Labour’s denial about the 2008 crash

Labour’s denial about its responsibility for the great crash of 2007/8 beggars belief. The Conservative opposition at the time issued clear warnings about the dangers, according to evidence documented by John Redwood MP

Here John Redwood says

Labour are reissuing their old lie that the Conservative party in Opposition backed Labour borrowing plans and advocated light touch regulation of the banks or even deregulation of the banks. They have always wished to duck responsibility for the great crash that occurred on their watch in 2007-8.

There are strong grounds to reject these allegations. I have dug out the relevant quotes of the Opposition Economic Policy review, written early in 2007 and published in the August before the banking crash.

The Policy Review included Simon Wolfson, Andrew Feldman, Greg Hands and myself on its steering committee.

1. We warned that there could be a crash as Labour had allowed far too much debt to build up in the system…
P3 “…there is considerable uncertainty in world markets about how far the Fed, the ECB and the Bank of England may go in raising rates to squeeze inflation out of the system. They must know there are huge pyramids of debt throughout the system, and inflation will not be killed unless the appetite for more debt is blunted.

“They also know (apparently they did not!) that if they push interest rates too high for too long they could bring the debt structures crashing down, as we have seen with the sub prime mortgage collapse in the USA, leading to falling asset prices, rising unemployment and even recession”

2. We opposed in Parliament Labour’s regulatory reforms for banks at the time they put them in in 1997 and reminded people why in 2007:

P14 “We are concerned over the division of responsibility between the FSA and the Bank over banking and market regulation….We think it would be safer if the Bank of England had responsibility for solvency regulation of UK based banks, as well as having the overall responsibility to keep the system solvent.

“Otherwise there could be dangerous delays if a banking crisis hit, with information having to be exchanged between the regulators and there might be gaps in each regulator’s view of the banking sector at a crucial time, when early regulatory action might have spared a worse problem.”

3. We advocated better control of debts and deficit, and itemised the wider state debts which Labour did not report.

P15 said “ We believe that governments should not as a rule borrow to pay for current spending but instead should run healthy current account surpluses in the good years of an economic cycle, so that some latitude is possible in weaker years.

“We also believe there should be a limit on the total borrowings of the public sector as a percentage of national income……..borrowing is simply deferred taxation, which ultimately will have to repaid by taxpayers with interest.”

P14 “Under Labour there has been a rapid build up in debt, and official figures show the UK’s public sector net debt at £497.7bn (April 2007)….the true extent is almost three times this stated amount”

4. We advocated strict controls over reporting and capital adequacy for all banks, the opposite of saying we wanted to deregulate deposit taking institutions.

P59 “We agree that institutions which take clients money and place it on their own balance sheet or mix it with other funds, should have to meet capital adequacy requirements, and strict reporting requirements.“ Our deregulatory proposals were elsewhere “there is not necessarily a good reason why a regulator should have to be involved in product design and marketing for rich and sophisticated investors”

We decided to use understated language as a responsible opposition. On my personal website I myself used stronger language to explain how the Bank of England and government could bring on a crash if they did not change policy, and pleaded with them to take action to stop the crash.

On July 5th 2007 I wrote:

“So far the general view is that the sub prime mortgage market (in the US) will continue to be in distress, but these problems will not spread. However a similar pyramid of debt has built up around company borrowing….The Central Banks can literally go for broke and hike rates substantially. They will trigger a major decline in corporate debt as well as sub prime lending. …The worst case would be that they do to the USA and the UK what the Japanese authorities did to Japan in 1990, leading to a decade of recession or little growth”

and on July 26th:

“On 6 July I warned about the debt mountains built up on both sides of the Atlantic during the decade of easy money, and forecast that the central banks would carry on tightening, leading to further collapses after the sub prime crisis……. I assume the Central banks will back off quite soon. If they don’t it could be quite a collapse”

There were many other blogs along these lines explaining how to stop the crash by intelligent central banking and government intervention.

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