Letter: Peter Smith, July 25, 2017
I cannot let RB Mortimer get away with his comment that “it was the Labour Party that created the austerity problem when they left the country with billions of pounds of debt”.
In September 2008 the fourth largest investment bank in the US filed for bankruptcy protection. The US authorities had earlier eased the sale of another ailing investment bank, Bear Stears, and propped up mortgage lenders Freddie Mac and Fanny Mae, but decided to let Lehman Brothers go bankrupt.
Fearing a huge financial slump, both the US and European governments decided to save the financial markets and financial trades through a coordinated rescue package which dealt with the immediate crisis by stabilizing the financial system.
The UK, like the US and other EU states, reduced interest rates to near zero, nationalized some banks, bailed out others, announced a large fiscal stimulus and increased the money supply through ‘quantitative easing’, which used taxpayers’ money to improve bank balance sheets. This rescue package, fully supported by the Conservative Party, was thought of as an emergency measure which would no longer be needed once the immediate danger had passed. As a consequence, the politics of austerity and retrenchment began, and continues today.
It is the case that neither the Financial Services Authority nor the International Monetary Fund saw the crash coming.
The Conservatives and Labour had trusted the bankers, the central bankers and the regulators to get on with managing the financial system. In hindsight we can see that trusting those rewarded with bonuses and shares of their firm’s profits to do anything other than look after themselves was pretty naive.
When things went pear-shaped Gordon Brown’s response was widely praised internationally, and backed by the Conservatives. The austerity problem was a direct consequence of events in the US. Governments, including our own,responded as best they could in line with most expert economic advice.
However, austerity , which was seen as a short term measure, has been continued for ideological reasons by a Conservative government. It is proving to be damaging to both our economy and our wider society.