How Labour's Faustian pact with capitalism led to the financial crisis
Labour decided not to regulate the City, as long as they paid for social programmes
It is rare to find the causes for a national disaster encapsulated in the dull prose of an obscure measure. Helpfully, a concise explanation of why you and your children will be paying for the collapse of the banking and housing bubble into the 2020s are set out in the clauses of the 2001 Financial Services and Markets Act.
The Financial Services Authority was not "to discourage the launch of new financial products", the government said as it laid down the terms of trade for London's banks and hedge funds.
The FSA had to avoid "erecting regulatory barriers", it continued, "must consider the international mobility of the financial business" and "avoid damaging the UK's competitiveness".
Dwell on those instructions for a moment and think of the consequences. If the police had to avoid damaging the competitiveness of the tourist trade, they would not arrest drunken visitors. If detectives had to avoid damaging the competitiveness of the music business, they would not arrest cocaine-snorting pop stars.
Traditionally, Tory governments preside over great booms and busts of capitalism
But in the case of the banking industry, the Financial Service Authority was mandated by law to avoid damaging the competitiveness of the City, so it sat back as barrels of gunpowder piled up under our financial system.
"A two-way street opened up between Westminster and the City," says Philip Augar in Chasing Alpha (Bodley Head, £20). The government invited speculators from all over the world to scratch its back while it scratched theirs.
Anyone who has read Augar's previous history of the City, The Death of Gentlemanly Capitalism, will expect his account of the fantastic bubble and crash we have lived through to be lucid and intelligent, and he does not disappoint. And niggling away in his opening chapters is a question I believe will produce unforgiving verdicts from future historians: how could a Labour government let this happen?
Historically, parties of the centre-left have taxed too much and spent too much. Their classic economic crisis consists of a run on the currency. Never before has one presided over one of the great booms and busts of financial capitalism. Conservatives presided over those.
To be brought up on the Left was to learn that spivs, the gnomes of Zurich and the funny money men must always be watched. Take your eye off them for a moment, conventional leftish wisdom ran, and they will bring down the roof on the rest of society as they did in 1929. It was a prejudice, of course, but not always a bad or unwarranted one.
When they were young, many of today's Labour ministers were Marxists, who accused an older and wiser generation of leaders of selling out. Yet by the time they arrived in office they had, as so often happens, flipped from one version of extremism to another.
They went from wanting to abolish financial capitalism to wanting to venerate financial capitalism, without once stopping on the sensible middle ground of wanting to regulate it.
Gordon Brown is a case in point. A man who campaigned as a student for a socialist transformation of Scotland, provided both an epitaph and an indictment for his Labour generation when he gushed to a meeting of City bankers in the autumn of 2006: "What you have achieved for the financial services sector, we, as a country, now aspire to achieve for the whole British economy."
The "whole British economy" is sharing that achievement now.
The money dazzled them, of course. Augar rolls out the figures, which show how Labour's social programmes were financed by taxes from the banking bubble. Financial services' share of GDP rose from 6.6 per cent to 9.4 per cent between 1996 and 2006; trade surplus went from £8.7bn to £25.1bn; City jobs from 265,000 to 338,000; and City bonuses from £1.7bn to £8.5bn.
Put like this, it sounds as if Labour cut a deal: you provide us with revenues for public works, we won't regulate you. But this explanation is too cold and calculating to catch the passion of the romance.
Brown was no Dr Faustus knowingly entering into a pact with the Devil. He embraced the Devil, and gave no sign of realising that the Devil was indeed a devil. Even now, Labour ministers believe that the pact can be revived, and that they can go back to the lost bubble world, which suited them so well.
Looking at the ruinous consequences of Labour's naivety, I don't know what is sadder: the government's demands that the working and middle classes bail out speculators, who earned more in a year than they will earn in their lifetimes; or the self-delusion of a once-honourable party, which abandoned its traditional suspicion of bankers and was then shocked when the world fell apart around it. ·