Gordon Brown's role
In the previous parts we saw how Gordon Brown threw off the shackles that forced Banks to be prudent.
Many saw this as essential to “The City”, for only under a system where there were no blocks to the movement of funds in or out could “The City” truly become competitive in the capital markets of the world. Political risk was being removed from investing in the UK … as you could remove your funds as soon as you saw a government embarking on risky policy. The actual effect was to vastly increase the money supply in the UK and place its effective control outside the hands of Government. The Bank of England's obligation was to steer the economy relatively free of consumer price inflation, The FSA would regulate the activities of Banks.
These vast flows of cash now in the hands of “The City” and not the Bank of England were largely used in the Capital Markets and thus to a degree sterilised from consumption expenditure which would create a demand led inflation as more and more money chased the same goods. However, there has been inflation … largely ignored by the statistics which are looking at consumption expenditure and not capital account. This has emerged in two areas … property prices and stock exchange values. We saw in my example of the effects of securitisation and discounting of the debt how banks were able both to rapidly expand the mortgages they offered, increasing their profitability at the same time, as long as they had access to short term funds while they put together parcels for sale in the capital markets. A further effect of this type of transaction was to move it off balance sheet thus removing the obligation of the Bank to meet liquidity and solvency ratios.
So what has Gordon Brown truly achieved?
He totally monetised the foreign capital flowing into “The City” by releasing “The City” from the need to place these funds in foreign markets as long as they kept the funds in capital markets. This would keep them clear of The Bank of England's need to prevent consumer price inflation.
He created a climate which would enable him to become the biggest borrower in the history of the UK. With all his public/private partnership deals he was able to embark on capital ventures without ever having to go to the market with a bond issue. He created an environment where he was able to take his borrowings “off Balance Sheet”.
He has been the most profligate chancellor in the History of the UK … to keep the “feel good” factor alive and well he has in fact allowed the UK economy to borrow 40p for every £1 it spends or invests!!!
Continue to part 5 ?