It became clear over that weekend that a major banking collapse was imminent. On the Sunday morning I was invited on to the Andrew Marr programme to discuss the Sunday Times article and it emerged for the first time that our suggestion of partial nationalization was now under active consideration. RBS, then the world’s biggest bank in balance sheet terms, and HBOS were close to collapse, with worthless shares and extreme difficulties in raising inter-bank lending. I learned a few days later, in a meeting with the Governor, that the banks had collectively reached the point of being unable to borrow overnight. They were twenty-four hours from collapse, such was the loss of confidence and trust in them. The next twenty-four hours involved a constant round of media interviews, on the one hand stressing the need for decisive government intervention, with de facto nationalization, while on the other trying to help calm people’s panic about their own bank accounts. In the event the government and the Bank of England acted decisively, with guarantees for inter-bank lending and recapitalization through the acquisition of shares to replenish capital. RBS was in urgent need of capital, as was HBOS, and via a hastily arranged shotgun marriage between the relatively healthy Lloyds and HBOS, Lloyds was also drawn in.
I was called in by the Chancellor on Monday morning, separately from George Osborne, to have the policy explained. This seemed cosmetic because the details were in the morning newspapers and I had been touring the television studios and carrying out pavement interviews in the City since 7 a.m. But there was more to the meeting than formality: Darling was anxious to have cross-party agreement since this was a national emergency. I had no problem in principle but, since I and my party were often accused by the right-wing press of being in bed with Labour, it was important to be sure that the Conservatives were also on board. They were, at least for the next few days, until they sensed that cross-party unity was helping Labour.
That afternoon I publicly endorsed the package in Parliament, stressing that the rescued banks could not be left to act in the interests of failed management and the remaining private shareholders but must act in the taxpayer’s interests. The government had some suspiciously vague agreements on new lending and bonuses which would emerge later as a major weakness. But in the short run our role was to help make the case that leading banks could not be allowed to collapse and that de facto temporary nationalization was the correct response to such a banking crisis, as had been deployed earlier in Sweden, Korea and Israel. The Tories agreed, uncomfortably, and only John Redwood seemed to have a coherent alternative view.
Drafting The Storm over the summer had already given me a crash course in the subject matter and this helped to elevate me – sometimes to my alarm – as one of the leading ‘experts’ of the crisis, alongside Robert Peston of the BBC. Nick Clegg delegated to me the response to the crisis and I had the satisfaction of seeing the Lib Dem line holding its own in the news bulletins and press comments.
There was a succession of complex sub-plots, each of which dominated the agenda for a while. Ideally, a considered response was needed, but an almost immediate media reaction was required in order to be, and to stay, in the story. There was a lot of skating on thin ice. I had broadly endorsed the HBOS–Lloyds merger on national interest grounds, though it was clearly a questionable deal for Lloyds (which they nonetheless snapped up gladly). Going back to my lunch with Sir James Crosby five years earlier, and even before, I had sensed, and occasionally said, that HBOS was a bad bank in the style of Northern Rock. I was therefore seriously thrown when a Scottish campaign was launched to rescue HBOS from the clutches of the Sassenachs and to avert the threat to jobs in Edinburgh. As with RBS, which had, however implausibly, marketed itself as a great advertisement for Scottish banking, there was a nationalistic prickliness about the threat to ‘Scotland’s banks’ (even though the RBS balance sheet was fifteen times the size of the Scottish economy – a small country with a big bank attached to it). The able new leader of the Scottish Lib Dems, Tavish Scott, wanted to run with the issue by pursuing a separate, Scottish buyer for HBOS and I felt politically obliged to back him. There were also genuine concerns at a UK level about the competition policy implications for the mortgage market and among Lloyds’ shareholders about the way in which they had been shafted. I organized a U-turn and led the troops in Parliament to vote against the merger. Such is the difference between a commentator and academic, and a politician.
The minutiae of the banking crisis were rendered less important by the growing debate about macroeconomic effects and the growing recession. The government had been very slow to acknowledge the risks of recession and the consequences of rising unemployment for policy and for the budget deficit. The 2008 Autumn Statement was a masterpiece of self-deception (or deceit). My team and I argued strongly for an active policy response to fight the risks of deflation and rising unemployment. We defended the aggressive monetarism of the Bank of England’s policy of lowering interest rates, followed later by quantitative easing. We also supported the government’s willingness in principle to provide a modest fiscal stimulus – albeit in a way, the VAT cut, that was unconvincing and wasteful.
We had been concerned from the outset of the crisis about the collapse of the construction industry. Having spoken at several property industry conferences, I was left in no doubt as to the scale of the crisis in commercial property, private construction companies and housing associations, with a big overhang of unsold property and mounting construction industry unemployment. Our response had been to advocate the acquisition of unsaleable new dwellings for rental, a large-scale programme of social housebuilding to replace the failed model of quotas of social housing on private development sites, and emergency action to head off large-scale repossession. The government acknowledged the pressure to act on these fronts but was infuriatingly slow in implementing decisions. It was only a year after we had urged action, and six months after a commitment had been made to new social housing, that serious money began to flow into the sector.
