Larry Elliott argues in the Guardian this morning that:
Jeremy Corbyn is right to blame the banks, not Labour, for the financial crisis
and
While other candidates apologise for spending and borrowing too much, Corbyn's take on austerity and party's economic record adds up.
I agree, and have always agreed that the claim that labour caused the crisis is absurd: for it to have been true Labour would, for example, have needed to have been responsible for the US economy where the crisis began and it very clearly was not.
The evidence that Larry (who I should ad, I know) uses comes from a House of Commons library note that contains these three graphs:
The graphs show three things. The first is that in interest terms Labour delivered new low levels of interest cost until US banks collapsed.
Second, they show that public sector net debt was also at a low rates under Labour until US banks collapsed.
And, third, that public sector net borrowing was especially low, and better under Labour than under the 1979 to 1997 era.
In other words, Labour could not have in any way caused a crash by overspending because, quite simply, it did not do so.
You can argue whether Labour caused banks to crash. I do not think it entirely innocent on this but raise four points.
First, the failure was in the US in the first instance: no one disputes that.
Second, Labour did resist demands for more relaxed regulation.
Third, those demands came most especially from Opposition benches.
Fourth, the banking failure in the UK would not have been prevented if Labour had adopted a different policy: the risks were not understood at the time by supposedly clever economists and was as a result systemic and not national.
The conclusion is that for seven years the UK's economic narrative should not have been focussed on government spending as the cause of what went wrong. That's because that was not the case. It should instead have focused on recovery, which is exactly what has been deliberately denied to the UK economy. I am a very long way from being the only person to argue this, of course.
Jeremy Corbyn happens to have made that point. It is a shame others in labour have not, from 2009 onwards. This country would have been vastly better off if they had.
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A number of commentators have consistently made this point and it does not need a profound understanding of economics, or complex data, to make the point.
Credit to Corbyn for making the argument. I’ve been baffled as to why the opposition have utterly failed to argue this case and left the field wide open for the dishonest argument that the crash was caused by government spending.
Not hard to understand: the opposition are neoliberals, just as the government are. If you are a neoliberal everything bad is the fault of government and is further proof that we should be ruled by plutocrats. All else is neogotiable 😉
Richard, you have just asked me a “genuine question” on this post: http://www.taxresearch.org.uk/Blog/2015/08/05/putting-the-record-straight-on-peoples-qe/ and then apparently closed the post for comments!
Although off-topic here: you ask what my answer is to the question: “what form of money is created by PQE?”. My answer is as follows:
“Reserves of course. Reserves and banknotes are the only kind of money that the BoE can create, and it would be impractical to make wholesale payments like those for GIB bonds in banknotes!
Reserve creation was the original declared motivation for QE.”
There are two types of money
Government created and bank created
PQE is government created money
Interest will not be paid on government created money
I am struggling to see how you think it would be. I want you to tell me how and why
For the distinctions see https://www.youtube.com/watch?v=qBpm5sVmGYc or just read Modern Monetary Theory
I presume you consider reserves as government money, Richard. Reserves pay interest at the BoE repo rate.
I am done with you. You are short with any commenter who does not agree with you. You conduct a moderation policy that allows you to filter out any embarrassing criticism – in my opinion, it is poor form as a blogger to exclude any comments that are not profane or advertising, rather than allowing your readers to judge them on their merits. You reject all warnings, even quiet ones, and refuse to discuss the balance sheet implications of your proposal, which is how you would see that you are wrong. Well, you go full speed ahead and damn the torpedoes, and make the fool of yourself that you richly deserve.
But you still can’t explain who gets the interest
Nor how this cost is created
The bluster and the problem is all yours
As for the moderation issue: if people add to the debate they can be here for years – critics included
I just get bored with time wasters whop can’t answer questions
Answer my question and you can stay here. Saying interest is paid without explaining who to and why is not answering them
I guess you can’t in that case
It’s rather like interest on QE debt: it was paid – and went straight back to the Treasury
Just so here. In which case the answer is ‘so what?’
But you don’t like that one so ignore it
Richard,
Thanks for posting the link to Steven Hail’s excellent MMT presentation.
FYI the following link is better (‘DVD’) quality than the YouTube link posted above…
https://vimeo.com/117137212
All posts close automatically after 4 days
The key point is not that Labour caused the banking crisis, because of course they didn’t, but that over-spending prior to the crash made things worse afterwards.
The fact is that Labour really did over-spend.
Borrowing in the boom years was a hostage to fortune. Worse, the 2007 budget forecast public spending to rise to 48.1% of GDP, and that was on the assumption that there would be continuous growth. Then growth went into reverse. This was a massive increase.
