Vincent Cable: How to tackle the recovery
The Crunch one year on: A professional economist as Chancellor of the Exchequer? Sean O'Grady talks to the Liberal Democrats' 'Shadow Chancellor' about how we got into this mess, and how his party would get us out of it
Wednesday 16 September 2009
The collapse of Lehman Brothers may have caused vast damage to the global economy, smashed thousands of businesses and chucked millions out of work, but there is one man who has done well out of the crisis: Vincent Cable, the Liberal Democrats' "Shadow Chancellor".
It isn't that this patently decent man wanted to make political capital out of the miseries of others; it just turned out that way, as the public looked around for a politician who might help them to make sense of a bewildering turn of events. The former chief economist at Shell has a Northern, plain-speaking manner and vulpine wit that the general public clearly appreciates.
By the time Dr Cable was on all media outlets commenting on the Lehmans crash last September, he was already established in the national consciousness, thanks to his quip at Prime Minister's Questions about Gordon Brown's "remarkable transformation – from Stalin to Mr Bean". Since Lehmans, Dr Cable has written rather a good little book about the credit crunch, The Storm. Last week he was paid one of the highest compliments in politics: a hatchet job in the New Statesman.
So, to take the question of the moment, should the US authorities have let Lehmans go, because as the US Treasury Secretary, Timothy Geithner, said last week, they had no legal power to save it and no buyer?
"I agree with the spirit of what Geithner says, in the sense that a major collapse of the financial system was inevitable.
"But in terms of what could have happened, there was the attempted private-sector solution with Barclays, which was not in fact going to work, because it needed government guarantees from the United States. The second option was to simply take it over, which is what happened with AIG and others, and with hindsight that is clearly what should have happened."
Even so, he adds: "One can understand why they did decide to let it go, because they had to send a signal that they couldn't just bail out every badly run dangerously financed institution."
Like the Governor of the Bank of England, Mervyn King, Dr Cable cannot contain his irritation at the banks' lavish subsidies at taxpayers' expense: "We simply cannot have a position where banks that engage in high-risk casino-type operations are underwritten by the taxpayer. If they are to benefit from lender of last resort protection, then they are going to have to get rid of these."
Dr Cable favours a "modernised" version of the famous Glass-Steagall Act, passed in the US in the Great Depression to separate investment and retail banking, and repealed in the 1990s.
As for the macro-prudential tools that are so often talked about as a way of reining in the banks – by making them put up more capital for their more risky operations – "my worry is that we are trying to get these tools to do too much, to regulate the credit cycle as well as banks' risk-taking and bonus levels".
He is very cautiously optimistic about the economy: "We're no longer in Armageddon," he judges. "A year ago there was a real risk of a return to the 1930s. Central banks and governments did the right thing, with big budget deficits, low interest rates, quantitative easing and supporting the banks, and one needs to give a certain amount of credit for that ... But the idea that things are returning to normal is just a fiction. There are a lot of legacy problems, not least the budget deficit."
Ah yes, the budget deficit. What would Vince do about that? He is tired, he claims, of the "theological nature" of the debate on public spending. His party won't like it, but the says there are "no sacred areas" for cuts – "we cannot say that the NHS must be completely ignored but we cut everything else," he argues. He says that everything has to be justified "from first principles". He wants to be specific.
The structural budget deficit is anywhere between 5 per cent and 10 per cent of GDP, according to Dr Cable, perhaps as much as £150bn. Dr Cable's cuts include: zero growth overall for public-sector pay, and a salary freeze and end of bonuses for the Civil Service; a "radical review" of public-sector pensions; scrapping the ID card scheme, regional development agencies and strategic health authorities; and the Eurofighter, Nimrod and the Trident successor.
Less promisingly, perhaps, he wants to remove virtually all controls on local government finance, give them more room to spend on local health and widening their tax base through business taxes. He agrees that this might lead to councils going bust.
Well, I wonder aloud why, if his cuts are so obvious and sensible, Gordon Brown and Alistair Darling haven't made them already?
"I think the Government has got into the habit of thinking that public spending is good in itself; also, the Government has not had its back to the wall like this before."
The Lib Dems want to take everyone on less than £10,000 a year out of tax, and pay for this by abolishing higher-rate tax relief on pensions and by "aligning" the 18 per cent rate of capital gains tax and income tax. Dr Cable wouldn't change the new 50p higher rate of income tax now, but "when normal conditions return it seems to us that 40p is a sensible top rate, in due course".
I also wonder, as the Queen famously did, why no one saw this crisis coming: "I and various other people saw bits of the problem, but I don't think anyone saw the full totality of it ... What I thought was odd about Mervyn King's role is that two or three years before the crash he was warning in very public terms about the asset bubble and house prices, about the time I was raising it in Parliament. There was a serious flurry of concern, which he expressed with all the authority of his position. The bubble got bigger – but then he didn't say any more. Either he was told this was none of his business, or he calculated that it wasn't having any impact and he didn't have any authority to act on it."
Chancellor Cable? It remains an unlikely prospect, no matter how popular Dr Cable seems to be with the public, and would have to be the product of an incredible coupling with the Tories.
Even so, it is not immediately obvious why he'd be markedly inferior to his competitors for the job in either of the big parties. Lehmans should have taught us all to expect the unexpected.
Vince Cable: A life in political economics
* Dr Cable read natural sciences and economics at Cambridge, where he was President of the Union, followed by a PhD at Glasgow. In the 1960s he worked as an economic adviser to the Kenyan government.
* In 1990, he joined Shell International, taking up the post of chief economist in 1995. He has also been head of the economics programme at Chatham House, and is a fellow of Nuffield College, Oxford and the LSE.
* Formerly a Labour Party member and special adviser to John Smith when he was Trade Secretary in the late 1970s, Dr Cable joined the SDP in 1981. He was elected as Liberal Democrat MP for Twickenham in 1997.
* He joined the Liberal Democrat front bench in 1999 as spokesman on Trade and Industry. He has been Treasury spokesman since November 2003. He is also deputy leader of the Liberal Democrats.
* His hobbies include ballroom dancing and Indian English literature.
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