Monday, 9 March 2009

Heads in the sand as World Bank reveals the truth

Here's a story about political leadership...

Politicians, business people and pundits the world over can't believe what is happening. Their beloved creation: free market capitalism, international trade and globalisation as guarantors of economic expansion - is collapsing before our eyes.

Today the World Bank at last came clean on the scale of the crisis we face: a collapse in world trade. They are the first credible international body to state that international trade will shrink by 15 per cent by the middle of this year, and that world trade is on track to record its largest decline in 80 years. Yes, that's 80 years. Let me see, that takes us back to 1928, just before the last great world depression. The signs are ominous, and while I'm by nature an optimist, I fear that our leaders have not been as honest with us as they might have been.

I totally understand why politicians feel that they must try to soothe our fears. Firstly, they do not with to "talk down the economy", or talk us into an even worse situation. Secondly, they do not want to admit that they do know how bad the situation will get. Thirdly, they do not want to admit that the steps they have taken so far have not actually worked in containing this economic disaster. Fourthly, they do not know what steps to take in the future. And finally, they do not want to admit that the economic system which they helped create and nurture through the treaties they signed and the institutions they created, both domestically and internationally, is failing so dramatically. Instinctively, no politician wishes to admit this.

So we have seen a variety of responses from our political leaders (helped at all stages by the media and by business). Initially, there was an overt case of what I will call "wishful thinking disguised as forecasting". When in the UK we had our first inkling of impending problems back in the summer of 2007 with the run on the Northern Rock bank, our leaders and the commentariat told us that this was an isolated case, and that the rest of the banking system was well capitilased and invulnerable. Sadly, this turned out not to be the case. Next, we were told that the problems of the US housing market and their subprime crisis would not greatly affect the UK. How wrong this turned out to be... The next case of wishful thinking came when we were reliably informed that the financial crisis enveloping our investment banks and housing market would not, under any circumstances affect what was quaintly titled by the financiers as "the real economy." Of course the real economy then became well and truly infected as the flows of credit ceased and general economic malaise descended. The next prediction, as politicians and commentators alike started to dig head-shaped holes in the sand, was that the UK's economy would not go into recession (remember how Gordon Brown avoided using the term for as long as he possibly could), but would perhaps level out before recovering. This turned out to be way off the mark. Next, we were told that the UK recession would be short, and not too sharp, with growth returning by the middle of 2009. We all know that this will not be the case. Next we were told that the recession would be a deep one, but that it would not become a depression akin to that of the 1930s, and yet within weeks, the Prime Minister used the word "depression" accidentally, during Prime Minister's Questions. We are now surely in danger of there being a depression, lasting several years.

A pattern emerges when you look at my potted and partial history of recent events: at each turn, wishful thinking and wide-eyed optimism was the prevailing theme. As the evidence disproved the optimism, what I'll call "head-in-sanditus" took over, and the optimistic message was modified to take into account some of the bad and worsening news. Anyone who issued any public statement predicting the dire possibilities that were likely was immediately trampled on by the commentators and political leaders. If you don't believe me, please recall the trouble that Alistair Darling got into when he referred to the worst crisis in 60 years. This was then superceded by Children's Secretary Ed Balls who claimed that Britain was facing the worst crisis for 100 years. Both were immediately condemned by their political opponents and many commentators for being too pessimistic and for having let the "cat out of the bag." And yet finally today, the World Bank has corroborated these statements in black and white.

