Over time, a model of public service reform had developed that came to define the Government at its most radical. Pressure on the provider of the service came from three sources: from the users who could choose to go elsewhere; from the central State, which set targets for performance and ensured that services were audited and inspected; and from the threat that any failing institution would be subject to losing its franchise in competition with a private company.
The practice always fell some way short of the theory, not least because few Labour MPs could be assembled to agree with it. A more comfortable phase began when Mr Blair left office and was replaced by Mr Brown. Although, ostensibly, there was no serious change of direction, the Government slowed everything down. The reforms in health were slowed almost to a standstill. Education policy was almost entirely derailed by a crisis in child protection with the aftermath of the dreadful case of Baby P, a boy battered to death at the hands of his mother, her boyfriend and their lodger despite repeated visits by social workers. Only in welfare did the radicalism of the second phase continue as James Purnell tried to add greater conditions to the receipt of benefits and tried to widen the range of suppliers of welfare.
In a sense, the third phase of the Government brought it full circle. The emphasis during the Brown years on a multitude of small initiatives driven by central targets, now rebranded as guarantees, and the evident reluctance of the Government to open up the health and education markets were reminiscent of the Government’s stuttering beginnings.
Of course, just as the Blair years will not be remembered for the travails of domestic policy, so the Brown years will be recalled as the moment that the banking system almost collapsed. The banking rescue, the small discretionary fiscal stimulus and the recession were events of great economic magnitude on which the Government chose, unsuccessfully as it turned out, to fight the general election.
By the time of that general election the ideas that had sustained the Labour Party through more than a decade of government were widely felt to have been emptied of content. And yet this was only a half truth. In the Conservative policy on free schools, for example, there were glimpses of where second-phase Labour was trying to get to. The social liberalism of the coalition Government owed something to Mr Cameron’s desire to change his party, something to Nick Clegg and the Liberal Democrats, but rather more to the example of the Labour governments.
Phil Collins is a former speechwriter for Tony Blair
‘This sucker’s going down’: diary of a financial crisis
Suzy Jagger
Politics & Business
Correspondent
For the man who told a reporter three years ago that he had no idea whether the US was heading into recession because he got a B in basic economics, President Bush showed astonishing prescience on the future of the world financial system. As Lehman Brothers collapsed in September 2008, almost dragging the global banking system down with it, the President declared: “This sucker’s going down.”
While Britain’s “sucker” of a financial sector started to go down before its American rival, it was a US fiscal malaise that triggered the fall. Throughout the summer of 2007 banks who had lent extensively to borrowers on low incomes with bad credit histories began to warn publicly that in many cases they would not get their money back. HSBC, the owner of a US lender called Household International, startled the City and Wall Street in May of that year when it wrote off $5 billion of bad US debts. As the summer dragged on, more banks admitted that mortgage borrowers were defaulting on their repayments and that they would have to write the bad debts off. Banks started to become wary about lending to each other and by the end of the summer the wholesale lending market, where banks lend billions to each other for short periods, had dried up.
It was the crisis in this market that triggered the collapse of Northern Rock, sparking the first run on a British bank for more than a century. Its business model, devised by Adam Applegarth, its chief executive, had two main consequences. By choosing the wholesale lending market to fund Northern Rock’s mortgage book, rather than backing it with savers’ deposits, the former mutual was able to grow its business quickly and become Britain’s fifth biggest provider of home loans. It also meant that when the wholesale lending market ground to a halt, Northern Rock was the most heavily exposed.
The public began to develop a new financial vocabulary. The word “liquidity” crept into headlines, television news alerts and ordinary conversations. It seemed, almost overnight, that everyone had become familiar with the term “sub-prime loan”, even if they were not entirely sure what it meant. (It means a loan to a low-income borrower with a poor credit score.)
Central banks started to pump cheap money into the financial system to get capital markets moving again but it failed to stem the rot. If the British public had become nervous about the state of the banking sector, their anxieties took a turn for the worse on September 13, 2007. At about 10pm, the news ticker along the bottom of the BBC news screen reported that Northern Rock had gone to the Bank of England to beg for emergency funds. Once news of the approach leaked out, the bank was effectively dead. The next day, a Friday, the shares lost 32 per cent of their value. Savers, who formed long queues outside branches, withdrew £1 billion that day.
Bankers from other institutions rushed to reassure shareholders that they did not need Bank of England funds. It emerged rapidly that Northern Rock could not survive without being acquired by a rival but none volunteered, put off by a £2.7 billion refinancing bill, its shonky mortgage book and limited branch network.
The infection spread to other parts of the financial markets, such as bond insurers. Citigroup, then the biggest bank in the world, started to dump losses. Merrill Lynch admitted at the end of October to $7.9 billion of bad debts. Between December and March, central banks across the world started slashing interest rates in the hope that cheap money would cushion the strain. Brussels set up a $500 billion facility just to tide banks over the Christmas period.
In January 2008 major stock markets, including London, suffered their worst one-day fall since 9/11, prompting the US Federal Reserve to reduce the cost of borrowing in the biggest cut for 25 years. Alistair Darling, the Chancellor, announced the following month that Northern Rock was to be nationalised.
It took one month for the next major bank to break. Bear Stearns, the weakest of the five Wall Street banks, was acquired by its bigger rival JP Morgan Chase in a deal worth $240 million, having been valued at $18 billion the year before. The manner in which the acquisition was handled dictated the rescue terms of every other terminally fractured US bank over the next 18 months. Four men masterminded every subsequent US bank rescue deal: Henry Paulson, the former US Treasury Secretary; Ben Bernanke, the chairman of the Federal Reserve Board; Christopher Cox, the former head of the Securities and Exchange Commission; and Tim Geithner, then president of the New York Federal Reserve Bank, latterly President Obama’s Treasury Secretary.
While hedge funds were allowed to snap like twigs under the financial strain, no US bank, large or small, was allowed to go bust on a weekday. The rescue talks often began in earnest on a Friday evening when world stock markets were shut. Mr Paulson was worried that if private rescue talks were leaked during the trading week, it could trigger wild swings in the stock market. The public statement declaring a troubled bank’s new buyer or winding down arrangement would typically be made by early evening on a Sunday in the US, just before Tokyo opened for Monday morning business and 13 hours before New York. On the other side of the Atlantic, RBS, UBS, the Swiss bank, and Barclays begged existing investors to pay £27.2 billion