As Britain, like America, developed an aggressive monetary and fiscal response to the crisis, I found myself agreeing with the broad thrust of government policy while disagreeing on a lot of specifics. The Conservatives’ response to the crisis was poor by any standard: unremittingly negative, frequently changing, and seemingly devoid of any economic content. But I had already learned to appreciate that Osborne and Cameron were politically smart. They were quick to pick up the anxiety and resentment of elderly savers about low interest rates and managed to bury their earlier failure to spot the dangers of mounting household debt, deliberately confusing the issue with the emerging problem of government debt. I heard at second or third hand that George Osborne was relaxed about being a poor shadow Chancellor if he was going to become the real one on the back of the government’s unpopularity.
Our own dividing line with the government was over its passive approach to the banks. It became increasingly clear that the Treasury (though probably not No. 10) wanted an arm’s length relationship, as far removed from nationalization as was possible given the large injection of taxpayers’ money. The senior management of the semi-nationalized RBS and Lloyds were getting contradictory signals from the regulator – to build up capital – and the government – to lend more to solvent companies – and their instincts were to go with the former. Corporate Britain was being starved of capital.
Christmas 2008 was a victim of the need to get The Storm to the publishers on time for a launch in April. A lot had happened since the summer and there was a lot of writing and rewriting to be done. Rachel, as in the summer, was extraordinarily patient and typed up the later chapters as I wrote them.
The next six months involved more intense, relentless activity than I had ever previously known and I learned to appreciate the advantages of a strong constitution and a loving wife and family. I had begun to achieve serious celebrity status on the back of the economic crisis, even more than at the end of my period as acting leader. Desert Island Discs, which went out in January 2009,
was a success, reinforcing the idea that I was a human being instead of (or as well as) an economic nerd. There was a stream of hon-ours: Parliamentarian of the Year from Channel 4, together with similar recognition from The House Magazine, Oldie magazine, GQ, the CAB and others. Flattering as these occasions were, what mattered to me more was the hard graft of business conferences, provincial tours, parliamentary speeches and media interviews, slowly building up credibility for myself and my party through a network of contacts and feedback from the grass roots.
I was conscious at this stage of receiving considerably more publicity and favourable comment than my party leader. With a lesser person this would have caused considerable tension. But Nick recognized that issues would arise later – as happened with the Gurkhas and the expenses scandal – when he could find his own voice and popularity.
The publication of The Storm in March 2009 was well timed, coinciding with a surge in both public interest and public anxiety, as well as Gordon Brown’s successful G20 summit. The book attracted extensive and broadly favourable reviews, even from those, like Dominic Lawson and Simon Jenkins, who were not instinctively well disposed to my politics. The book achieved my objective of providing a clear, easily accessible guide to the different dimensions of the financial and economic crisis: global and local; past, present and future; economic and political. My greatest satisfaction was that after publishing, I estimated, two million words in my lifetime so far, which had languished in almost total obscurity, I had at last produced a few thousand words that people wanted to read. My self-confidence as a writer grew when I was asked to write a weekly column for the Mail on Sunday. My late father must be chuckling in his grave that I am writing for the Sunday sister of his favourite newspaper.
On the back of the book was a degree of public interest in serious discussion beyond my wildest imaginings. Having spent a lifetime struggling to attract a free audience of a few dozen, I was amazed to discover that hundreds would come to a forty-minute talk, plus Q&As, as happened in Oxford, Bristol, Ely and London and at the Yvonne Arnaud Theatre in Guildford. I was treated to a full and appreciative house of almost a thousand at a lecture in the City Guildhall, attended by bankers about whom I had been less than complimentary. At the Hay Festival, 1300 people were packed into the big tent. But it was good, and necessary, to be brought down to earth occasionally, as when I spoke to a multi-ethnic audience of 200 teenagers at a college in Uxbridge, who patiently waited when I was forty-five minutes late, listened politely, and then peppered me with numerous questions centring on the two main political questions: ‘why should we vote at all?’ and ‘why should we vote for your lot?’. It was also good and necessary to be forced out of my economic comfort zone to deal with public wrath over MPs’ expenses, and in particular to face those two heated Question Time audiences in Ealing and Salisbury.
With celebrity status came, I was told, an ability to move markets. I found this difficult to credit, but was assured by those on the receiving end that my comments had come close to bringing down leading banks, particularly Barclays. I had calls from Stephen Hester of RBS and an especially agitated John Varley at Barclays who worried that my critical remarks about Barclays Capital’s lavish bonuses and tax avoidance activities were destabilizing the share price, which was then highly febrile. The calls were followed by a fraught discussion in a parliamentary committee room in which Mr Varley and his team ran into a stream of tough but fair questioning led by Matthew Oakeshott.