I believe that the reason why this story of wishful thinking on a mass scale is important is that it reveals a dynamic which hinders recovery and allows politicians, the media and the general public the option of entering into a bout of collective procrastination with regard to thinking about what kind of a world we wish to live in once this crisis is over. Firstly, the psychological features of what I have described above, mirror in many aspects, the kind of behaviors which were evident in those who worked either in high finance, or government or in regulatory authorities over the last few years. Collectively, we did not want to admit that we were living on borrowed time, and that much of the economic miracle of recent years was in fact a mirage, an elaborate con trick. We consumers also chose to believe the lie that an economy largely fueled by consumer spending, a housing bubble, personal indebtedness and the so-called wonders of the financial services sector, was going to lead us to long-term prosperity. We chose not to confront the structural, and yes, moral weaknesses which lay under the surface. We chose to stick our heads in the sand. We chose not to heed the warnings of the tiny minority of politicians, commentators and philosophers who preached about the folly of what was going on (Vince Cable deserves a medal for his efforts thus far - and as a Labour man, I only wish it had been a Labour politician who had shown such wisdom).

I believe that we are still choosing this easy option as a nation. We are still choosing to believe that somehow, with the limited fiscal stimulus package and the numerous other measures that the Government has taken (all of them laudable and well-intentioned), we will be able to return to the glory days of circa June 2007. Indeed the Government even called on banks to return to their pre-credit crunch levels of lending. President Obama, and our own Prime Minister are in my opinion to be congratulated for taking activist, Keynesian steps to try to stimulate their economies. They are also to be congratulated in leading the way on the international stage to garner a coalition of political leaders in creating new financial architecture. But I firmly believe that a dose of realism would be very useful at this time. People need to be told the scale of the problems that we face, if there is to be any hope that they will make the necessary sacrifices required for us to rebuild our economies.

There is just one more optimistic prediction which I often hear, and which I sincerely hope is proved to be true: that this economic crisis will not cause social and political ramifications as severe as did the last crisis of anywhere near this scale in the 1930s.

All I do is humbly offer these thoughts, and wish my political leaders and those around the world the very best in doing what they can to alleviate suffering and to rectify the situation as quickly as possible. It is my belief that we are entering a new paradigm, in which the needs and aspirations of ordinary people, on lower incomes, must be placed at the top of the political agenda. I believe that Prime Minister Brown and the Government, which I support, have not done anywhere near enough to indicate firmly that they are both on the side of ordinary people rather than financiers and big business, or that the economy which emerges from this crisis must be shaped to benefit the interests of ordinary people over and above those in the top echelons. Perhaps the reasons why we hear little about this from our leaders is that they simply do not want to contemplate a future society and economy which is radically different, or even partially different, from the one of 2007.

Yet one thing is for sure, there are always social and political consequences from any economic catastrophe. Our politicians owe it to us to both be honest with us about the scale of the problem, and then to start to take proactive steps to ensure that we will not replicate the mistakes of the past. The scale of this crisis is far bigger than anyone dared imagine or publicly state, therefore the political response needs to mirror the scale and impact of the economic problems. Politicians who start to speak more eloquently about their vision for the future in terms which are honest with their electorates and which show that we can create a better economy, and a better society in the future, deserve our support. Mainstream politicians who merely tinker with a broken system and hope for a return for the glory days of the credit card, equity release and a services-dominated economy probably may find that they are deserted and that they leave a political vacuum which can easily be filled by those with a bleaker vision and in the worst case scenario, by those whose political motives are deeply troubling.

Optimism and hope alone are not enough. They need to be translated into political action. The stakes could not be higher.


Written from a computer in the Marriott Hotel, Jackson, Mississippi, where I am in the middle of the International Visitor Leadership Programme run by the US State Department. If I get time, I'll write a blog from New York, where we go next.

Tuesday, 3 March 2009

View from the States


I'm currently in the middle of a three week visit to the US, focussing on US foreign policy challenges. It's run by the State Department, who have brought together 22 of us from European countries to travel around the States and to receive briefings on all manner of US foreign policy issues. I'm hugely privileged to be on this visit, and am learning a great deal.

I rarely get access to the internet, but am hoping to blog more about my thoughts on US foreign policy when I can. The significance of the economic crisis is playing heavily in my thinking. I personally am always asking our illustrious speakers what their interpretation is of the potential social and political consequences of the economic disaster that we're facing.

More to follow on that.

Best wishes,