Another party political conference season, another party political memoir. Most of the coverage of Alistair Darling’s account of the financial crisis has focused on his poor relationship with Gordon Brown, his predecessor as Chancellor of the Exchequer. As a Labour Party member, reading this book calls to mind the temptation you have to scratch a healing wound; unhealthy, yes, but compelling nonetheless.
George Osborne comes out poorly, too, blamed for focusing on short-term political advantage. But the real merit of this book is the description of what happened during the financial crisis. Gordon Brown wrote about it last year. Alistair Darling here gives his view, but while the purpose of Brown’s account was to argue for a fiscal stimulus from the G20, Darling is more concerned to give what he sees as his account of events. He mixes this with the occasional personal reflection, highlighting that, amid extreme pressures, there were real human beings trying to prevent complete disaster.
Darling was appointed Chancellor when Brown became Prime Minister in the summer of 2007. The outlook for the economy appeared benign to most people, including those in the Treasury. As it happens, the housing market in the United States had peaked in the second quarter of the previous year and some investors were nervous, worrying about the exposure of financial institutions to securities linked to American mortgages. These concerns began to become more widespread later that summer when a couple of hedge funds ran into trouble. Then the money markets began to seize up and, in Britain, lenders became very worried about Northern Rock.
I remember that time very well, since I was managing a money market fund at the time. The interest rates that banks – Northern Rock, in particular – had to pay in order to borrow money were rising sharply. This was the case even for three-month loans, and most banks were affected. It was quite clear that there was a problem. But the authorities were behind the curve. Darling describes his frustration with the Bank of England as it worried more about the risks of “moral hazard” if it helped bail out Northern Rock than about the immediate crisis. Customers forced the hand of the Bank by, in large numbers, withdrawing their deposits from Northern Rock.
There is a similarly engaging account of events surrounding the fall of Lehman Brothers, from a British perspective, and the problems faced by Royal Bank of Scotland and Lloyds/HBOS. Darling regularly expresses his amazement at the attitude of some of the bankers during this time. They refused to admit they had a solvency problem rather than just a need for more funding (in other words, liquidity). They continued to be arrogant, to pick holes in a proposed rescue plan, and to express no gratitude that the Government (that is to say the taxpayer) was trying to bail them out of a predicament into which they had got themselves. Eventually Darling went home, predicting accurately that removing himself from the Treasury for a few hours would put an end to the negotiations and force a deal.
I still find it incredible that, despite Northern Rock and the fact that it was clear the money markets remained under extreme strain for the following year, and despite the fall of Bear Sterns in the spring of 2008, the authorities were still caught on the hop – both by Lehmans and, in Britain, by our own banks. The approach appeared reactive. Wait until a disaster is about to occur and then commit billions of taxpayers’ money (this was the right thing to do, but what if action had been taken earlier?) without forcing fundamental structural change on the banks.
Markets can catch you out but, in this case, the system had been under strain for a while. Darling says: “There was a Reuters screen outside my office in the Treasury and a Chancellor needs to know everything on it.” All well and good. But wait a minute. The Reuters screen was outside the office? It wasn’t at his desk, along with a couple of Bloomberg screens? Sure, such screens can be distracting, but they do tell you what is going on. It calls to mind sterling’s fall from the Exchange Rate Mechanism in 1992; John Major received verbal updates. Or the 1929 crash when investors would crowd around the ticker tape machine to read the sharply falling prices, semi-detached from what was happening on Wall Street.
Darling says that Labour lost economic credibility. It took the right actions during the crisis, but the Government needed a consistent message on the economy. In the summer of 2008, when Darling predicted the biggest slowdown in 60 years, he was attacked by people close to the Prime Minister who, it turned out, was making policy on the basis that the slowdown would only last six months. (Darling says that Brown’s move to replace him the following year was prevented only
by James Purnell’s sudden resignation from the Cabinet). That may have
been a tactical move, to help maintain confidence.
Nevertheless, Darling was right, although the Lehmans collapse triggered a series of events which caused the economy to hit the buffers in the fourth quarter of that year, sharper and sooner than he expected. The inability of the Labour party to develop a clear message on the economy contributed to its defeat in 2010, Darling maintains. He attributes this in large part to Brown’s refusal to publicly acknowledge the scale of the impact on public spending. You need a convincing plan to reduce the deficit after such an event.
This is a quietly engaging book and Darling comes across, as he does in his public appearances, as a warm, sincere, and very capable character. In his tenure as Chancellor, he was buffeted by extreme events unknown to most of his predecessors and his boss was not someone with a reputation for working with a team. Yet, sometimes, he seems too much at the apparent mercy of outside forces and there is a sense of quiet despair. His Pre-Budget Report in 2007 had to cope with fighting the “election that never was”. He was not happy with his Budget in 2008, at least the growth figures. However, his 2010 Budget remains the benchmark against which the coalition’s economic policy is being measured.
Back from the Brink provides an insight into how ministers operate under pressure. Alistair Darling deserves praise for his actions during the crisis. It is not a joyful read: Labour “failed to capitalise on our successful handling of the financial crisis [and] lost our collective vision and sense of purpose”. Yet its central message is an important one; Labour must be credible on the economy to win a general election.
