A Journey (115 page)

True, certain cracks in the edifice had begun to appear. There was even the odd hole punched in the outbuildings. New forces were busy building something different, not far from where we were. But it was our model that still imposed itself and commanded most attention. So it looked in June 2007, when I left office.

The three years since then have seen something of a revolution in that apparently unassailable order. The economic crisis of 2008 ruptured our confidence in the rationality of the market economy. The war in Afghanistan hangs in the balance. President Obama, as we did in 1997, faced an orgy of expectation when he came to office and, like any president or prime minister, has to face the difficult choices of government. The rise of China is there in real life, visible and pulsating, a fact, no longer an interesting intellectual conjecture. Power is shifting east. Other nations such as Brazil and Turkey grow assertive, no longer seeking permission to play a role, but simply playing it. The European Union is in trouble, and for once the word ‘crisis’ is not an exaggeration but a description. We in the West remain democracies, but we have never had less respect for those we elect.

We thought the ultimate triumph of our way of life was inevitable. Now it is in shadow. Our confidence is low and our self-belief is shaken. Most of all, we feel weak, at points almost listless. The future, once so firmly in our grip, seems to have broken loose in search of new masters. Read much of our media, and that’s how it is: malaise, decline, impotence, challenges unmet, promises unfulfilled.

Personally, I have never felt a greater sense of frustration or indeed a greater urge to leadership. I enjoy my new life much more than my old one, and find in it huge purpose. I am fighting for my world view, but in a different manner from that of being in conventional office. I have tried to gain a bigger and deeper understanding of the world. China is no longer such a mystery, though that is only a relative sentiment. The Middle East is endlessly fascinating and frightening. I see the economy from a broader and different perspective in business. In my two major charitable areas – Africa and faith – I find complete spiritual as well as political satisfaction.

I’m living life full pelt, but I find my old world in a state of despair and feel both shocked and galvanised by this. Perhaps that is because I am removed from it and so think I see it more clearly. (This could be an illusion.) Perhaps it is because some of the
bouleversement
is directed at precisely what I represented in office: liberal economic policies, market reforms in welfare and public services, and engagement and intervention abroad. For whatever reason, a chapter that I intended to write as a postscript now resembles more of a credo.

To summarise: I profoundly disagree with important parts of the statist, so-called Keynesian response to the economic crisis; I believe we should be projecting strength and determination abroad, not weakness or uncertainty; I think now is the moment for more government reform, not less; and I am convinced we have a huge opportunity for engagement with the new emerging and emerged powers in the world, particularly China, if we approach that task with confidence, not fear. In short, we have become too apologetic, too feeble, too inhibited, too imbued with doubt and too lacking in mission. Our way of life, our values, the things that made us great, remain not simply as a testament to us as nations, but as harbingers of human progress. They are not relics of a once powerful politics; they are the living spirit of the optimistic view of human history. All we need to do is to understand that they have to be reapplied to changing circumstances, not relinquished as redundant.

The dramatic and far-reaching impact of the financial crisis of 2008 is still being played out. It will probably register in history as the most significant economic event since the 1930s. The facts of what happened are well known and don’t require repetition, but the interpretation of them is and should be a matter of enormous debate.

Almost at once, as occurs now in virtually any such drama, a conventional wisdom arose that was extremely resistant to challenge. It has gone roughly as follows: there was a catastrophic failure of ‘the market’, necessitating a rescue by ‘government’ and a Keynesian reflation to counter the deflation. In late 2008, banks were stabilised by the injection of government support; regulatory systems began to be overhauled in order to bring the rogue financial sector into line; deficit spending became economic policy.

Politically, of a sudden, the state was back in vogue. The market-led reforms of the 1980s and 90s appeared wrong. The economic growth was said to be a delusion based on debt. Above all, government was in the ascendant. You could almost touch the
Schadenfreude
of large parts of political and academic opinion as ‘the market’ was exposed as having been bereft of clothes after all.

This led progressive politicians, on the left especially, to assert that politics was going to undergo a radical shift of direction towards a more interventionist and statist position. This seemed to accord with the change in mood in the US (though Obama’s appointments to key economic positions were actually very centrist). It signalled the end of an era that began over thirty years ago with the Thatcher/Reagan economic and political philosophy.

Disentangling all of this and putting it in some order is a hugely difficult task, made much more difficult by the fact that challenging any part brings a fair amount of criticism since it is a conventional wisdom that is so entrenched. But we do need urgently to unravel it and come to a better and more considered view.

First, ‘the market’ did not fail. One part of one sector did. The way sub-prime debt was securitised, spliced and diced and sold on with no real appreciation of underlying risk or value was wrong, irresponsible and immensely damaging. Some of the rewards, the huge payouts for shuffling round securities, the bonuses, are not just presentationally awful; they can’t be justified and, at worst, have helped create a propensity to ‘do the deal’ whatever the long-term merits, in a way that significantly contributed to the crisis. All this is correct and should be acted on. However, such practice should not define or represent the whole of the banking sector, let alone the whole financial sector, let alone ‘the market’.

Second, government also failed. Regulations failed. Politicians failed. Monetary policy failed. Debt became way too cheap. But that wasn’t a conspiracy of the banks; it was a consequence of the apparently benign confluence of loose money policy and low inflation. The responsibility for the crisis should be shared, not borne by the market alone or even by the banks alone.

