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Speech
George Osborne: A differentvision for the economy
George Osborne MP, Friday, March 6 2009
 This morning I was at Jaguar-Land Rover in Castle Bromwich. Thisafternoon I will be talking to employers in the Black Country. Large orsmall, businesses in the West Midlands and across the country are facing adesperately difficult time. Orders are down.Sales have slumped. Import costs are rising. Credit has dried up. Theprospect of mass unemployment now looms, with all the heartbreakingconsequences for families and damage to our society we know that brings.We have been arguing for many months now that this is a monetary crisisthat requires monetary solutions. Getting the banks lending again tocompanies through a big, bold and simple National Loan Guaranteescheme is the urgent priority.It distresses me that the credit scheme the government eventuallypromised to set up, and which was supposed to start this week, is still onthe drawing board.Like so many other promised government initiatives, from the housingrepossession plan to the support for trade insurance, to the car rescuepackage announced two months ago, Ministers don't appear to know thedifference between a newspaper headline and actually delivering real helpon the ground. This dithering and paralysis in government is costingpeople their jobs and their businesses and their homes.It is the scandal of inaction and it contributes to the widespread feelingbest expressed by the CBI Director General a fortnight ago that 'there's
 
little sense of a coherent strategy' in the government's approach to therecession.It may seem, therefore, a distraction that the political world inWestminster is asking whether or not Gordon Brown should apologise forhis role in the mistakes that led Britain into this economic mess. The Chancellor thinks he should. So too does his closest ally Ed Balls. Butthe Prime Minister thinks he shouldn't. The rest of the Cabinet is divided.Does it really matter, you may ask. What use is an apology to a strugglingbusiness or a family losing their home? In fact it does matter. This is notabout some Westminster game - it is a disagreement about the futuredirection of our economy and the foundations for recovery.For if, like Gordon Brown, you believe that Britain is simply the innocentvictim of a banking crisis that came from America then you would agreewith him that there is "nothing to apologise for".And because the Prime Minister believes none of Britain's problems arehome grown, his solution is simple too. Apply the sticking plaster to anotherwise healthy body; urge the Americans to improve their financialregulation; try to get some international early warning system so we spotfuture trans-Atlantic storms; and pump the bubble up again. That, boiled down, is the Prime Minister's answer to the current economiccrisis. He won't say sorry for his mistakes because he really doesn't thinkhe made any.I take a fundamentally different view - and so do an ever growing numberof the British people.Our banking system is not separate from our economy, it is a reflection of it.Our banks hold a mirror up to the worst excesses of our society. And theunsustainable debts in our banks are a reflection of unsustainable debts inour households, our companies and our government. That is what the man who was Chancellor for ten years has to apologisefor. And it means that applying sticking plaster and lecturing theAmericans won't work - because the model of economic growth pursued inBritain in recent years is fundamentally broken and needs fixing.In short, where you stand on the question of the prime ministerial apologysays a lot about where you stand on the future direction of economicpolicy in our country. That is why, for Gordon Brown, 'sorry' really is the hardest word.Let me explain why I think the banking crisis is a mirror of a deeperproblem that infected the whole of our economy.
 
We can all now see that our banks lent more than was safe and mademost of their profits from business models that turned out to beunsustainable when the bubble burst. British banks became amongst themost indebted, most leveraged in the world, with tangible assets thirtynine times tangible equity compared to seventeen times in US banks. Butas an economy we weren't saving enough to fund this debt. So our banksand shadow banks sucked in hundreds of billions of pounds from abroad.As a country, we lived beyond our means. Our banks borrowed moneyfrom China to lend to us, so we could buy the goods the Chinese produced.We could see it in the huge current account deficit that persisted for adecade.But it was explained away with talk of a new paradigm of low inflation,stable growth and the end of 'boom and bust'.For a while almost everyone was persuaded, and even amongst thesceptics almost nobody put the whole picture together.As I said in my speech to the Conservative conference here in Birminghamlast year, "we forgot that an economy built on debt is not an economybuilt to last." Or as Warren Buffet puts it more colourfully, it is only whenthe tide goes out that you see who has been swimming naked. The truth was that Britain's economic growth of the last decade was aboom founded on an unsustainable current account deficit which itself waslargely driven by unsustainable growth in consumer spending across theboard.Many consumers funded this spending boom not from earnings or savings,but borrowing - often borrowing secured against the value of house priceswhich themselves were booming on the back of cheap credit. The result is that by the time the boom turned to bust, our householdswere the most indebted of any major economy, more even than America's,with debt to income standing at 175% for the average British familycompared to 140% for the average American family. The huge losses suffered by our banks from UK mortgages and consumerloans that are now turning bad are a reflection of that unsustainableconsumption. A stark illustration of just how much the economy wasreliant on unsustainable consumption growth is that if consumer spendinghad merely grown in line with incomes over the decade between 1998 and2007, average growth would have been 0.7% lower. Every year. That may not sound much at first, but it means that our GDP would havebeen about 7% lower - £100bn lower - in 2007. That's more than £4,000for every household in the country. And now those debts are being calledin.Of course it wasn't just consumers.
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