The Observer, Sunday 8 February 2009
Stories not only grow in the telling, but change their moral as well. The tale of how Hank Paulson begged Alistair Darling to help with the rescue of Lehman Brothers last autumn was once an affirmation of British good sense. Now it is a lament for lost certainties.
As the doomed firm creaked and splintered, it seemed as if the chance of picking it up on the cheap might tempt Barclays or another British bank. Paulson wanted the chancellor to give his blessing. But Darling did not think Lehmans was a bargain. He thought it was a basket case. He refused and, for good measure, warned British bankers that if they bought Lehmans, they could expect no help from the taxpayer if it went down.
You can imagine the relish with which civil servants repeated the story. The unilateralist neocons of the Bush administration were asking for help from foreigners. They had reckoned without a Britain that was not going to allow itself to be dragged into a madcap Republican scheme.
The collapse of Lehmans also made the victory of Barack Obama certain and that, too, was a comfort. Everyone thought they knew that the Democrats were civilised men and women who drank our lattes and drove our dinky, fuel-efficient cars. Soon they would be in the White House and the world would return to normal.
I cannot overestimate the strength of the government’s belief that it can restore the status quo ante. Obviously, ministers understand the scale of crisis. At its peak, financiers told Darling that the bank with his current account was 20 minutes away from collapse, news which must have concentrated the mind. Nor have Labour and the Bank of England been frightened of making the vast but necessary interventions to stop a disaster turning into a catastrophe. But they do not think that the crash is like the fall of the Berlin Wall or 9/11, an event from which there is no going back. They still hope that the model of free trade and globalisation can be put together again. Property prices will shoot upwards. The tax receipts from financial services will flow. The City will resume its primacy and all will be right with the world.
In this intellectual climate, reforms that appear obvious to social democrats remain unthinkable to insiders. Closing tax havens, regulating hedge funds and stopping high street banks behaving like investment banks so that never again do we have the obscenity of taxpayers bailing out speculators are items the agenda-setters have no wish to put on the table.
Much to their discomfort, however, our leaders are realising that although the Washington consensus lives on in London, it is dying in Obama’s Washington. Now when they talk about Paulson there is a faint whiff of nostalgia. Say what you like about old Hank, but at least he wanted to consult us. We wish we could say the same about his successors.
Press and public are still so in love with Obama that they barely noticed that Congress ordered the US government to spend American taxpayers’ money on American goods last week. True, senators watered down the measure and Obama insisted that existing trade treaties must be respected. Nevertheless, protectionism triumphed and profoundly unsettled European policy makers as it did.
In their minds, Republicans were the “stupid white men” who cared nothing for foreigners. Now, they find that the Democrats are the real America Firsters, not only in Congress but also at the Doha talks, where an agreement on freeing up world trade seemed within reach. It is in the balance, because Democrats want to protect the American economy against foreigners dumping subsidised goods and to hold countries to account for their environmental standards and respect for labour rights.
Obama came to power with more international goodwill than any president since Eisenhower, mutter angry ministers. Do not think his popularity will last if he keeps on indulging the protectionists. If Obama is hearing their warnings, he is clearly paying them no heed. Every day brings news from Washington our rulers find profoundly unsettling. Conceivably, Labour may have to imitate Obama’s pay cap on executives of firms that have taken public money. The power of the American example, combined with the public’s disgust at the remarkably dumb yet brazenly rapacious executives of Lloyds, Barclays and RBS, could be too much for any government to resist.
But, trust me, they will hate intervening if they forced into it. They still yearn for the roaring days when the moneymen were getting richer and Labour was winning elections. Salary caps and bonus bans are alien inventions from a strange, new world they neither like nor understand.
You can sense the ambivalence in a letter Alistair Darling sent to the G20 leaders ahead of April’s economic summit in London. He argues for international co-operation to stop the banks bringing the roof down again, but there is no echo of the talk in Washington about closing tax havens or regulating hedge funds. Instead, the chancellor worries that “heavy-handed regulation can lead to sclerosis in financial markets where the ultimate losers are pensioners, savers and businesses”.
For what it is worth, although I believe in free trade, I also think it a scandal that the World Trade Organisation allowed China to join when it sends trade unionists to the camps. In my view, tax havens are centres of organised crime and, like everyone else, I find the sight of bankers enriching themselves at public expense revolting.
I also know, however, that Whitehall regards such social democratic views as naive and extremist. Once-respectable Washington society had no time for them either, but now its resistance is melting.
Maybe Labour is right to think we can get back to normal. It is not an ignoble aspiration when “normal” means secure jobs, safe homes, growing businesses and well-financed pensions.
But I sense as I watch startled ministers react to the changing line from Washington that they are beginning to suspect that perhaps normal is dead and gone; that maybe, just maybe, there is no normal to get back to.