So. Labour did not cause the banking crisis, but:
1) Over-spending and excessive future commitments put the UK in a relatively poor position when the crisis broke.
2) Brown’s tripartite regulation system, and his lack of interest in regulation, meant that warning signs were missed.
So where was this over spending?
And why are services collapsing now spending has been cut?
Far too much over-analysis here.
Fact is that Labour were in charge when the economy crashed. That is why they are regarded as economic incompetents.
That is like saying the lamp post is to blame for the driver hitting it
Only if you believe that the “lamp post” – i.e. the Labour Party – cannot influence the economy.
The lamp post could be repositioned
It was where it was at the time for what was thought to be good reason and against pressure and demand to be more dangerously located
Only retrospect has suggested the change you think appropriate
“Only retrospect has suggested the change you think appropriate”
It’s retrospect that suggests that leaving Harold Shipman in charge of patients was a bad idea.
Does that do anything to absolve Shipman’s guilt?
Since most of Africa and the far east, Latin America, China and Australia and South Korea south Korea all managed to avoid both a banking crisis and a recession when it struck the US, UK and much of the EU it’s absurd to say that no government had any chance to avoid the problems caused by the banking crisis. Many did.
Karl
The crassness of your commentary has i think expired my patience
Not only are you clueless on tax but you also very clearly have not noticed a banking crisis impacted a major banking sector more than Latin America
I will be deleting your comments now: they add nothing to debate
While I agree that certainly labour did not cause the financial crash by either over spending or over borrowing, I would add a note saying they are at least partially culpable by the fact they failed to properly regulate the banks.
That was the neoliberal way, worldwide
Despite thinking that certain members of the last Labour Government rank well below the fly that sits on the stuff that I stepped in, I would fully agree that the Government was not responsible for the crisis. However, what is absolutely clear, and Brown even admitted this (“I didn’t say no more boom and bust, I said no more Tory boom and bust” (ha, ha, ha, wasn’t he a real wag)), was that the reckless tax and spend policies, as well as consigning many people to welfare dependency, created unsustainable commitments which have left us with umanageable levels of debt and have made the recovery harder and the crisis deeper than it should have been. It’s all very well to say that the important thing is to manage the recovery, but essentially you are saying “it doesn’t matter how badly Labour manages the economy, as long as in the event of a downturn they can manage the recovery”. It would be better not to muck things up so badly in the first place, and what the crisis has served to highlight, YET again, is that Labour’s tax and spend obsession always end in tears. Despite all his waffle about prudence, Brown (and Labour) were and continue to be financially reckless and irresponsible, and I hope that Jeremy Corbyn wins and consigns them to history once and for all.
But there is no evidence of all that you are suggesting
it is just hyperbole
Now provide some facts for all your claims
‘Labour tax and spend’. Always amuses me that one. Quite inconvenient for those peddling this lazy and disingenuous guff that public spending under Blair was lower as a % of GDP than under Thatcher or Major. And during the glorious era between ’79 and ’97, when commonsense, financially astute Conservatives ruled the roost, the UK ran up deficits for 16 of those 18 years. All this despite the many billions from privatisations, and North Sea oil revenue of up to £45bn pa flowing into the Treasury coffers
Mrs thatcher had the enormous benefit of North Sea oil in her coffers. Was it Sweden who created a wealth fund for the benefit of her citizens from oil. Could have been done here in the UK. No use looking back, though we do learn, as if needing reminding that her priorities were not to help improve the lives of most of us, only those who dared take a chance and gamble with other people’s money, hit the jackpot, and so be a success.
Think it was Norway, the wealth fund, have not googled to find out. Sorry for any misinformation.
I know most on this blog are anti-austerity and would like to just take that £120 billion that is just there, sitting on the table, ready to be collected with no conditions and at no cost to anything, or alternatively to print as much money as we want or need (again seemingly with no impact to anyone or anything), but the economic reality is somewhat different. Brown raised public spending to unsustainable levels: simple proof, the government’s receipts now are very far short of its outgoings, and this is as a direct result of Labour’s obsession with creating welfare dependency, bureaucracy and large government. I should mention that I am no fan of the Tories either, but possibly through luck more than anything else they were not in power when the crisis hit. Had they been, do we really think that they would have adopted all of Brown’s tax and spend policies? Probably not, I would hazard to guess, as they have never really been about blatantly buying peoples’ votes through the tax and benefits system. So it’s fairly safe to say that a crisis under the Tories would have been less severe than under Labour, and time and time again history has shown Labour to be economically more inept than the Tories. I don’t know, perhaps it is time to have someone like Richard Murphy as Chancellor, but he keeps saying he’s not up for it.
