With apologies to Father Ted Crilley for the post’s title. The ever-fascinating ConservativeHome* has introduced me to the delights of the blog of Douglas Carswell MP, the obscure Conservative MP for Harwich & Clacton, and in particular his latest post: ‘Big Government made the credit crunch‘. From reading the article, it strikes me that Mr Carswell, a member of the hard-right Tombstone Cornerstone Group, could do with some of Father Crilley’s advice on recognising the effects of perspective, particularly when it comes to recognising a ‘big’ government.
As the financial crisis deepens, it’s important to remember that the events unfolding are not a failure of the markets – it’s the market response to a problem created by Big Government.
Note the capital letters. Apparently Big Government is a proper noun now. Mr Carswell continues:
For years, central banks – particularly the US Fed and the European Central Bank – have kept interest rates lower than they might otherwise have been.
Mr Carswell seems to be taking a slightly odd definition of Big Government here: independent central banks, the creation of which is surely a key part of the de-regulated financial system that he would support. Given that the Bank of England has been equally keen to keep interest rates low, its omission from the list is surprising. Now, I don’t necessarily disagree with Mr Carswell’s analysis that the central banks and their encouragement of cheap lending are in part to blame for the situation that the global financial system is now in. But this has occurred because they aren’t a part of government. The elephant in the room here is that perhaps Bank of England independence in 1997 wasn’t the great idea it was made out to be (as once suggested by a former Mayor of London). Even if it was, then setting the Monetary Policy Committee a sole target of low inflation without reference to unemployment, wealth distribution or economic stability certainly looks increasingly like a bad idea.
The gist of Mr Carswell’s argument is that the era of cheap money is over and that the Bank of England should resist the ‘Neanderthal tendancy’ who want a cut in interest rates (I presume that ‘Neanderthal tendency’ won’t become the Conservative’s accepted description for the millions of mortgage holders in the UK).
But despite the unequivocal title of his post, Carswell never really seeks to make a link between the credit crunch and this mythical Big Government. Why? Could it be because the heart of the problem lies in the home of minimalist government, the US, and the fact that its effects are being felt so acutely in the UK is due to the eagerness of the Labour government to maintain a low-regulated, Thatcherite financial services sector.
The effects of de-regulation in the 1980 and 90s are now becoming clearer of both sides of the Atlantic. An example would be the 1999 repeal of the US Glass-Steagall Act, which removed the need for a statutory separation of investment banks from high street banks, allowing huge sections of the economy to be effectively gambled on high-risk investment strategies. Had Merrill Lynch not narrowly avoided bankruptcy, its effects on the US economy as a major high street bank would have been disastrous. The UK is in a very similar situation. If HBOS were to ‘go down’ following the collapse in its share price, the bankruptcy of the Halifax and Bank of Scotland high-street banks would make Northern Rock look like an insolvent tuck shop. The toothlessness of the FSA serves to underline the complete lack of effective regulation of the UK financial services market.
Of course, the ironic thing is that those involved in the financial sector don’t seem to share Mr Carswell’s allergy to a government role in their industry, at least not when times get tough. Bankers who have spent the last two decades eulogising the free market are suddenly demanding government assistance to bail them out of a mess they have created. The only thing to lead to a significant market rally in the last two weeks has been the US government’s effective nationalisation of Fannie Mae and Freddie Mac.
Carswell is, quite simply, wrong. He has convinced himself with his own rhetoric about a New Labour created megalithic state. Big Government simply doesn’t exist in the US or the UK, nor in much of the Eurozone, at least as far as the financial services sector is concerned. But despite the lack of any evidence to support his argument: indeed his only argument destroys his own point by demonstrating the complicity of independent central banks in propping up a fundamentally unsustainable and dangerous system.
Carswell starts his post with a pretty hoary old quote:
Margaret Thatcher was fond of saying that if you try to buck the markets, the markets will buck you.
Well, the problem is that no-one tried to buck the market, but we’ve all been bucked by the market anyway.
* Always worth reading, especially the comments, for an insight into what Tory activists think a Conservative government is going to do. Like abolish the BBC and ban civil partnerships. It’s quite sweet really – I remember when I used to think that a Labour government would do left wing things. I was 15.