IN the fairy tale, courtiers persuade the emperor to parade naked through the streets because he is supposedly robed in new clothes made of a cloth which appears invisible to people unworthy of their office. It is left to a guileless child to see through the confidence trick.

We live in a democracy. There is careful scrutiny of every public decision. So, the confidence trick needs to be that bit more subtle. It need not even be a conscious trick, but may instead be motivated by genuine belief. And it may take years for the trick to be revealed.

During the 1992 US presidential election, James Carville, in managing Bill Clinton’s campaign kept on reminding his candidate: “It’s the economy.”

In the UK, a fourth successive General Election defeat that year schooled the Labour Party to find new ways of developing a reputation for economic competence. John Major made that a much easier task by trashing the Conservatives’ reputation in the run-up to Black Wednesday.

New Labour came to power in 1997 after working very hard with the City to re-assure it that it would support its interests. It introduced a new form of regulation for the industry, under the Financial Services Authority, which was given the jobs of both policing and promoting it.

Throughout the 1990s, bankers sidled up to politicians, effectively with the seductive offer of making everyone richer. Not all that much richer, and not all that quickly. But enough to make a noticeable difference.

Gordon Brown bought into that message, claiming prudence as a friend, even while rashly claiming to have “banished boom and bust”. Mervyn King, as governor of the Bank of England, identified the NICE decade – a long period of non-inflationary, continuous expansion. Essentially, many people working in finance had come to believe they had become so skilled at managing risk that there would never be another financial crisis.

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Politicians, regulators, and central banks, persuaded by these arguments, stood back and tolerated a huge expansion of credit. People with assets felt wealthier because they could easily find buyers who would pay high prices, because they could borrow to buy these assets. There was a credit bubble, and there was an asset bubble. As they inflated, the economy seemed to be growing.

In 2008, the bubble burst. The NICE decade was over. The boom had bust. The sleight of hand needed to sustain economic confidence suddenly seemed to be just another shabby trick.

All that had happened was that banks had found new ways of taking risks, which they would once have disdained, by lending to people who had never been able to borrow before, and then raising funding by issuing financial derivatives to other financial institutions.

This “originate to distribute” lending was most obvious in the sub-prime housing market in the USA, where lenders were able to draw in money from across the world.

In the UK, Northern Rock – the first bank to fail for 140 years – used a similar business model. Very crudely, the NICE decade relied on massive lending to consumers, and for commercial property. So long as the economy continued to expand, the loans could be repaid.

AS light stutter in the real economy brought the financial system shuddering to a halt, and then the real economy tanked. National income fell by more than 6% over 18 months from the beginning of 2008. It was the deepest recession since the 1930s, and the slowest recovery.

Derivatives, invented to dissipate risk within the financial system, instead ended up concentrating, and focusing, it. The regulators, who should have been holding the banks to account, seemed to be as much out of their depth as most bank non-executive directors.

The bankers’ promises had turned out to be empty. True, few of them realised just how risky their businesses were. Partly, that was because many senior bankers in the year before 2008 were recruited from outside the sector, and very often they were recruited to make sales.

Risk stopped being a challenge, borne cautiously, and needing management, and mitigation. Instead, it became yet another commodity, with banks using their derivative positions to choose the level of risk with which they were comfortable.

Since they had persuaded themselves that there was no real possibility of a crisis, many banks ran down their capital – their own money, which they would draw on to meet losses in a crisis. As for the regulators, they looked on, complacently assured that the banks had complete control of the situation. Northern Rock, Bear Stearns, Lehman Brothers, Halifax Bank of Scotland, and Royal Bank of Scotland – in turn, they were tested, and found wanting.

Gordon Brown may not have had come to the despatch box as naked as the emperor in the fairy tale. It didn’t matter that in responding to the crisis he got most of the big decisions right, along with his chancellor, Alistair Darling, directing Lloyds Banking Group to take over HBoS, providing the capital to keep RBS and Lloyds trading, and coordinating international action to stop international capital markets from seizing up completely.

Like John Major, they’d been elected to be good stewards of the economy, and instead had presided over a massive financial crisis.

Once again, all that they could do was to limp on, waiting for the voters’ final decision.