Graham
Sorry, but this is close to nonsense
Not once, for a moment, has any government since 2008 not been able to fund its programme at record lie interest rates
In that case the economy was in 2008 in good shape to face a crisis
Your claim makes no sense in that context
And for the record, as I have argued often, balanced budgets are utterly irrelevant
‘Balanced budgets are utterly irrelevant’
This comment makes no sense to me. Badlands makes the observation that the conservatives between 1979 and 1997 ran 16 deficits out of 18, and the meister doesn’t come in to say that was unimportant. Considering the asset sales, and council house sale, that IS important in my view.
We have surpluses run by the Labour government between 1998-2002, and credit is due for that in my view.
Were those failings of the conservatives and achievements in the early Labour years really irrelevant? If so, there should be a headline economic paper that has been peer reviewed to support this claim by now. Or is this irrelevance specific to the period from 2008?
Go and read Krugman
And many others
Can I challenge the idea of Conservatives being more competent? Labour restored a bankrupt economy 1945-51 even though they had to contend with a long over due devaluation and then the need to re-arm.
In 1964 Maudlin’s dash for growth floundered and he left a note saying “sorry, there is no money left”, and a large deficit. However, in 1969 -70 labour with Jenkins as Chancellor, produced a surplus but the measures caused discontent with Labour voters and Heath got in.
He introduced the Credit Creation and Competition Act which helped to develop the shadow banking industry and pumped lots of money into the economy and caused inflation and wage claims to compensate. To be fair there was also the end of the Bretton Woods arrangements and the 1973 oil crisis. This resulted in a shortage of foreign currency so we had to go to the IMF (always quoted by the Tories as evidence of Labour incompetence) but only half the amount was actually taken and it was paid back by 1979.
We then had the Conservative monetarist experiment which ended in failure. The Conservatives had the benefit of the new oil revenues which pushed up the pound, making exports more expensive BUT they also raised interest rates to fight inflation-all of which made our exports uncompetitive and the collapse of much of British industry which was unable to be to afford to modernise,
Instead of investing the oil bonus or creating a sovereign wealth fund like Norway, the money was spent in tax cuts and rising unemployment payments. We then pass onto the 1990s and the ERM mishandling under Major. By 1997 the economy was in balance but investment was low and by the early 2000s it was obvious that money needed to be spent on new schools and hospitals -not about the strange notion a govt. would want a welfare dependent population. They did also create tax credits and increased housing benefits but these subsidies to landlords and low paying employers became necessary as the banks were increasing the money in circulation, forcing up housing costs and thus leaving less money in people’s pockets for other spending. Plus the slow growth in wages -but not in CEO remuneration.
The Conservatives have always been led by the City whose priorities have not been investment in the real economy of goods and services, unlike the German banks. The proof is in the low productivity of this country compared with France -often referred to as a ‘basket case’.
The primary protective bulwarks of the financial sector failed leaving assets to be overstated and liabilities understated.
Internal auditors, external auditors, audit committees, rating agencies,finance directors, shareholders and boards of directors. None of these knew what was happening.
This should have been the narrative, instead Labour allowed the “out of control and overspending” narrative to grow and thrive. Why?
I’ve tried to find an example of anyone blaming the financial crash on overspending by Labour. I’ve not found a single source, much less the conservatives, making this argument. I’m actually thinking of offering a reward to anyone who can find the source of the claim.
Instead, the argument is that we had a bank induced credit expansion and contraction. The effect of this expansion was to pump up gdp and tax revenues. Labour increased its spending to track this growth. The criticism is that they shouldn’t have done this. They should have been Keynesians and actually dampened demand in the economy.
Then you are deluding yourself
It is the whole Conservative ideology
And Danny Alexander could not open his mouth for saying it for five years
If you want to be taken seriously here lying does not help
Well, I’ve looked and I can’t find it. I’m not lying. I’ve looked for it in speeches Osborne and Cameron have made and they have blamed the financial crash on the banks. I really can’t find a single source for the claim that overspending caused the crash. To my knowledge no one attacking the claim has ever said where they heard it. It seems everyone just assumes the claim was made. I’d love to find it if it exists.
Sorry: total and utter nonsense
Please don’t call again if you wasting my time with such drivel
Barred for pointing out the truth?
Where are these claims, if they exist?
Let’s start with Mervyn King http://www.theguardian.com/business/2014/dec/29/labour-government-not-responsible-crash-bank-england-governor-mervyn-king
Just one of hundreds saying so in a simple Google search
Mervyn King saying overspending did not cause the crash is not what I am looking for. I am looking for anyone claiming that it did cause the crash. The article states the following:
the shadow chancellor, Ed Balls, as he prepares to battle a Conservative claim at the next election that Labour mismanagement of City regulation and excessive public spending were jointly responsible for the crash from which the UK economy is still recovering.
