Around this time last year, Gordon Brown was facing the first economic challenge of his premiership: trying to fend off the collapse of the Northern Rock bank. The episode saw the first run on a British bank for nearly 150 years.
All that must now seem of little proportion compared to the financial crisis currently consuming Britain, along with America and the rest of Europe. Newspapers are calling it a meltdown. Coverage on the BBC is dominated by foreboding about the first recession since 1991. Many ordinary Britons are only half-joking when they talk about withdrawing their money from their savings accounts and stashing it away under their beds.
And so when Brown fronted up yesterday for his first Prime Minister’s Questions (PMQs) after the House of Commons’ long summer adjournment, there was none of the partisan bluster you normally expect from the first parliamentary engagement of the year. No, this is no time for any politician to be seen scoring political points. For all those watching from the Commons gallery, it was clear there was an informal suspension of the regular parliamentary cut and thrust.
There is a sombre, if not uneasy, mood in Westminster. A summer that saw febrile speculation about a leadership challenge to Brown, amid freefalling poll numbers, has given way to an autumn preoccupied with how Britain braces itself against the banking crisis that is rapidly and unpredictably unfolding.
Yesterday morning, the Brown Government formally announced plans for a dramatic and unprecedented £500 billion bailout of British banks. Only a few hours later, the Bank of England slashed half a percent off interest rates, in its first emergency rate cut since 2001 following the September 11 attacks.
The moves came after shares in the Royal Bank of Scotland and HBOS, two of Britain’s five big banks, plunged 40 per cent in one day. A year ago, the Royal Bank of Scotland and HBOS enjoyed market values of £58 billion and £35 billion respectively – today, they are valued at £14 billion and £5 billion. Three successive "Meltdown Mondays" have seen the London stock exchange plummet, as investors seek safe havens for their funds.
The seriousness of the crisis cannot now be underestimated. So far, it has been a common belief that the freezing up of lending between banks reflected a problem of liquidity. Falling confidence among banks has been choking off the flow of credit. The solution? Get governments around the world to inject some cash into the system.
Yet it is clear that there is now a looming concern about solvency as well. Money markets are seizing up, in part, because high levels of debt and tougher economic conditions have increased the prospect of mass bankruptcies. The only feasible solution is for governments to step in, and provide not only added liquidity but equity as well.
This is being played out in the British case. In addition to providing £200 billion of liquidity as short-term loans to free up inter-bank lending, Brown’s rescue plan involves the Government taking stocks in British banks, with £50 billion being offered to bolster banks’ capital reserves, and a further £250 billion being used to underwrite lending between banks. The guarantee of part-government ownership is the only way that creditors can be assured banks will not collapse.
Few would have predicted this a year ago, or even a few weeks ago. When Northern Rock got into trouble, the Brown Government took some five months before deciding to take it into public ownership. At the time there was much fear that any intervention would involve "moral hazard", sending the wrong signals about rescuing bad financial decisions. Brown and his ministers were concerned that nationalisation would suggest a return to the socialism of "Old Labour".
Today, financial socialism is the paradigm. Even David Cameron’s Tories are to be found in support of recapitalising the British banking system through state means. Labour MPs, in the single display of political emotion in yesterday’s PMQs, roared with laughter when the opposition leader began criticising the recklessness of bankers’ risk-taking in a question to the PM. Cameron has also stopped using the word "market", opting instead these days to speak in terms of a "free enterprise" system – evidently an attempt to dissociate his party from the toxic connotations of the M-word.
The question many British observers are asking is whether all this means the death of neoliberal capitalism as we know it. Judging from the comment pages of The Guardian – the traditional bellwether of left-liberal British opinion – we might as well start relearning the words to the Internationale. In some quarters, and if only momentarily, anti-market triumphalism has trumped anxiety.
There is no doubt that the culture of risk-taking among bankers, facilitated by years of cheap credit and growth in household borrowing, is at some fault. And there is no doubt now that the safe hands of the state are needed to calm nervous and spasmodic money markets. According to sources in Westminster, when Labour MPs reconvened in London earlier this week, Gordon Brown gave an emphatic and rallying speech about this being the moment for a more interventionist government, for a return to a more authentically Labour Government.
It remains hard to predict the full economic fallout of the crisis. But the odds of a British recession are shortening fast, markets being beholden as they are to self-fulfilling prophesies. The only sure consequence is that the beleaguered Brown and his flagging Government seem to have a second chance to connect with voters.
Brown, who last week brought Blair-confidant and erstwhile EU trade commissioner Peter Mandelson back into his cabinet as business secretary, has been insisting that the current situation calls for "serious people for serious times". As Britain lurches further into financial uncertainly, this most serious and dour of men is about to discover whether these serious times will indeed suit him.
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