Vince Cable is not your typical modern politician: no smarmy charm; a conscious lack of superficial soundbites and exaggerated ‘dividing lines’; in his dour unflashy manner, a walking triumph of substance over style, apart from his talent for deadly aphorisms and his proficiency at ballroom dancing. 

We go to interview Vince in his Commons room, surrounded by books, pamphlets and press cuttings. Cable is clearly like his one time Scottish Labour intellectual collaborator, Gordon Brown - a politician, who likes to do his own thinking and research. Vince and I first came across each other at the tail end of the Callaghan Government when we were both Special Advisers, he to John Smith. We both joined the SDP in 1981, but Vince then spent fifteen years working through the wards in Twickenham to end up in 1997 Liberal Democrat MP for this previously banker Tory seat: one of the unsung victors of the great progressive coalition Tony Blair had put together. 

I first ask Vince how much he thinks the global economic crisis represents a paradigm shifting event. His reply is at one level careful and qualified: but at another far more radical than any Labour figure has so far suggested. 

RL: Will the crisis have similar consequences for the hegemony of market neo-liberalism to the Winter of Discontent’s destruction in 1978 of post-war social democracy?

VC: The crisis is profoundly serious, and I suspect that we are only at the beginning of it. It’s a particularly serious crisis for the UK because we have big structural problems which this government chose to overlook: the massive build up of the housing market bubble and personal debt; the fact that City of London financial services were allowed to grow disproportionately, exposing the British economy to bigger shocks than would otherwise have been the case.

Cable, however, doesn’t play the George Osborne game: he offers a more profound critique of successive UK government policies.

“The problem is not, as the Tories put it, the hole in the roof while the sun was shining, but rather that the whole building was erected on very, very fragile foundations and swamps. We had a banking system that was made unstable by decisions made over the last twenty years. The Government was quite happy to let the City of London run without questioning too deeply many of the assumptions under which it operated.”

RL: So this is as big a crisis as the 1930s?

VC: In the 1930s many people, except for Keynes, wanted to overthrow everything to do with capitalism. Instead we are talking fairly narrowly about the financial sector. In the short run, there is no alternative but to working with the banks in their current very messy structure. In the longer term the banking sector is going to have to be reconstructed on very different lines. I don’t think it’s going to be possible to have high street banks that are simultaneously operating like casino-type investment banks.

What is going to have to emerge is a system of domestic banking, which is either significantly more regulated or has a different ownership structure which sits alongside the internationally traded financial services industry. How we maintain a firewall between those two activities is very difficult in practice to define but is the issue we have to focus on.

RL: How does your focus on the distinctiveness of the financial sector determine your view of what the voters will regard as fair and unfair in future?

VC: When people look at what’s happened over the last few years they see people making enormous fortunes and not through entrepreneurial activities. Not as Bill Gates introducing wonderful new innovative technologies - I don’t think any sensible person in a capitalist society would question wealth creation based on genuine entrepreneurship and innovation.

But (what was happening in the financial sector), if it wasn’t fraud, it was certainly sophisticated pyramid selling: people making fortunes through bonuses which were not in any meaningful sense earned. The anger is because the tax payer is having to pick up the bills. It is not so much that the rich got richer, which may be understandable in a successful capitalist system, but that the losses have been effectively socialised.

RL: Surely you support the Government response to the recession?

VC: I don’t dispute that in the last few weeks the Government has been decisive and hands on, and many of the things it has done in regards to the banking system, the capital injection and the fiscal stimulus, have been appropriate and I have publicly supported them.

But that doesn’t mean he is giving the Government a blank cheque.

“The big failing in policy at present is the lack of clarity of what the Government wants the banks, particularly the part nationalised banks, to do. Though I am advance of the pack when it comes to kicking the banks, they have a genuine point that the Government is setting them very confused and contradictory objectives. They are being told to lend more to keeping the economy going, which is right and should be top priority. But then they are also being told to hold more liquidity, and to repay public loans as quickly as possible. The Government preference shares were subscribed on very tough terms. All of this undermines their ability to lend.”

RL: But surely you stand with the Government against the Tories on the big dividing line David Cameron has opened up with the government on fiscal policy in a recession?

VC: Cameron is trying to create a dividing line, and it may be tactically quite clever. But I’m not sure it is quite the divide that you imply, because even the Tories, I think, accept the necessity for the automatic stabilisers to work. And the Government’s fiscal stimulus is pathetically small.
 
RL: So you think it should have been bigger?

VC: I think it should have been different and bigger. The emphasis should have been on long term public investment in projects that are sound in their own terms: social housing, where the government is doing something but not very much; big transport projects, which are self-financing in the long-term; mass home insulation etc. Because I don’t think this is going to be a short recession.

