Five years ago, in 2008, Conservative Conference was dominated by the financial crisis.
The Prime Minister interrupted the schedule to make a special statement inviting the government to rush through a special administration regime for the banks and backing the government’s decision to bail them out. I circulated, aghast if not surprised, telling everyone that would listen that such a bailout was a disaster and the Party should not back Brown on this. A few listened sympathetically, but I think none felt confident any viable alternative existed.
Much has been written over recent weeks about the economic and financial events of September 2008. Most of it seems badly wrong to me, though I do not wish to replay old economic arguments here. Suffice it to say I regard the key moment and iconic policy error not as the September 15th bankruptcy of Lehman’s (allowing that was almost the only thing policymakers got right in 2007/8), but the September 7th bailout of Fannie Mae and Freddie Mac.
Bailing out the banks was the greatest economic folly in history, by some margin, leading to effective sovereign defaults in Ireland and Spain, with the UK only escaping (so far) by a whisker, and in much of the developed world a deeper recession than in the 1930s. Somehow there persists a belief that by bailing out the banks we averted a great economic slump. Which one was that that we avoided? The one where UK GDP contracted 7%, more than in the 1930s? The one where Greek and Spanish unemployment exceeded 25%? The one where countries defaulted on their debts and the recovery was the slowest since the 1870s? Bailing out the banks did not avoid economic collapse: it exacerbated it, and impeded recovery, as well as being immoral in shielding the rich from the consequences of their folly and in imposing upon the poor and the prudent the burden of saving the lax.
But here I want to focus upon the politics. In 2008 the Conservatives were still far behind the play. From around 2000 onwards, the Conservatives had adopted a strategy of submit-to-neutralise on the economy. As Shadow Chancellor, Michael Portillo embraced the minimum wage and Bank of England independence (which Conservatives had opposed in 1997, particularly because it was explicitly intended as a stepping stone to joining the euro). In 2001 and 2005 the only material spending cuts the Conservatives proposed were those relating to “fraud and waste”. Shadow ministers floating larger spending cuts were either hidden away (Letwin) or deselected (Flight). The belief was that we had won all the main economic battles and needed to be willing to move on.
After the 2005 General Election this position came to be shouted louder by the Cameroons. Oliver Letwin proclaimed that “econo-centric” politics was over, and the debate had moved on to a “socio-centric” age. As in the 2001-05 Parliament, the Conservatives after 2005 promised to matched Labour’s spending plans on major items (health and education) and our policy of economic reached its apotheosis in the declaration that the only legitimate debate was about “sharing the proceeds of growth”.
After Hubris, Nemesis. As Mervyn King called, in the summer of 2007, for a Grand National debate on “moral hazard” – should the imprudent be bailed out to be spared the consequences of their folly – Conservative spokesmen were silent. When Northern Rock suffered a bank run, the Conservative response was widely seen as embarrassing and naïve.
Yet the moment passed. Some of us started writing blood-curdling warnings that Northern Rock was just the beginning, and that economic policy needed to be adjusted, and quick. But by mid-2008 senior Conservative politicians gave every impression of feeling little had fundamentally changed. Some Conservative commentators complained of the “sharing the proceeds of growth” formulation and said tax cuts needed to be higher on the agenda, learning the lesson of the strong welcome given to Osborne’s inheritance tax cut pledge of 2007 – a pledge widely credited with seeing off Gordon Brown’s plans for a General Election. But Cameron said cutting taxes was not an option – “the cupboard is bare”, he declared in the summer of 2008.
I said at the time that such a position was badly wrong and that with recession coming, later in 2008 there would have to be a temporary tax cut as a macroeconomic policy measure. A few commentators joined my side. As events in financial markets spiralled in September 2008, Alistair Darling started to float the idea of a temporary “Keynesian” expansion in spending. I was only a little less aghast at this idea than I had been at bailing out the US banks in September 2008 or at the introduction of universal deposit insurance in the UK in 2007. Had macroeconomics so quickly abandoned all the lessons of recent decades that had seemed secure only a couple of years before?
The problem Cameron and his team faced, in late September and early October 2008 was that they had no economic ideology, no underpinning theory or bedrock economic principles. Policy pragmatism - declaring that you favour “what works” – is all very well when events are stable and the policy required covers well-trodden ground where we have a good idea of what works. But when events are incomprehensible and we are in uncharted territory, what we need is not a map drawn by past travellers, but instead a clear direction and an intellectual compass to guide us.
Cameron supported bailing out the banks in 2008 because he didn’t know why he shouldn’t and he didn’t have any conception of what alternative options there might be. That wasn’t a lazy decision on the day. It was the product of Conservatives spending the period from 2000 to 2008 trying to avoid thinking about the economy at all. If he had said he didn’t favour bailing out the banks, what would he have proposed instead? And how would that have meshed with any of his previous policies? Conservatives tried to copy Labour on the economy from 2000 on, just nuancing here and there. So naturally when it came to bailing out the banks, they tried to copy Labour again. That wasn’t simply some abandonment of Conservative principle; it was precisely what a sustained policy of economic disarmament implied.
This also set the stage for what came later. When the Conservatives rightly started calling for spending cuts in 2009 and blamed Brown for the depth and consequences of recession, Conservative commentators, Labour commentators, and the voters alike noted that the Conservatives had spent most of the past decade endorsing the very policies that they now blamed for recession. So although, when push came to shove, Brown had to take the fall as the man at the tiller when the economic ship went down, no-one really believed the Conservatives would have done anything materially different.
These, then, are the political lesson of 2008. First, the economy is never dead as a political issue. Second, ideology finds its greatest value when events are uncertain, and the belief that ideology can be abandoned is a delusional luxury of placid times. Third, if you copy your opponents’ policies, don’t expect much political credit when they go wrong.
Andrew Lilico is a former Bow Group Council member and now Director of Europe Economics.