Johann Hari: Thatcher's baleful influence lives on

Behind a series of recent crises lie deregulation and tax cuts - both legacies of an unlamented era

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The crises consuming the Brown government today should indeed be seen as a Winter of Discontent – a moment when the governing ideology is coldly exposed as unworkable. But this time the ideology being exposed as unworkable is small-government conservatism. It is Gordon Brown's decision to retain and push forward the Thatcherite policy of perpetual deregulation and spending cuts in a slew of policy areas that has left him skidding into a dead-end.

Let's look at the three interlocking calamities that have brought Brown and the global economy to this point – and show how they can all be traced to an excess of right-wing economics.

Crisis No 1: The sub-prime mortgage crash in the US. Once you peel back the jargon, this is the simple story of a scam, made possible because over the past three decades, the regulations designed to protect American consumers have been tossed on to the bonfire. The flames were accompanied by a low chant: government regulation bad, unhindered markets good.

This created the opportunity for a string of shady mortgage banking companies to devise a whole new business model. With the old rules stripped away, it was easy. They would go to the poorest people with the shakiest credit records and make them a magical offer. We won't ask to see your credit history. We won't even ask to see proof of your income. We'll give you a mortgage, no down payment, no questions asked.

These people were so desperate to house their families decently that they felt they couldn't say no – and the banks often didn't tell them the catch. After an initial introductory period, the mortgage payments soared to vast levels, with rip-off rates of interest. The banks knew the default and foreclosure rates would be through the roof, but the compensatory profits meant it didn't seem to matter. They financed all this by setting up "structured investment vehicles", which they kept off the balance sheet and hidden from public view. The old rules to prevent all this were gone. As the economist Professor Paul Krugman puts it, "It was Enron redux, except much bigger than Enron."

It was a business model that was simultaneously unethical and unsustainable – the kind of scam that regulation was introduced in the early 20th century to prevent. So this year the chickens bought at sub-prime rates came home to roost. More than 25 sub-prime lenders have gone bust, big Wall Street names like Merrill Lynch are seeing their holdings in sub-prime loans tank, and more than 2 million Americans are at serious risk of losing their homes.

This caused a panic among international investors. If Merrill Lynch can have $3bn knocked off its value in a breath, what can you trust? And so the financial influenza spread to Britain – where another risky and unsustainable financial experiment had been made possible by Thatcherite deregulation.

Crisis No 2: Northern Rock. The former building society is headed by Matt Ridley – an extreme market fundamentalist who scorns government regulation to such an extent that he believes that the food industry would be better than food safety laws in protecting us from being poisoned. The deregulation of the 1980s enabled him to pursue a business model that defied financial sense. He and his board believed the financial dictum that you should have substantial savers' deposits to finance your lending schemes was a myth to be cast aside.

The result was collapse. The state has had to risk forking out £24bn, equivalent to £1,000 for every tax-payer, to prevent it from going bust.

We shouldn't be angry at the government bailout; we should be angry at the deregulation – maintained by both main parties – that made the bail-out necessary. John Caine, former director of corporate affairs at Alliance and Leicester, explains: "If government is to blame, then it is that led by Margaret Thatcher [and her] determination to deregulate the UK financial markets."

To understand how extreme London's post-Thatcher financial deregulation is, you have to look to the States. The most hard-right Republican congressmen issued a report last week calling for the US to adopt "a regulatory structure like the one used in the United Kingdom." Our model is the market fundamentalist dream, where companies can be almost as unethical and risk-riven with our cash as they like.

We were warned. Seven years ago, the Cruickshank report, commissioned by the Treasury, argued that banks should have proper utility-style rates of regulation to prevent all this. The banks shrieked and howled, and Brown – disastrously – backed down.

Crisis No 3: Datagate. Since he came to power, Gordon Brown has been steadily scything through the civil service, based on the right-wing belief that they are "bureaucrats", and "bureaucracy" is always bad. He has demanded that government departments make "efficiency savings" of 3 per cent, year on year, irrespective of their circumstances. The result is predictable: there are far fewer people doing the same jobs, and they are starting to screw up. They ignore the protocols they should follow; they post out disks they shouldn't. The civil service trade unions have been warning that a major mistake like this would result.

But it would be foolish to punish Gordon Brown's right-wing errors by turning to David Cameron's Tories. They are committed to pushing all these mistakes further and harder. For example, their recent policy inquiry into financial deregulation, led by the foaming John Redwood, actually demanded the total deregulation of mortgage finance – which would mean sub-prime mortgages on the British high street. Cameron complained earlier this year that the civil service cuts didn't go far enough.

It has been bleakly hilarious to watch the right-wingers who cheered on these acts of deregulation and "efficiency savings" respond to the crises their ideas have wrought. Several appear to be hallucinating. My favourite was Charles Moore, the former editor of the Daily Telegraph, who blamed the "Marxism-Leninism" of Tony Blair.

For Brown this could – just – be an opportunity to put things right. He could stand on the doorstep of Downing Street and say: "Yes, I got it wrong. When it comes to financial regulation and civil service cuts, I followed the old Tory ideas for a decade, and it has blown up in my face. These crises have been a failure of Thatcherism, and I have learned my lesson. But remember: both main parties got it wrong, yet only Labour has the philosophy that can put it right. We were wrong to demonise 'bureaucrats'. We were wrong to believe markets work best when they are unregulated. You know, at the 2003 Labour Party conference, I said my party was 'at our best when we are Labour'. I was right then. I will act on it now. This week, the Conservative era of endless deregulation and civil service cuts has finally come to an end."

j.hari@independent.co.uk

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