Britain's Winter of Discontent
Behind such comments lurks the specter of another bankrupt island nation--the fear, as The Economist recently put it, that a city known in boom times as Manhattan-on-Thames, or Londongrad for all its wealthy Russian exiles, might turn into Reykjavik-on-Thames. In October, when Iceland became the first national casualty of the credit crunch, the notion that Britain might follow its northern neighbor into bankruptcy seemed absurd. Like the City of London, Iceland's banking sector owed its spectacular growth to transactions in foreign currencies and debt-fueled acquisitions. Yet once the Icelandic króna started to slide, the government could do little to protect it. Unable to pay its foreign debts or buy imports, Iceland was forced to call in the IMF. As BusinessWeek recently pointed out, the $2.8 trillion balance sheet of RBS (currently 68 percent owned by the British taxpayer) alone is larger than Britain's entire gross domestic product. Exact comparisons are hard to pin down, in part because different sources give different figures for total debt. And even after two decades of malign neglect by Thatcher and Blair, manufacturing and mining still account for about 17 percent of the British economy. The perils of remaining outside the big currency blocs are the same, though, which is why Iceland's new left-wing prime minister, Johanna Sigurdardottir, said she thought her country's "best option is...to join the EU and adopt the euro."
Might Britain follow suit? Opposition to the euro is the cornerstone of Tory foreign policy, and though Labour is theoretically open to joining, even the Liberal Democrats (led by former Nation intern Nick Clegg), still the most pro-European of the three major parties, recently dropped their long-term commitment to join the euro.
But if politics has closed one road out of Britain's predicament, it might also open others. So far the government has limited itself to what might be termed financial firefighting: recapitalizing failing banks, trying to stimulate lending with government loan guarantees, forcing short sellers (speculators who sell borrowed stock, hoping to make a profit when share prices fall) to disclose their positions. On February 13 the Bank of England will begin a £50 billion asset swap, buying up companies' short-term debts and offering Treasury bills in exchange. Though criticized by the Tories as ineffectual, none of these measures have been particularly controversial. Even Richard Lambert, the former editor of the Financial Times who now heads the Confederation of British Industry, said that Brown's latest moves "are almost exactly the measures we at the CBI have been asking for. So we are pleased."
The problem is that so far the medicine isn't working. And Brown, who famously promised voters "no more boom and bust," seems unable to articulate a fresh vision, a narrative of national renewal comparable to President Obama's call to remake America. Perhaps because that would entail admitting that a return to the day before the disaster, when bankers called the tune and politicians danced attendance, is as undesirable as it is impossible.
Yet inaction has its perils. The government's reluctance to get too involved in running the banking system risks creating "zombie banks," says Scott Urban, former senior editor and consultant at Oxford Analytica, a strategic consulting firm. "You can pump in all the money you want, but these banks will still be extremely risk-averse." The wave of oil refinery strikes, like the French general strike and earlier protests in Greece, suggests that in Britain, too, the surface placidity of everyday life masks considerable discontent. "In Labour's working-class heartlands," says Jon Cruddas, MP for Dagenham, "there is a powerful feeling of being dispossessed."
Cruddas faults the government for doing nothing during the boom years to halt the European Union's "race to the bottom," leaving British workers among the least protected in Europe. Though he sits on Labour's back benches, Cruddas, who comes from a Catholic working-class family and arrived at his politics by way of liberation theology, has become an increasingly influential voice urging the party toward greater economic activism. Perhaps surprisingly, he doesn't favor wholesale nationalization--"Why should the government have to price the banks' toxic assets? Let the market do that"--but says they might as well put the banks they've been forced to buy to good use. One idea is a National Infrastructure Bank, issuing public works bonds to fund railway improvements, bridges, wireless broadband, etc. (Similar ideas have been proposed in the United States, bolstered by regulator Elizabeth Warren's revelations about how little Washington got for its TARP billions.)
More radical is Cruddas's plan for social credit and micro-lending, turning the hundreds of recently shuttered post offices into community development banks--another model, pioneered by the Grameen Bank in Bangladesh, as well as ShoreBank in the United States. (Peter Mandelson, the New Labour godfather serving as business secretary, endorsed a version of the "People's Bank" plan--an indication of the shift in politics here.)
Cruddas's really big idea is for a housing bank, using Northern Rock, an S&L taken over by the government a year ago, as a vehicle to enable local councils to build 250,000 units of public housing a year. "Since Thatcher got the government out of the housing business, we've got 2 million families on council waiting lists," he says. "Even in boom times there was no way the private sector was going to house those people." With so much of the construction industry idle, Cruddas says, housing could be "Labour's equivalent of the TVA--a program that changes lives and transforms politics."
With no need to call an election until 2010, Gordon Brown might just have enough time to turn the crisis into an opportunity. First, though, he has to keep his balance--and find his nerve.