A stream of whistleblowers also came to me to expose past goings-on in Barclays, RBS, HBOS and the FSA. After satisfying myself that they were genuine (we had one hoax) and not simply settling old scores, we released their testimony to the press. It was clear that there had been some appalling abuses taking place in the banks. But with the unrolling of the MPs’ expenses scandal, there was a sharp fall in the market for MPs, even those untouched by the scandal, chiding the banks for their past excesses. As the City A.M. newspaper proclaimed in its headline: ‘Now THEY can’t lecture US’.
After the distraction of being almost dragged to the Speaker’s chair in the wake of the expenses scandal, I have returned to the task of defining an economic vision, and wider policy framework, for a centre-left party which is no longer on the periphery or a source of ridicule but now has a sporting chance of breaking through and becoming a major force. The most obvious way in which a breakthrough would occur is that at the next General Election, or the one after it, it will become apparent that the traditional binary, two party, system has largely broken down.
There is already a fragmentation of political loyalties occurring and the Liberal Democrats are an important fragment but not the only one. The much debated ‘hung parliament’ could bring this process to a head; or perhaps the realisation that ‘elective dictatorships’ based on minority, and lukewarm, public support cannot any longer function effectively, particularly at times of serious economic stress. There are numerous sub-scenarios as to how these stories could play out but the upshot could well be some form of electoral reform and the acceptance that – as is commonplace in local government already – parties can and should work together rather than perpetuate tribal apartheid.
On a personal level I would like to be in a position to translate ideas into practice in government: to do things rather than talk about them. But I have no compulsive need for the status of office or the temporary glories of being welcomed into someone else’s ‘big tent’ and I recognise that the Liberal Democrats may have to be patient and play a long game.
A breakthrough could occur in a different way, if the internal and external disillusionment with Labour were to reach such a point that it faces an existential crisis of the kind experienced by the Liberals in the 1920s and 1930s. Parties do rediscover their sense of purpose and will to win and my own party has recovered from near-death experiences, notably in the late 1980s. I also had a ringside seat in government in 1979 when there was a similar sense of political failure and surrender. I and others in the SDP wrongly judged the condition to be terminal. But I have a hunch, if no more, that this time we are heading for a serious realignment. If this occurs there will be an opportunity to complete the work I first embarked upon as a student politician trying to bring together and reconcile the different strands of what is loosely called progressive politics.
Even as I use this political jargon however, I am conscious of its limitations. And although I subscribe to what can be called the ‘progressive agenda’ – a sympathy for the underdog; a distaste for gross inequalities of opportunity, wealth and income; a support for properly provisioned public goods – it is far from representing the totality of what I believe and am in politics for. Deep down I am an old fashioned liberal. What makes our society fundamentally different from either the totalitarian horrors of the 20th Century (whether perpetrated by the Nazis or the Communism of Stalin and Mao) or such evils as apartheid or theological autocracy, is respect for individuals in all their variety and quirkiness. I was educated out of the racial and cultural stereotypes with which I was brought up and I was never a very convincing class warrior. I now recognise kindred spirits across the main political parties and outside them.
Fascinating though it is to speculate about future political scenarios and alignments, the more urgent need, for both party and country, is to work on a route map out of the current economic and political crisis. The daily feverishness of the stock exchange and fluctuations in the public mood disguise some troubling long term weaknesses which have been brutally exposed in the last two years. For three decades there had been a gradual revival of national self-confidence from the pessimism and sense of decay which prevailed in the 1970s. But much of that revival has been exposed as hollow.
There was Britain’s great success story – the financial services industry, the City – which we now realise was incubating self-destructive folly and greed and has inflicted great damage on the economy. There was a passionate attachment to property ownership as the basis of personal wealth a
nd self-esteem which has been shown to be just as vulnerable to boom and bust as any other speculative mania. There was a long consumer boom with rising expectations of physical comfort, more leisure and more travel which was underpinned by excessive household debt and the depletion of environmental resources. There were morale boosting military achievements but they were based on overstretched resources.
Some of these illusions will be self-correcting as expectations adjust to a more challenging reality. But I sense that the political parties are reluctant to face up to the scale of the problems. There is a public appetite for politicians to ‘tell it like it is’; but the appetite goes largely unsatisfied. The winner-takes-all system imposes a stranglehold leading to positioning, triangulation and political manoeuvrings in a very limited political space. Truth risks political suicide. But it has to be tried.
The first issue which has to be faced, and will dominate political life for years to come, is the fiscal problem: chronic, structural, deficits. The immediate cause has been collapse of revenue and increased financial constraints in the wake of the banking collapse. Massive losses have been temporarily absorbed by the state. A more longstanding problem is the Labour government’s ambition to create Scandinavian levels of social provision and welfare without Scandinavian levels of taxation and without the political and administrative structures – decentralised decision making and cross party consensus – necessary to support them. Even as these problems are addressed there are looming issues of increased health and care demands from an ageing population.
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