Monetary policy was kept too loose for too long. The Bank of England averted its eyes from the rapid expansion of the balance sheets of the banks. It ignored the bubble in house prices that its policies built up, targeting only increases in the prices of goods and services, and not the prices of assets like houses.
While he was Chancellor, Mr Brown made inadequate budgetary provision for the occurrence of a recession. Why did he fail to act? Perhaps he believed the siren voices of those American economists who told him that they had solved the problem of preventing recessions. Whatever the reason, as late as March 2007 he was still repeating his claim that “we will never return to the old boom and bust”. Martin Weale, Director of the National Institute of Economic and Social Research, has estimated that Brown’s rule of delivering a current budget balance over the cycle was too slack by about 3% of GDP.
The result of that error was revealed in the Budget of 2009. Large budget deficits will persist for almost a decade, long after the recession is over and the growth of the economy has resumed. This means that for years to come the country is condemned both to an effective standstill in the provision of public services and to increases in taxation that will affect all families, not just the rich.
The third failed area of economic policy is in the regulation of financial markets. During the boom, neither the Bank of England nor the FSA exercised their powers to oblige the banks to keep more liquidity or to build up more capital. This was in large part because in 1997 Brown unwisely split responsibility for supervising the banking system between them.
The current British framework for financial regulation was created by Brown himself with some help from Alastair Darling: it is embodied in The Financial Services and Markets Act of 2000. Unlike, for example, Canadian banking regulation which restrained reckless lending by that country’s banks, so that none collapsed during the financial crisis, bank lending in Britain to people who couldn’t afford to repay their loans was not just tolerated but actively encouraged by the Government in the name of ‘social inclusiveness’.
The other major omission of Brown’s banking legislation is that it made no provision for the orderly liquidation of a bank in the event of its insolvency. This meant that the Government was forced into an emergency £50 billion bail-out of the banks in the autumn of 2008. Had that money been available for spending on infrastructure, it could have provided a more productive use of taxpayers’ money.
People may also remember Brown’s ill-judged decision to sell off half the nation’s stock of gold in 2002, when the price of gold stood at one quarter of its present level. It is said that when your neighbour loses his job that is a recession, whereas when you lose your own job, it’s a depression. Many people might think that when Gordon Brown loses his job, it will signal the beginning of a recovery.
David Simpson is a former Economic Adviser to Standard Life. He is also the author of The Recession: Causes and cures (PDF), which was published by the Adam Smith Institute in June 2009.