Where is the original source? I will give £10 to a charity of choice if it can be found! All the time it can’t be found I’m calling it a myth.
Try this from the 2010 Tory manifesto
One thing is clear. We can’t go on with the old model of an economy built on debt. Irresponsible
public spending, an overblown banking sector, and unsustainable consumer borrowing on the back
of a housing bubble were the features of an age of irresponsibility that left Britain badly exposed to
the economic crisis.
£10 to Oxfam, please
James
If I may be permitted to respond, I think there is a very good reason why you cannot trace the origin of the “Labour overspent” claim, namely that it is ‘obvious’ for everyone to see. Obvious, that is, to anyone who does not stop to think what are the real reasons behind the economic crash, and is able to see through the neoliberal smokescreen of market infallibility. Cameron and Osborne don’t need to draw the conclusion, just state the facts in such a way that is consistent with the idea that Labour’s overspending directly caused the crash.
Best
David
‘Badly exposed to’ is not the same as caused. For example,
‘Going out in the rain without an umbrella left me badly exposed to the rain.’
(the lack of umbrella did not cause it to rain).
The conservative narrative has been that the banking crisis caused the crash and overspending left the country exposed to its effects. Osborne in particular appears to see the business cycle as inevitable, and the role of government to mitigate its effects. I can in fact find no one who claims overspending caused the crash, as you say has been claimed.
There are, it is said, none so blind as those that will not see
And it is also said that I get bored with pedants
There is truth to both
You have been warned
you obviously don’t read the Mail or Telegraph.
In the elections debate, Miliband was in Yorkshire and she he denied it was labour’s fault,there was a collective noise of disbelief. (That was the one where a woman who claimed to be a undecided voter was actually a member of her Conservative Association.)
Utter drivel
The reality is that any ‘debate’ about the economy is only so much smoke. It will be no surprise to regular visitors to this site that current policies, and indeed promised future policies from the opposition are all about maintaining the status quo.
It is now accepted across the political board that the first to the table for every meal are the rich and powerful.
Anyone who doubts this only need look at the grimacing and bleating of the Right and the Left to the growing popularity of Mr. Corbyn.
Few people blame Labour for the banking crisis.
GDP and tax receipts rocketed in a credit bubble. Labour ratcheded up spending to keep pace. Critics merely point out that if you increase government spending in these conditions, then when the credit bubble bursts then your spending as a percentage of GDP will go into orbit.
Which is exactly what happened.
“We can’t go on with the old model of an economy built on debt. Irresponsible public spending, an overblown banking sector, and unsustainable consumer borrowing on the back of a housing bubble were the features of an age of irresponsibility that left Britain badly exposed to the economic crisis.”
Actually that seems a remarkably accurate analysis.
Whether the Tories will actually learn anything from it is another matter.
And as James points out, “badly exposed to” does not mean “caused”.
So the Tories built more debt than any government in history
And now want to massively inflate corporate and personal debt
Haven’t you noticed?
Given the deficit they inherited the Tories building the biggest debt in history was a mathematical certainty.
However, if we look back over the last 40 years I agree that both Labour and Tories seem to be addicted to rampant government expenditure irrespective of income they receive from resource (Oil), licences (3G) or assets (multiple sell offs).
Politicians of all colours are going to buy votes at the end of the day.
The old anti-democratic argument comes out
I note that all the people attacking Labours spend never like to talk about why Labour had to spend. It’s all so easy for those who think Thatcher’s decimated legacy should have been left unrepaired.
No doubt the next time Labour pick up the mess, I’m sure we will criticised again.
Maybe some of commentators would like to also explain how Labour in it’s so called ‘incompetency’ managed to turn our economy back to growth, in under two years of the greatest financial disaster in living memory.
In the time since the election of 2010 the Tories have achieved …. Disastrous dismantling of everything they can steal….. Massive increase in Debt, the only reason for deficit reduction and the return of despair and poverty.
The Tories basically got lucky because of the electorates rank stupidity.
I don’t think electorates are stupid
I do think Labour did not tell a good story, and had one to hand
Labour themselves did themselves absolutely no favours by letting the conservatives, to my utter dismay, to rattle off their ludicrous, evidence-free narrative that it was Labour’s overspending that caused the crisis, not profligate banks gambling with money they often didn’t have, crashing the economy when their huge debt balloon exploded.
Far from overspending, the last Labour government’s borrowing was around 40% of GDP, hardly massive, and they had borrowed less than the previous Major conservative government.
I love how some contributors on this board still try to get away with this ridiculous narrative. Unfortunately for them, all the facts are against them.
But why Labour politicians continue to let the tories away with this fictional version of events is something you would have to ask them.