Suggestions that Peter Mandelson may have shared government information with Jeffrey Epstein amid the fallout of the global financial crisis are being investigated by police.
Emails between Mandelson and the disgraced financier, released by the US Department of Justice, are said to include market-sensitive details. This was at a time when Mandelson was in government and ministers around him were scrambling to keep the UK economy afloat.
Now, the 2008 global financial crisis belongs to a different political generation, with almost all of the leading players having left the world stage. But the ripple effect of the credit crunch can still be felt in our politics and in our pockets.
This surely makes the allegations against Mandelson, some of which date to his time as UK business secretary, even more awful. The anaemic UK economy, its weakened public finances and the divisive nature of UK politics can all trace their ways back to the crisis.
This catastrophic event, where developed economies were brought to the brink of collapse, came at the end of a long period of prosperity. It put paid to a belief, embraced by Gordon Brown when he was chancellor, that the UK had achieved a “Goldilocks economy” – not too hot and not too cold. This was supposedly a triumphant end to the boom and bust of the past.
For a time it worked. Britain experienced 16 years of quarter-on-quarter economic growth, emerging from the aftermath of “Black Wednesday” in 1992 when sterling fell out of the European Exchange Rate Mechanism.
The cracks first started to appear in 2007 as US lenders specialising in sub-prime mortgages (typically sold to high-risk borrowers) started to collapse. This was at the heart of what would become a global catastrophe. To meet market demand, lenders bundled together thousands of everyday home loans into “mortgage-backed securities”. These were then sold as low-risk debt to investors.
You can see the attraction: safe and steady repayments over the long term, underpinned by bricks and mortar. Only it was a deception, because that debt was not all safe. As house prices kept rising, banks increasingly agreed loans with customers who did not have the capacity to repay them. And the loans were made against property that had been overvalued.
Then the housing market weakened. Credit markets seized up, since holders of securitised debt found they couldn’t unwind their positions (put simply, they were unable to sell them on) – it was impossible to tell which parts of their holdings were sound and which were toxic. The result was that institutions stopped lending, interest rates on corporate borrowing jumped, investment ground to a near halt and stock markets plummeted.
Banks, big as well as small, started to fail. While the collapse of US giant Lehman Brothers in September 2008 marked the start of the global crisis, in the UK it was the liquidity emergency of Northern Rock that brought things into focus. Savers, having lost confidence, queued up outside branches in September 2007 to withdraw their money, marking the first run on a UK bank since the 19th century. But worse still, banks had lost trust in each other.
Banks are not just any business; they are the arteries of a functioning economy. Policymakers around the world judged that these banks were simply too big to fail. Governments responded with unprecedented interventions, including bank rescues, capital injections, fiscal stimulus and major regulatory reforms.
In Britain, this included nationalising Northern Rock in February 2008, recapitalising Royal Bank of Scotland and Lloyds, and launching wide-ranging guarantee and liquidity schemes. It meant containing the crisis, recapitalising the system, and restructuring the sector – all paid for by government borrowing.
In December 2008, Brown – by now prime minister – claimed he had “saved the world”. But what followed was the longest and deepest recession since the Great Depression of the 1930s. And that sharp downturn, in contrast to the previous decade, hit the young and the unskilled hardest as unemployment rose. For those in work, pay growth stalled.
It was during this period that Mandelson is suspected of sharing sensitive government information with Epstein. In June 2009, an email appears to show the then-business secretary forwarding details of proposals to sell off UK government assets to raise money for the public purse.
The crisis had blown a hole in the UK’s public finances as the Treasury grappled with falling tax receipts and increased demands on spending on public services and welfare. Added to this, bank rescues had of course piled up public debt.
Meanwhile, other emails in late 2009 appear to show Mandelson and Epstein discussing ways to push back against UK government plans for a “supertax” on bankers’ bonuses. These proposals were a bid to recoup some of the public money pumped into the sector.
For all the successes, perhaps the “Goldilocks economy” wasn’t entirely built on responsible policymaking. While inflation targets were hit, Bank of England experts had all but failed to notice the massive asset bubble. And then there were the “light-touch” banking controls, which even the regulator blamed for its failure to spot the storm brewing.
The long tail of the crisis
While economies eventually stabilised, not least because of Brown’s leadership and that of the subsequent coalition government, the consequences of the crisis play out to this day. In contrast to the optimism of the previous period, the years since the financial crisis have seen weak economic output, derisory productivity growth as well as slow improvements in pay.
Those were the years of austerity policies, with increasing distrust of institutions and a backlash against “elites”. All of this fuelled populism on the left and right.
Many felt left behind by the globalisation that had driven the economy from the mid-1990s, or were hit hard as low-skilled work became more precarious and public services squeezed, or felt taken for granted by the political class. When it came to their vote, Brexit was an opportunity to express their frustration and disrupt a system that they no longer believed worked for them.
And so it is impossible to understand the fractious nature of politics today, or the relatively feeble state of the UK economy, without understanding the huge challenge that the financial crisis posed to a generation of politicians. Although Mandelson is understood to deny any criminality, his alleged betrayal came at the peak of this jeopardy. We are all still paying the cost of bringing the global economy back from the brink.
