Britain’s economy and our politics were broken by the financial crisis
The impact of the collapse and rescue of RBS was much bigger than we understood at the time
Almost 17 years after British taxpayers rescued what had briefly and disastrously become the biggest bank in the world, the UK government has announced it will finally sell off its remaining shareholding in NatWest Group, the successor to RBS. In 2008 and 2009 ministers spent a total of £45bn acquiring an 84% stake in the bank, because they feared its collapse would cause a chain reaction, destroy the financial system and devastate the British economy. Now, the bomb has been defused and the bank will return to full private sector ownership.
Having spent several years of my life so deeply immersed in the RBS story, for a book on the crisis published in 2013, barely a month goes by now when someone doesn’t ask me about RBS and the consequences of the financial crisis.
My response is usually that the impact of the disaster was much bigger and more enduring than we realised at the time. The illusion and comfort of the rescue, necessary but having long term unintended consequences, gave the British a false sense that this was an emergency that had been dealt with successfully. Disaster averted.
Fortunately, a great depression was avoided. Unfortunately, choosing to spread it out we underwent a slow, great repression that has lasted many years.
In a paper published last year the Institute for Fiscal Studies assessed the decade and a half of low UK growth and dire productivity that followed 2008:
“On a per person basis, economic growth has been slower than in the US, the EU27 and Germany in that time. The slowdown has been particularly stark given that the UK economy, and its productivity, were growing quite quickly prior to 2008. While employment growth has been strong, average earnings growth has been dreadful - for which read almost non-existent. Gross Domestic Product per head is today nearly £11,000 lower than it would have been had pre crisis trends continued.”
People feel poorer because relatively many of them are, and they don’t like it. They blame the old political parties for this and are tempted to try something new and populist as a desperate last resort.
Even worse, the financial crisis knackered our financial system, for a time breaking the basic capitalist transmission mechanism by which credit is generated and investment functions to fund innovation, improvement and future prosperity.
My view is it also contributed to the high immigration orthodoxy with the Treasury pursuing ever higher immigration. The only way the UK’s troubled post-GFC economy could get any growth at all, it was and is said by the Treasury, is to import lots of people. This argument had been building in British policy making circles pre-crisis. Until 2004, net migration ran at manageable levels. In 1997 it was only 48,000 according to the Migration Observatory. In 2004 it hit 268,000. These numbers became the new normal, with immigration bumping around a bit and hitting 331,000 in 2015.
All the while, officials said there is no other way. Quite a bit of it is students, they pointed out, though we’re not good at tracking who comes, stays or leaves. Anyway, we’re not growing much and productivity is terrible after the financial crisis, they said, so imagine how much worse it would be if we didn’t ship in a lot of people. Enter, Boris Johnson post-Brexit and the controls really came off. Net migration hits 970,000, we think, though it could be more, in 2023.
And here we are. Nigel Farage and the rise of Reform are the result.
Weirdly, we rarely talk about the deep political crisis we are going through in Britain today as being directly rooted in the financial crisis, its aftermath and the profound identity crisis it caused. Brexit gets all the attention when it was an economic blip, a rounding error, in comparison to the impact of 2008.
The financial crisis is the ground zero of contemporary politics, so it is worth continuing to study and think about it.
There’s a play being premiered this summer at the Dundee Rep and Edinburgh Festival called Make it Happen. Nothing to do with me, I should add, it is a National Theatre of Scotland collaboration between the leading playwright James Graham and Brian Cox of Succession fame. It will be interesting to see where they land with the story. The focus of the play is said to be on Goodwin’s misappropriation or misunderstanding of the theories of the great economist Adam Smith. Fine, but will the outsize role of Scottish nationalism and expansionist patriotism run riot, as happened in the real RBS story, also get proper attention? Let’s see.
My book, Making it Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy, is still available and still dividing opinion, although at the time the response was largely positive from irate taxpayers who wanted explanations for what happened.
I wrote the book as an irate taxpayer myself, as someone who wanted to try to understand what had happened after having gone into the 2008 crisis thinking I had a decent grasp of economic concepts and realising half way through that I didn’t understand the crisis and most of the people involved didn’t understand it either.
Several broadcasters asked me to go on air late last week to talk about the financial crisis and why it has taken so long for the government to get to the point when it can sell the rest of its shares in the bank.
If I had got round to going on, I would have said that my view hasn’t changed too much in the 12 years since the book was published, other than in one regard.
I still believe Fred Goodwin (the former CEO of RBS who expanded the bank too fast) got a lot of the blame and only deserved some of it. He didn’t operate alone. The board, senior management, institutional investors, regulators and politicians failed too. Foolishly, he made himself an easy scapegoat for more widespread failures.
Gordon Brown, the Chancellor at the time, didn’t cause the crisis, but his hubristic policies in the run-up helped make the UK particularly vulnerable to a global financial disaster. The GFC hits Britain hardest of all the major economies because we went all in on financialisation, a process that did not start with Brown. It started under the governments led by Margaret Thatcher. Brown then accelerated it and the over-extended and over-leveraged banks became far too big relative to the rest of the economy.
To give a proper sense of the scale of what was created pre-crisis, as finance expanded in the boom years and politicians enjoyed the benefits of growth and of spending the resulting tax receipts on vote-winning largesse, I always return to the Bank of England graph from 2010 sent to me by the economist Richard Davies.
In 1990, the total combined balance sheets (total assets) of Britain’s clearing banks reached a sum equivalent to 75% of UK GDP that year.
In 2000, the total combined balance sheets (total assets) of Britain’s clearing banks hit a sum equivalent to 143% of UK GDP that year.
By 2010, the total combined balance sheets (total assets) of Britain’s clearing banks were a sum equivalent to 450% of UK GDP that year.
That’s why the blow-up when it came was so consequential. When the banks failed, the impact was so large it punched a huge hole in the British economy. The effect on the public finances was equivalent to a national war and when our economic performance might have recovered, with the Brexit fight out of the way, Covid hit and the British taxpayer was clobbered again.
What I missed at the time about the financial crisis - or one thing I missed, I’m sure there were others - was how damaging the political chain reaction would be.
Stop the boats or Nigel Farage will be unstoppable
This weekend the plan had been to write something on Nigel Farage, the leader of Reform, committing his first major strategic error since his insurgent party started to rise in the polls. Labour and Keir Starmer are behind Reform in the polls and concentrating their attacks on Farage to the extent that they cannot stop mentioning him. Reform has even issued social media posts asking why Starmer is obsessed with their leader.
It was an amusing line from Reform, but much less amusing were Farage’s new economic plans which are reckless to the point of being terrifying. Welfare benefits will go up while the tax threshold will be raised to £20,000 and paid for by, er, eliminating waste on the model implemented so successfully by Elon Musk’s DOGE in Washington. So great has Musk’s success been as a waste buster that he is leaving with a black eye to go back to his business, having saved perhaps 2-3% of the mooted $2 trillion that was promised.
The holes in Farage’s tax and spending sums are so large - £80bn in year one, perhaps much higher - that it makes me wonder who he is going to hire as Chancellor if he becomes Prime Minister. Fred Goodwin? Actually, that is unfair to Goodwin.