A long 5-years – What Alistair Darling got right

It’s five years to the day that former Chancellor Alistair Darling gave THAT interview to the Guardian newspaper where he said the UK was facing its worst crisis in 60 years.

That wasn’t the only notable thing about the interview, he also predicted – correctly - that the recession would be more profound and long-lasting than most people feared and he explicitly referred to the tensions between himself and Gordon Brown, and how he wouldn’t take the flak for Brown’s mistakes.

Fast forward five years and the new Governor of the Bank of England, Mark Carney, gave his maiden speech earlier this week where he went even further than Darling, and said that the UK had its “worst recession in living memory”, never mind 60-years.

The pronouncements are the same, but the context is very different: Carney is coming into the job when the upturn is finally starting to take shape, while Darling took on the unenviable task of Chancellor at the same time as the proverbial hit the fan.

It got worse

With the benefit of hindsight, Darling may have spoken too soon. In August 2008 he only had Northern Rock on his plate, back then he said that he had to deal with a crisis “almost every week”. He’d barely begun. As Lehman Brothers collapsed, HBOS and RBS almost followed and the likes of Bradford and Bingley being part nationalised in the days ahead, he had to deal with a crisis in the UK financial system on a daily basis.

One of the anecdotes included in the Guardian’s interview with Darling was how he was warned against ordering another bottle of wine by a waiter. He was out to dinner with friends, and the waiter feared that he would look like he was lording it up while families all over Britain suffered job losses and a 10% decline in house prices in just one month in July 2008.

So can Carney splash out and order that second bottle? Not according to his take on the recovery. Although economic data has picked in recent months, Carney called the recovery “solid, not stellar”, and said that the Bank of England’s task now is to “secure this fledgling recovery”.

So no second bottle for Mr Carney, at least not until he sees his new policy of forward guidance reap dividends and growth to continue to pick up steam.

Both right and wrong

One thing that Alistair Darling did understand was just how serious this crisis was and how dramatically it would change the UK’s fortunes.  He hinted at mass unemployment, a dramatic fall in house prices and decimated confidence in the financial system. Tick, tick and tick.

There are still one million unemployed people in the UK, confidence levels as measured by the share prices of banks that remain majority owned by the tax payer, RBS and Lloyds, are still 85% and 50% below their 2008 peaks respectively, and house prices in some parts of the country have never recovered.

However, he could not be expected to predict the dramatic shift in policy tools used by the Bank of England to try and alleviate this crisis. Back then monetary policy was a different ball game. Interest rates were at 5%, ISA’s actually earned real interest, and quantitative easing and forward guidance weren’t even invented.

This financial crisis has caused a huge shift in central bank policy making, not only are there a new league of savvier, more worldly-wise bankers - think the European Central Bank’s Mario Draghi and the Bank of England’s Carney versus Trichet and King - but the tools have changed.

The prospect of pumping money into the economy to try and boost growth was not on the agenda in 2008. Back then central banking was more innocent – crisis struck so central bankers cut interest rates until they could cut no more, but growth didn’t pick up so they had to print money and risk their credibility instead.

When will it end?

Perhaps interest rates are a good way to measure this recovery. If the current governor of the Bank of England is correct then rates won’t rise for another three years. So, we could be looking back eight years from Darling’s prediction that this mess would be hard to clear up.

Out of everyone in power back in 2008, Darling has emerged with his reputation most intact. Gordon Brown, even Mervyn King all left tainted legacies, none more so than the former Prime Minister.

Darling’s reputation as one of the good guys, trying this best to speak the truth to the electorate, not sugar-coating the facts, and also trying his level best to save the UK from financial collapse endures. For this he will be remembered fondly, as fondly as a politician can be, by the UK.

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Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.