JIM LEHRER: Next, Britain tries its own economic stimulus package. And Margaret Warner reports on that from London.
MARGARET WARNER: It’s a month before Christmas, and London’s Oxford Street is filled with would-be shoppers, gazing at the glittering window displays, but mostly free of shopping bags. And salespeople say customers haven’t opened their wallets yet.
CAB DRIVER: We’ve been the first to feel the crunch.
MARGARET WARNER: One of the best barometers of London’s economic health are its cab drivers.
CAB DRIVER: The business is really right down. We have to be in the cab seven days a week to earn any money, really.
MARGARET WARNER: And today Prime Minister Gordon Brown unveiled his latest recession fighter: a nearly 20 billion dollar pound stimulus package with a temporary sales tax cut and a bit more spending on infrastructure.
This comes not a moment too soon for Britain. The retail sector is hurting; homes aren’t selling; unemployment is its highest in 11 years and forecast to get worse; and the British pound has lost a quarter of its value against the dollar.
All that means Gordon Brown has an anxious British public to reassure.
JAMES MAX, Radio Talk Show Host: Five minutes past 5:00, you are listening to “Business Matters”…
MARGARET WARNER: Just six months ago, London radio talk show host James Max was fielding calls from listeners looking for advice about how to profit in a booming economy. No longer.
JAMES MAX: The kinds of questions that we’re getting are, “I’ve got money in my bank account. Is it even safe?”
Dangerous growth in the economy
MARGARET WARNER: It's a far cry from London's go-go decade under Brown's predecessor, former Prime Minister Tony Blair. By some measures, in 2006, London actually surpassed Wall Street as the world's biggest financial center.
A new enclave, Canary Wharf, was built to house the profusion of global banks and investment houses. As in the U.S., they were offering a legion of new and ultimately risky financial products.
TRADER: Financial futures, repot, repot in dollars, dollar deposits...
MARGARET WARNER: David Buik is a longtime analyst with brokerage house BGC. It acts as a middleman between banks trading, some would say betting on, complex financial instruments.
TRADER: You've got option on equities, and you've got foreign exchange options.
MARGARET WARNER: The business was fueled by the rivers of easy credit available globally and, in Britain's case, even less regulation than in the U.S.
DAVID BUIK, Brokerage Analyst: You know, lend whatever you like, and we're not going to worry too much about regulation. Well, it's like offering a bag of candy to a child and say, "Just take one." He's going to take the lot, and that's what the banks did.
And you can't really blame them for that, because within the parameters of what they were allowed to do, that's what they did. And nobody wanted to get left behind.
MARGARET WARNER: The result was a British economy dangerously reliant on financial services. According to the Wall Street Journal, one in five British jobs depended on the finance business, compared to one in 16 in the U.S.
Easy credit also fueled a housing bubble that, in London at least, was more extreme than in the states. British banks did not offer subprime loans to marginal buyers as American banks did; instead, they extended no-money-down credit terms to people up and down the income scale, gambling that home values would continue to soar.
Britain's housing bubble
DAVID BUIK: We have seen in the United Kingdom insanity, of housing going up 600 percent to 700 percent in a decade, which is ludicrous, with mortgage banks allowed to lend 100 percent mortgages and 125 percent mortgages.
Let's get real. This is insanity. And the government should have said, "No."
MARGARET WARNER: That was apparent in the charming medieval-era town of St. Albans, a half-hour train ride from London.
NICK SALMON, Real Estate Agent: So here's our window display.
MARGARET WARNER: Nick Salmon is a real estate agent in St. Albans.
And how are sales going, say, compared to last year?
NICK SALMON: I think we can say generally sale volumes are down by at least 50 percent, if not more, on this time last year.
MARGARET WARNER: He took us to a tiny row house...
NICK SALMON: And it was built in the 19th century. It's Victorian.
MARGARET WARNER: ... that even in today's depressed market is listed for 270,000 pounds, or nearly $500,000.
Does that suggest to you maybe a little price inflation?
NICK SALMON: Well, that's what we've had over the last decade.
