The MT diary

Schmoozed by Gordon; it's the economy again, stupid; no escape from that Diarmuid.

by Howard Davies, director of the London School of Economics
Last Updated: 31 Aug 2010

The Treasury has always been ambivalent about its relationship with the financial services industry. Over the past decade, it has gradually taken over responsibility for regulation, in a series of land grabs from the DTI. (When it comes to turf wars between those two, it is no contest.) But the notion of 'industry sponsorship', which comes easily to the DTI, is foreign to HMT. If you are also the tax department, you have to be careful not to get too close to those who write many of the cheques.

So the financial sector has fallen between two stools. With no other role in financial services, the DTI couldn't see why it should do the job - and anyway it prefers to promote hopeless causes. Yet the Treasury was not stepping up to the plate, which is perhaps why a recent City Corporation survey showed that many financial firms feel unloved by the Government.

The Treasury, however, seems to have had a change of heart and has stepped in. The doors of its new building were thrown open for the good and the great of the Square Mile - well, the great anyway. The mood was positive, even ebullient. The Chancellor was at his most charming, and the chardonnay flowed incontinently. Could an election be in the offing?

Another tell-tale sign is the growing exodus of advisers from No 10. Alastair Campbell and Jeremy Heywood have already left, for the stage and Morgan Stanley, respectively. Soon Geoff Mulgan, head of strategy and the prime minister's social conscience in chief, will also be handing in his 'access all areas' pass.

The PM's loss is the LSE's gain. Mulgan will be, among other things, a visiting professor at the School, and he came to deliver his first lecture here the other day.

The thesis he elaborated is not diary material (too many long words), but Mulgan included two amusing and telling quotes. The first was from Donald Rumsfeld: 'There are only two things the US government does well - nothing, and overreact.' He should know. The second was Arthur Miller's comment on Roosevelt's devious campaign to bring American opinion around to entering World War II on the allied side in 1941: 'Mankind is in debt to his lies.' No doubt this was inserted for purely historical interest.

Election fever is mounting in the US too, with two themes to the fore - the war and the economy.

There are not many in the pro-war party at the LSE, and their numbers are dwindling fast. But the state of the US economy generates considerable debate. Is the current growth rate sustainable, or will the twin deficits - fiscal and balance of payments - bring the party to a halt?

Paul Krugman, George W Bush's fiercest fiscal critic, dropped in to offer his contribution. He argued that the latest Bush tax cut, the benefits of which are heavily skewed towards the rich, has created an unsustainable position for the federal government. Only swingeing expenditure cuts, on social programmes in particular, can put things right - no President is likely to propose defence cuts in the near future, which leaves no other plausible option.

Furthermore, he maintained, this is part of an explicit neo-con strategy, known as 'starve the beast'. The argument is that the only way to cut back the size of the government is to begin by denying it resources, to create the imperative for spending reductions, which would not be politically feasible in other circumstances. An idea for Oliver Letwin, perhaps.

In Palm Beach, oddly, the deficit does not seem to be of huge concern at the bars of the Breakers Hotel. Baghdad seems a long way away. I was there for an arduous conference speaking engagement, you understand, and to meet some alumni. It is odd where LSE radicals end up.

It was a tough schedule. But there was just time for a short cycling tour around the beautiful homes of northern Palm Beach, where the nanny's runabout is an XKR. The highlight is Rupert and Wendy Murdoch's delightful cottage, behind a 20ft privet hedge. Even OK! magazine has not yet penetrated those defences, and I suppose may never do so.

Back in London, the summer season is in full swing. The first Lords test against New Zealand was outstanding, with the right result for once, and a dramatic finale. If only all those in British public life could bow out in style like Nasser Hussein. There are one or two politicians around who could learn a lot from his example.

We kept away, however, from the Chelsea Flower Show, which has become altogether too sensational and dangerous, with garden designers shouting abuse at each other over the picket fences. Better all round, we thought, to stick to the Tate's blooming 'Art of the Garden' show. It would surely be a much safer environment, with no flying forks or trug-wielding makeover artists to avoid.

No such luck. Even the audio guide was recorded by Diarmuid Gavin, though the rude words were edited out. But when the herbaceous borders pall, you can hop onto Damien Hirst's polka-dot Tate-to-Tate boat and view Edward Hopper at Bankside. His melancholy view of American alienation and introspection is as relevant to Bush as it was to Hoover and Coolidge.

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