautiful houses that were being built or restored imaginatively, it tipped over at points into a parade of preening consumerist self-obsession and interior design-driven dottiness. The British had long made a fetish of property, compared with the more cautious Germans or relaxed French, but it was as though the obsession with buying and selling houses was turning into a national mania, or illness.
In June 1987, when Margaret Thatcher won her second landslide election victory preaching the virtues of a property-owning democracy, the average house price in the UK had been £45,809; in April 1992 when John Major beat Neil Kinnock it stood at £64,509 and in May 1997, at the time of Blair’s victory, it was only a touch higher at £68,085. Then under Brown’s stewardship as Chancellor it soared as the economy raced ahead. By August 2007, and the first public stirrings of the credit crisis, the average house price in the UK was £199,612. A year later it was £174,241. By August 2012 it had fallen back to £160,142.13
Early in the first decade of the twenty-first century, Christopher Fildes, City sage and Fleet Street veteran who had witnessed many booms, and subsequent busts, was notably concerned about house prices. In May 2002, on the fifth anniversary of Brown’s decision to grant the Bank of England independence, he issued a warning in the Daily Telegraph: ‘The most visible signal of trouble ahead (in Britain) comes from house prices, which are having a boom of their own.�
�� The Bank of England’s Monetary Policy Committee, dedicated to keeping inflation at 2.5 per cent, focused on studying retail prices and did not include house buying, even though the Nationwide Building Society reported that house price inflation was running at 16.5 per cent. This was not a cause for excessive concern, the Bank of England said. ‘Now that is worrying,’ said Fildes. ‘It is true that the committee was set to aim at retail prices, not house prices, and was told to ignore mortgage payments. All the same, anyone who can leave the cost of housing out of the cost of living must have bought himself a tent.’
Fildes cited asset price inflation. A bubble was being blown and if it burst it might send the economy into recession. Perhaps surprisingly, Brown showed no sign of being perturbed by these developments. Cautious by inclination, he was normally not a naturally reckless type. He was, noted colleagues, obsessive when launching initiatives or planning a Budget, asking how will this look in tomorrow’s papers and what if this doesn’t work? What then could have caused him to believe that boom and bust, an observable cycle in human affairs, had been ended? A close colleague of Brown’s from that period pins some of the blame on his advisers: ‘Gordon listened to Ed Balls a lot.’ Another agrees: ‘Ed Balls had a lot of theories about how the world had changed and how policy makers, including him and Gordon, had solved some of the big problems that had bedevilled the West. It suited Gordon to believe it.’
