Socialist Worker

Gordon Brown's economic crisis has only just begun

Issue No. 2099

Gordon Brown's biggest problem lies with the state of the economy. As Andrew Rawnsley put it in last Sunday's Observer, 'The economy was the pillar of his reputation with the public.'

If Brown could turn the economy round, then many of the woes that have afflicted him since last autumn wouldn't look so bad. Easier said than done.

The problem is partly that the credit he got for a robust economy was always based on a con trick. What Brown did as chancellor was follow his Tory predecessor Ken Clarke in aligning Britain economically to the US.

Successive US administrations went along with the strategy pursued by Alan Greenspan, chairman of the Federal Reserve Board (the US central bank), of encouraging the financial markets to expand as fast as possible and drag the economy along behind them.

This worked in the US for a while. Piggybacking on the financial speculation machine delivered respectable economic growth in Britain – but at a price.

The apparent success of the policy was reflected in the City of London's boast of rivalling and then displacing Wall Street as the most important global financial centre.

But this meant an increasing divide between the south east and the rest of the country, plus a deepening gulf between rich and poor, which Brown's means-tested tax credits did nothing to reduce.

Moreover, the growing dependence of the British economy on finance means it is particularly vulnerable if the financial markets fall – which they have now done with a vengeance.

Collapse

Many commentators now say the worst of this crisis is over. What this really means is that the US state has made it clear that it will spend whatever is necessary to prevent the collapse of the banking system.

The effect, particularly since the Federal Reserve organised the rescue of the Bear Stearns investment bank in March, has been to reassure the financial markets.

The Bank of England, in a more hesitant and confused way, has been trying to do the same thing. An example is the much-touted £50 billion plus scheme to lend government money to banks on the strength of the mortgages they hold.

Mervyn King, the governor of the Bank of England, tried to stick to official free market ideology and initially resisted pressures to bail out banks. But the severity of the crisis has forced him to change course.

But state rescues of the banking system don't mean the crisis is over. In all probability, it has only just begun. Financial Times columnist Wolfgang Münchau says it won't be as severe as the Great Depression of the 1930s 'but it might last longer'.

So far it has been the financial system that has been in trouble. How much damage will this cause to the 'real' economy, where goods and services are produced and distributed?

The most important links are provided by the banks and the housing market. The banks have lost vast amounts in bad loans and so are cutting back on lending. This will reduce both investment and consumer spending.

House prices are falling on both sides of the Atlantic. During the boom households borrowed and spent money on the strength of rising house prices.

Now the process is going into reverse as consumers, feeling poorer because the value of their homes has fallen and because of rising inflation, are cutting down on what they spend.

In the US the debate among economists is about how severe the recession will be, not whether it will happen. The same forces are already at work slowing the economy down here in Britain.

Brown and King will find it harder to throw money at the economy than their US counterparts. The government is already under fire from the right for spending and taxing too much.

And the fact that the rate of inflation is rising to levels not seen for two decades is making the Bank of England reluctant to cut interest rates sharply. The economy isn't going to come to Gordon Brown's rescue.


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Alex Callinicos
Tue 29 Apr 2008, 18:01 BST
Issue No. 2099
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