Third, the failure was one of understanding. We didn’t spot it. You can argue we should have, but we didn’t. Furthermore – and this is vital for where we go now on regulation – it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn’t have said: There’s nothing we can do about it until we get more regulation through. We would have acted. But they didn’t say that.

Fourth, financial innovation is not bad per se. Actually, very often it is good: it increases liquidity and boosts economic activity. The danger lies in innovation that has consequences we don’t understand, and effects which we therefore can’t track.

Fifth, when a crisis occurs – and I suspect this may be true of any significant economic crisis today – its consequences are magnified beyond any comparison with days of old by the supremely interconnected and interdependent nature of the modern global economy. It impacts in its own right; and then the impact is multiplied through that elusive but profoundly powerful force called ‘confidence’.

I am not suggesting confidence is just some airy sentiment unconnected to the facts. The arithmetic, naturally, determines the fundamentals of the confidence. But the swings in confidence derive, in part, from the psychology of how the arithmetic is being handled, and that depends crucially on the politics. The equation revolves around the interplay between arithmetic, psychology and politics. So the arithmetic remains uncertain, the politics unclear, the psychology therefore troubled, and confidence therefore erratic.

When I say we have to disentangle the conventional wisdom, I mean this: it is absolutely right that the state intervened at the outset of the crisis – not to have done so would have been ideologically blind and practically stupid; the problem, I would say error, was in buying a package which combined deficit spending, heavy regulation, identifying banks as the malfeasants, and jettisoning the reinvention of government in favour of the rehabilitation of government.

Funnily enough (or perhaps predictably enough), the public has got this more than many politicians and commentators, which is why the great lurch leftwards has not materialised. The public understands completely the difference between the state being forced to intervene to stabilise the market and government back in fashion as a major actor in the general economy. The role of government is to stabilise and then get out of the way as quickly as is economically sensible. Ultimately the recovery will be led not by governments but by industry, business, and the creativity, ingenuity and enterprise of people. If the measures you take in responding to the crisis diminish their incentives, curb their entrepreneurship, make them feel unsure about the climate in which they are working, the recovery becomes uncertain.

This is even true of the financial sector, however heretical it sounds to say it. Of course there should be a regulatory overhaul, but most of all there should be systems of national and global supervision that enable us to understand this new financial world and to track it, so that we can intervene where the risk of systemic failure demands it. What there should not be is a wholesale attempt to predict every potential crisis and construct rigid rules in advance to prevent it. That way we risk flattening our financial system, squeezing the innovation out of it, trying to return it to the world of yesteryear, which is neither sensible nor economically productive.

One result will be that as the banks do less, the state will have to do more. At present, we have gone from irresponsible lending to the other extreme whereby even worthy businesses and customers are refused credit. Indifference to risk should not be and need not be replaced by aversion to risk. For example, credit default swaps and derivatives are not in themselves a bad thing. On the contrary, properly used and understood, they can be immensely helpful. So understand them, supervise and regulate them when necessary, but don’t treat them as a consequence of greed. Treat them as what they are: new financial instruments to be used with care.

My preference is to approach regulation with caution, not to deny the financial sector a say in putting it right since it was the author of the wrong, but to deal with it as a partner in trying to achieve the correct balance between supervision and regulation, global and national action, and diminishing risk while allowing innovation.

As for the state itself, and the role of government, that also should be regarded as suitable material for reform, as part of the problem and not just part of the solution. For one thing, the fact that anxiety over the economy has shifted from banking practices to sovereign debt should illustrate how foolish it is to ignore government and state responsibility for what happened.

The eurozone crisis has not created the sovereign debt issue; it has merely exposed it.

The truth is that over an extended period of time, the developed world has been moving – but with far too much hesitation – towards reform of their welfare, public service and governmental organisations. Ageing populations, declining birth rates, greater expectations and changing social conditions have been confronting us, ever more insistently, for decades. The economic crisis should have been (and indeed still can be) the moment when, instead of lazily succumbing to the idea that more state spending dressed up as fiscal stimulus is the sole answer, we took the opportunity to accelerate and sharpen reform. Getting value for money in services like health care, opening up competition in areas like education, radically altering welfare so that it becomes a genuine safety net for those who need it and a leg up for those who can and should stand on their own feet, and at every point questioning, reassessing, changing, not so as to abandon social solidarity but to make it effective in a changed world; that is what we ought to be advocating as progressives and embracing as nations.

Take two examples: procurement and pensions. With the first, there is no doubt we could get far better value if we adopted practices the private sector has long regarded as axiomatic. But we still confuse the aspects of public services that are genuinely different in scope and purpose from private services, with means of doing things common to both, and where they are done either efficiently or inefficiently. Procurement during my ten years came a long way, but it is nowhere near where it should be and could be.

In respect of pensions, I favour the link between earnings and pensions because of National Insurance contributions. But as a society we need to ask ourselves what we really mean by retirement now. In our developed world, people expect to be still energetic in their late sixties and beyond. Maybe I am an exception, but I would regard the idea of stopping work at sixty as absurd; horrifying, in fact. Now we can change gear, even change job, so it makes no sense to analyse the world of 2010 through the eyes of my grandfather.

Step by step we have been feeling our way towards a new paradigm of the state and the services it provides, how technology can save money through new ways of working; flexibility in professional demarcation; outsourcing, and so on. But the crisis simply brings home to us the need to speed it up.