Until a year ago, when the credit crunch began, the fashionable view in the City was that politics had become virtually irrelevant. A friend of mine who works as a political analyst for a big investment bank used to complain that his colleagues simply weren't interested in his insightful briefings on the agendas of the world's chancelleries. Apart from the occasion flicker of concern over a possible nuclear strike on Israel, most City folk looked down on politicians as little more than potentially useful purveyors of pork, while the serious business of setting interest rates was farmed out to central banks.
How that view has changed in the last 12 months. It turns out that politics matters far more than anyone realised. Not only have we discovered that our supposedly free markets were not so free after all with the state still a major player, both as lender of last resort to a reckless banking system, and as the guarantor in the case of the US of trillions of dollars of dodgy mortgage debts. But the financial world has also realised that it needs politicians to sort out its gigantic mess.
The result is that politicians are coming under scrutiny like never before not just their policies, but their competence, judgement and ability are under pressure. That applies not just to governments, but to oppositions too. In the current environment, decisions taken by policymakers under great stress have the capacity to topple the entire financial system a situation the US government may only narrowly have averted last weekend with its actions over the mortgage agencies Fannie Mae and Freddie Mac. At the same time, politicians must also make fine judgements over how much pain to inflict today, and how much the bill for the current crisis should be passed on to the next generation in terms of higher inflation, weaker public finances and increased moral hazard.
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All this makes David Cameron's economic plans set out in a heavily-trailed keynote speech earlier this week a matter of far greater interest than usual for an opposition party two years ahead of an election. Britain is currently run by a weak and desperate government that may be tempted to take huge risks to keep its electoral prospects alive. The opposition has a hugely important role, not only in keeping the current government honest, but in convincing the markets that when they finally boot Labour out, they can be trusted to remain honest themselves.
That was Cameron's urgent task this week and in my view, he fluffed it. The Tory response throughout the credit crunch has been weak, the party appearing out of its depth on Northern Rock and far too sympathetic to the banks and the City. Far more damaging, Shadow Chancellor George Osborne gives the impression his priority since the financial crisis is to seek ways to extract maximum political advantage rather than to offer a coherent and responsible critique of Government policy. Policies to cut fuel duty as petrol prices rise, or to scrap stamp duty for first-time buyers, are empty gestures that will do nothing to stop fuel prices soaring or house prices plunging, but will add huge sums to the national debt at the time when the country can't afford it.
Cameron had an opportunity to cut through these cynical Westminster gimmicks and set out the Conservative principles that would guide his approach to the economy. Instead, the one new idea in his speech a proposal to introduce aspects of the US Chapter 11 bankruptcy rules was far from reassuring. The UK already has a tried-and-tested method of dealing with failed firms. The administration process may not be perfect, but it is flexible, well understood, tends to lead to quick results and does not inevitably lead to liquidation but can allow healthy companies to re-emerge, as it did with Canary Wharf a few years ago. Chapter 11, on the other hand, is a hugely expensive system that often allows failed firms, including much of the US airline industry, to be propped up for years, to the benefit of managers, shareholders and lawyers, but to the detriment of more successful rivals.
At best, Cameron's sudden interest in the finer points of insolvency law shows an alarming complacency towards bail-outs and moral hazard, and a lack of trust in free markets. At worst, this was just another cunning political stunt designed to give the Tories a stick with which to beat the Government as unemployment figures start to pick up. Whether that is a smart tactic is a matter of political judgement. I'd have thought that most people can see through this sort of thing by now. But in the City, the lack of a coherent economic narrative is a matter of concern. The danger with proposing half-baked, socialistic ideas for bucking markets and dispensing corporate welfare is that they might just be adopted by the Government. Worse, the markets will assume the next government will be weak and irresponsible too. That can only further damage confidence in Britain at a time when confidence is already in short supply.
Simon Nixon is executive editor of Breakingviews.com
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