Last week, with a select group of businessmen, I had lunch with Jeremy Quin, a former Treasury official who continues, from a senior role in the City, to advise Her Majesty’s Government. Jeremy served as a senior civil servant inside HM Treasury 2007 -2009 and as such was in place through the financial crisis, advising the then Chancellor during a fascinating time both economically and politically. Prior to the Treasury Jeremy was company adviser operating a global practice in the consumer sector including advising on the largest agreed cash takeover yet launched. He is currently a Managing Director of Deutsche Bank in London serving on their UK committees. Although continuing to advise HM Government he is no longer constrained by civil service rules of confidentiality and so I was intrigued to hear his stories about life inside the Treasury.
At that time there were about 1,000 people working in the Treasury. George Osborne has since brought that down to about 800. During Jeremy’s time he found the average age of these officials was only about 28 to 29. As Chancellor of the Exchequer Gordon Brown had fallen out with most of his senior officials and so they had all been fired or moved elsewhere. The remaining officials were all very bright, dedicated to their work, often working extremely long hours, particularly in the darkest days of the crisis. But they lacked experience and most of them had not worked through a previous recession as the UK had known only growth in output from 1992 to 2007.
Jeremy did not find it to be an ivory tower, indeed he observed individuals taking their intellectual curiosity too far. On one particularly difficult day some of them had debated an arcane example of economic history and, when they should be catching a few hours’ sleep in the small hours of the morning, he later found one of them continuing to research this item. Their work was respected internationally. Jeremy could vouch for this personally as one report he had drafted was published with a number of typographical errors. He found these same errors reproduced faithfully in several other nations’ reports on the same issue.
Most of the department by now had learnt a default way of working. They would endeavour to find out what Gordon Brown wanted, by now the Prime Minister, and faithfully do the opposite. Many of them wore the scars from his time as Chancellor. Jeremy found his successor, Alastair Darling, a perfectly decent chap if not intellectually brilliant. Brown on the other hand could lighten up a room just by leaving it. He, of course, now dines out on his self-styled role as the Saviour of the World. History will tell a different story. By the end of his period in office as first Chancellor of the Exchequer and then Prime Minister the United Kingdom had the same deficit profile as Greece and was going through the deepest recession in 60 years. The last Labour Cabinet, fully cognisant of the damage they had collectively done, was united by one thing, a fear of being re-elected.
Jeremy believes the most important thing since then has been to give confidence to markets and in that respect he thinks the Coalition Government has done the right thing by stepping out to reduce the alarming deficit and has already reduced it by 25%. After all, despite the Eurozone crisis, the UK budget deficit is still more than double than that of the combined Eurozone countries. The world is now five years on from the financial crisis, yet the global economy remains unbalanced and is apparently becoming more so as interconnected weaknesses continue to exacerbate each other. Balanced economic policies and a reliable financial system remain a distant goal.
There are growing signs of a global economic slowdown. In the US there is continued weakness in consumer spending and the labour market. Among the BRICs, India’s economic growth is at its weakest in a decade, while recent monetary easing in Brazil and China can also be seen as evidence of softening economic growth. In Europe, the central bank lowered its policy rate by 0.25% to a Euro-era low of 0.75%. A weaker euro may assist export-oriented Germany but will do nothing to address the deep-rooted problems faced by Europe’s depressed south.
After the collapse of Lehman Brothers, the Bank of England cut interest rates to 0.5% and began the largest quantitative easing programme in history. The Bank increased the monetary base by about 40% a year for nearly four years but the money supply has only expanded at an annual rate of around 1.3%, while the economy has ground to a halt. If low interest rates were going to work they would have worked by now.
The reason why monetary policy has failed is simple. Instead of borrowing to spend, companies and households are paying down debt, a perfectly sensible strategy at the individual level. Rather than being channelled into economically productive areas, savings are being taken off the table or, as economists say, the money multiplier has turned negative. This would be the ideal time for the government to step in with some sensible infrastructure projects. Instead the decision by the governments of the UK, Germany, US and Japan to reject fiscal stimulus has placed an intolerable burden on central banks.
At the end of June, Sir Mervyn King, Governor of the Bank of England, told a Treasury Select Committee that the health of the economy had deteriorated so severely that policymakers had torn up their forecasts made six weeks earlier. Governor King warned that we were not even halfway through the financial crisis, something I had covered previously in my blog The New Normal, (24th March 2012). It might therefore follow that we can expect low interest rates for several more years.
I asked Jeremy if the policies of the Coalition Government to stimulate growth were somewhat in contradiction as they cannot decide if the problems are supply side or demand side problems. For example, the stated intention of sweeping away planning regulations is supposed to unleash a housing construction boom. But there are over 400,000 building sites with planning permission already granted, enough for four years of housing construction. Jeremy agreed with me and perhaps in his position as Chairman of the Countryside Alliance Foundation and a leading opponent of HS2 he would prefer to see planning laws maintained while investment in enabling infrastructure should be encouraged. If so then that’s my position too.
Copyright David C Pearson 2012 All rights reserved