Rewriting history and our Election campaign

By Bernadette Meaden
April 15, 2015

Many dramas are based on a true story. I never thought I’d see a General Election based on fiction. The three main parties appear to have based their manifestoes on a rewritten version of our own recent history, and the media are going along with it. It is quite bizarre.

The three main parties, with varying degrees of enthusiasm, assure us that their top priority is getting the deficit down, or balancing the books. This is a wrong and damaging priority according to Nobel Prize-winning economist Paul Krugman, and many others.

But how did cutting the deficit become accepted as such an overriding priority in the UK, and how was history rewritten to make it so?

We now hear very little about the biggest banking crisis in history and the ensuing bailouts, but we do hear about ‘Labour’s great recession’ and Labour’s profligacy’. It is almost as if the banking crisis never happened, so it seems important to remind ourselves of a few facts if we are to hold on to reality.

In September 2007 George Osborne pledged that a future Conservative government would not only match Labour's spending plans, but would spend more. He promised a two per cent increase in public spending per year. See him saying it here. Mr. Osborne evidently believed Labour’s spending plans were sensible and sustainable.

Yet even as Mr. Osborne made this pledge, the money markets around the world were beginning to seize up as the sub-prime mortgage crisis in America took hold. Less than two weeks later, the run on Northern Rock began.

The BBC explained what had caused this developing crisis. Mortgage brokers in the USA had sold sub-prime mortgages to people who couldn’t possibly afford them, (this was dubbed ‘predatory lending’) and banks then sold them on as investments.

"The business proved extremely profitable for the banks, which earned a fee for each mortgage they sold on. They urged mortgage brokers to sell more and more of these mortgages." The mortgage bond market grew to $6 trillion and then, inevitably, started to collapse as people defaulted on their mortgages.

"Already banks have announced $60 billion worth of losses as many of the mortgage bonds backed by sub-prime mortgages have fallen in value. The losses could be much greater, as many banks have concealed their holdings of sub-prime mortgages in exotic, off-balance sheet instruments such as 'structured investment vehicles; or SIVs."

The losses were indeed much greater, and starting in the US but spreading rapidly, banks began to look extremely fragile. The UK government launched a bank bailout, as did the government of most other affected countries.

This was not cheap. As the National Audit Office recorded,"Between 2007 and 2010, the Treasury made a series of large financial interventions to support the financial stability of UK banking. These interventions supported four broad aims: to protect depositors, maintain liquidity for UK banks, maintain capital for UK banks, and to encourage banks to lend to creditworthy borrowers."

The bailout involved a government cash outlay of £133 billion, and a total commitment of guarantees and indemnities to the banks of £1,029 billion.

As the effects of the credit crunch were felt in the wider economy, social security payments also rose naturally. This always happens in a recession.

However, by 2010 the UK economy was recovering remarkably well. The economy grew by 1.2 per cent in the second quarter of 2010, with the BBC reporting it was "the fastest rate of quarterly expansion recorded since the first three months of 2001."

At this rate of growth the deficit we had acquired bailing out the banks and supporting people through a recession would gradually and naturally shrink as a proportion of GDP. So far,so good.

But then, something bizarre happened. In the run-up to the 2010 General Election, and afterwards, a fictional version of events began to gain ground. We were told that the economy was in such dire straits we were in as perilous a position as Greece. Even more bizarrely, the media seemed happy to accept this fiction.

Simon Wren-Lewis, Professor of Economic Policy at Oxford, called this "mediamacro"."‘Mediamacro’ is the term I use to describe macroeconomics as it is portrayed in the majority of the media. Mediamacro has a number of general features. It puts much more emphasis than conventional macroeconomics does on the financial markets, and on the views of participants in those markets. It prefers simple stories to more complex analysis. As part of this, it is fond of analogies between governments and individuals, even when those analogies are generally seen to be false by macroeconomists.

"So after the 2010 election (and to some extent before it), mediamacro had bought with barely a murmur the view that reducing the government deficit was the top priority. It even bought a second story, which was that the previous Labour government had played a large part in creating the deficit problem in the first place. Like all good myths this was based on a half-truth: before the recession Gordon Brown had been a little less prudent than he should have been: he had been too optimistic about tax receipts, and followed a fiscal rule that allowed his progress in reducing debt in the early years of the Labour government to be reversed in later years. But… the impact of this on the deficit was dwarfed by the influence of the recession, and the recession was the result of a global financial crisis. Despite this, mediamacro allowed the myth of Labour profligacy to go unchallenged."

It is difficult to understand why the Labour Party did not do more to prevent this fiction becoming accepted, instead of allowing it to take hold. One theory is that Labour was plunged into a leadership election and was too distracted. Another theory is that they believed arguing about who caused the deficit was counterproductive, as they were then simply labelled ‘deficit deniers’ by the press.

Whatever the reason, the poorest and most disadvantaged in society have paid a heavy price for this rewriting of history, through unnecessary austerity.

For the Conservatives, this was the perfect opportunity to justify policies they had long wanted to enact but which had previously been politically unpalatable. Minimising the role of the banks in the crisis and blaming public spending, particularly on welfare, gave them the chance to shrink the state and reduce public services, ostensibly not on the grounds of ideology, but on grounds of financial prudence.

As poverty, homelessness and suicides rise, it looks likely that whoever forms the next government will bring more of the same, as macromedia continues to allow government ministers to say things like, "We inherited a shrinking economy" without challenge.

And the fact that our past is being rewritten, with the role of the banks and financial sector almost airbrushed out of the picture, does not just mean more austerity and suffering for the poorest. It also means that we are probably sleepwalking into another, even bigger financial crisis, as ‘wealth creators’ become ever more divorced from the real economy.

In 2013 Forbes magazine reported ‘Derivative trading…now totals in notional amount more than $700 trillion. That is more than ten times the size of the entire world economy. Yet incredibly, we have little information about it or its implications for the financial strength of any of the big banks.

The market has grown so unfathomably vast, the global economy is at risk of massive damage should even a small percentage of contracts go sour. Its size and potential influence are difficult just to comprehend, let alone assess.’

It has been estimated that the current size of the global derivatives market is $1.2quadrillion.

* More on the issues in the 2015 General Election from Ekklesia:


© Bernadette Meaden has written about political, religious and social issues for some years, and is strongly influenced by Christian Socialism, liberation theology and the Catholic Worker movement. She is an Ekklesia associate and regular contributor. You can follow her on Twitter: @BernaMeaden

Although the views expressed in this article do not necessarily represent the views of Ekklesia, the article may reflect Ekklesia's values. If you use Ekklesia's news briefings please consider making a donation to sponsor Ekklesia's work here.