A guest blog by Vidya Ramesh.

No matter how many recessions and bank bust-ups we have endured in the past couple of years, the UK could always puff out her chest with pride at her straight A grades. Not any more though. Our triple A credit rating has dropped, in perfect harmony with the economy’s potential dip into a third recession.
                This shouldn’t have happened. Since the 2008 crash efforts had been taken to reform the banking system, such as the Vickers’s Report. The Chancellor George Osborne claimed he had “tackled that big question that we face in Britain which is how can we be a home to successful banks” by following the recommendations of the report. However his Labour counterparts argued that his response was watered-down and ineffective. It has failed to adequately cut the ‘leverage ratio’- meaning that banks can still finance most of their loans using debt. This can generate huge profits for banks, but also huge losses. As seen with Lehman Brothers in 2008, it can even cause banks to collapse.
                Whether this crisis came about because of reckless borrowing, loss in confidence, or the bankers themselves, it has deepened the gulf between Whitehall and the rest of the country. Will Hutton, the Chair of Big Innovation Centre claimed that “The last vestiges of an approach to organising society based on a social contract have been shredded” in The Guardian, coinciding with the publication of Osborne’s Autumn Statement in December.
                Putting the blame on the politicians seems unfair; especially when it was the banks which slipped through the regulation put in place to control their activities. However politicians have acknowledged that it was their responsibility to exert authority over the banks by paring down this regulation, making it stronger and tying up the loopholes. Arguably this responsibility exists even in an economy that practically announces its independence from the government, such as that of the USA in during the 1920s. The term laissez-faire (free from influence) has been often used to define the American economy. Yet the government and the Federal Reserve covertly inflated the supply of credit during the 1920s, from $45 billion in 1921 to $73 billion in 1929. It is evident that the government had some control over the USA’s financial fate, and whatever control it had only made things worse. Credit inflation encouraged reckless borrowing and speculation. On 29th October 1929 16 million shares were traded off in a panic. This was only the beginning of the Great Depression, but it was a long time coming.
                The slogans of the current political leaders, from David Cameron’s “Big Society” to Ed Miliband’s “One Nation” have attracted support and criticism alike. However, irrespective of your political affiliation, Tony Blair’s motto “Education, education, education” from the 1997 general election takes some beating. Over the past decade the social contract has indeed broken down. It is vital that the next generation of aspiring policy-makers know how to mend it.

Vidya Ramesh

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