RL: What about the VAT cut?

VC: It’s not completely useless, as it has got some money into the economy but it’s based on the assumption that it is a short, sharp, relatively shallow recession. I feel it’s much bigger and deeper. The Obama people understand that.

The second criticism I have of the Government’s stimulus is that we think there is a bigger role for tax cuts concentrated on low paid workers, lifting them out of income tax, funded by people higher up the income scale…

RL: But isn’t that what the Government is doing?

VC: Not really. It isn’t doing much at the bottom: it corrected the 10p rate thing but at the other end, the 45p rate was only tokenism really.

RL: What would the Lib Dems have done instead?

VC: Two things would raise large amounts of money: abolishing tax relief on pension contributions at the top rate; and reforming capital gains tax, which is deeply inequitable.

Under the Alistair Darling reforms you pay top rate income tax at 40 and potentially at 45 per cent, but if you convert your income into a capital gain, you only pay 18 per cent. This is a nonsense that even Margaret Thatcher and Nigel Lawson recognised. Those two things together raise substantial amounts at the top end.

RL: So what is the current Lib Dem policy on the top rate?

VC: If you do those things then we think you don’t have to do anything else. If the Government brings in the 45p then we won’t repeal it but we didn’t think it was necessary.

Simultaneously, we are looking at public spending.
 
RL: But surely any talk of public spending cuts has to be set in the context of the Government’s November announcement of public spending real growth being held to 1 per cent year? That’s ferocious restraint by past standards.

VC: I think it’s simultaneously ferocious but also wildly optimistic. I think the economy could get significantly worse than the Government is assuming, and all these sums will look a lot worse. What escaped everyone except the IFS is that the particularly ferocious cuts occurred in public investment. So that instead of having long term commitment to wonderful infrastructure, the Government are going to cut it to pieces.

RL: On the other hand that there has been a lot of catch up  investment in the last ten years in schools and hospitals, which it should now be possible to phase back?

VC: Any party that gets back into government at the next election is going to have a horrendous public spending problem. Not least because there will be irreconcilable pressures between public sector workers who will feel they need more money and private sector people who are out of work and extremely angry at all these public sector workers with secure jobs and pensions and the rest of it.

RL: Do you think what’s happened brings back a strong case for the membership of the euro?

VC:  I think there is a strong case for British membership of the euro but I don’t think it should be predicated on what’s happed over the last few weeks. Of all the things we have to worry about the fact that the pound is flexible is actually a benefit in the current situation. But if the eurozone survives, as it is not totally clear it will, and in two or three years time the eurozone is clearly reviving and benefiting from its internal disciplines and unity and Britain is still struggling and floundering all over the place, then the whole national mood may change.

RL: Everyone remembers your quip describing Gordon Brown as Mr Bean. What do you think of his performance now as Prime Minister?

VC: I wouldn’t use that image any more. If I was going to conjure up a colourful image of Gordon it would be King Canute: the man who ordered back the economic tide of Boom and Bust and is currently being made to eat humble pie.

RL: But that refers to the past….don’t you think that recent events have opened up a big divide between what I’d call the progressive alliance and the conservatives?

VC: No. For self-serving reasons the Government and the Tories want to get back to that kind of polarised debate.  I don’t actually think that what they are doing in relation to fiscal stimulus is terribly radical. So I think that this division is a phony one and takes us away from other important issues such as civil liberties and the environment and the future of Europe.

It won’t work with the public either. There is a sense that this is a very deep economic emergency: the economic equivalent of war. If you have the two leading parties behaving like ferrets in a sack, this will go very badly for both of them.

RL:  Surely the description of the Conservatives as the do nothing party is accurate?

VC: Ok, but it’s polarised and confrontational.

RL: The present polling is suggesting a hung parliament. Do you think that the logic is that you could end up as a Chancellor in a Brown government?

VC: No I certainly don’t. I think it’s rather improbable. You know our view on hung parliaments: if it happens, we would be willing to work with either party in the national interest. I know that sounds rather trite. But I think actually it will strike a chord in the way it wouldn’t have done a few years ago, because in national emergency voters will respond to politicians who say what’s the point of trench warfare.

RL: Nick Clegg six months ago may have thought that he could work with a soft Conservative David Cameron. Is that the case any more?

VC: If at the next election, the Conservatives appear to have won a moral victory, even if they don’t have an overall majority, then we would feel we would have to sit down and talk.

It may be you are right that having sat down and talked, there is no common ground - but we would go into the election very clear that this would be one of the things we might have to do.