MARGARET WARNER: Now homes aren't moving, and Salmon blames the British banks.
NICK SALMON: I think there's been some terribly irresponsible lending over the last, really, 10 to 20 years. We've had some ridiculous situations. I mean, I've heard of people who, on self-certification mortgages, are getting 10 times their annual earnings. Now that's crazy.
ANGELA KNIGHT, British Bankers Association: It's easy to say, "Let's all shoot the banks or shoot the bankers."
MARGARET WARNER: Angela Knight is head of the British Bankers Association.
ANGELA KNIGHT: The pressure, you know, was on the banks to say, "You must lend 100 percent of the mortgage. You must get first-time buyers, you know, their foot on the ladder. You must help them, and especially in the southeast."
MARGARET WARNER: The housing boom began softening late last year, when British banks started tightening credit after being hit by their exposure to the U.S. subprime meltdown.
But the bottom really fell out this September, when U.S. investment bank Lehman Brothers went bust. Thousands of Lehman high-flyers at Canary Wharf lost their jobs. But far worse, British banks virtually stopped lending to one another or the public.
HOWARD DAVIES, London School of Economics: The economy here turned very quickly in September. It's almost as if people came back from holiday and said, "Help," and canceled orders, and canceled investments, and the economy really turned down very, very sharply.
Effects of a 'vicious circle'
MARGARET WARNER: Howard Davies, director of the London School of Economics, says Britain's current crisis isn't the fault of global contagion alone. Britain's finance sector made itself especially vulnerable because, instead of relying on deposits, banks turned to cheap money in global money markets.
HOWARD DAVIES: Our banks were funding themselves in the wholesale markets to a much greater extent even than the U.S. banks were. So when the wholesale debt markets gummed up, our banks found themselves in serious funding difficulties.
Banks couldn't lend on new mortgages, and that has precipitated a fall in house prices here. And now the banks do have bad mortgage books, because prices have now fallen by 25 percent probably, and so more and more borrowers are starting to get into difficulty.
MARGARET WARNER: This vicious circle has swept up even those who aren't in trouble on their mortgages, like contractor Peter Aynsley. This former army guardsman had built a comfortable life for himself and his partner, Sonia Chaibi, remodeling kitchens and bathrooms for the wealthy.
Now he's had to lay off his two subcontractors, and he's working as a garbage collector.
PETER AYNSLEY: Basically meant from going from potential earnings of 200 pounds a day now, which is 1,000 pounds a week. I now earn a little over 300 pounds a week. So I've lost 70 percent wages, basically.
MARGARET WARNER: Now, how did this happen?
PETER AYNSLEY: It started about four months ago, as soon as the word "credit crunch" was bandied around on the news, basically. People stopped wanting to spend money on their houses.
MARGARET WARNER: So how are you managing?
PETER AYNSLEY: We never go out eating anymore like we used to go out to enjoy a meal. And to be honest, beyond the next two months, I'm not sure how we're going to survive, basically. I'm going to have to try and get a second job, I think.
Trusting Gordon Brown
MARGARET WARNER: The one person whose job security has improved lately is Gordon Brown. Formerly chancellor of the exchequer, or treasury secretary, he became an un-elected prime minister when Tony Blair resigned 17 months ago.
And until this crisis hit, Brown looked unlikely to ever be elected on his own. After a brief honeymoon, Brown's Labour Party saw its fortunes sink amid inflation, missteps and a growing sense that Brown was not in command.
JONATHAN FREEDLAND, The Guardian: Every indication was that his days were numbered and people wanted to get rid of him. Then, as the financial crisis turned into an economic crisis, suddenly -- and this is so counterintuitive -- you saw his poll numbers rise.
MARGARET WARNER: Jonathan Freedland, a columnist for the Guardian newspaper, says there's only one explanation for that.
JONATHAN FREEDLAND: I mean, he's not great on television. He's not got a folksy manner. But he's hugely experienced, and particularly in handling the economy.
So when he says, "Trust me, I'll get you through this," even those people who think in some ways he got us into this, find themselves listening to that idea.
MARGARET WARNER: Brown also benefited from the international reaction to the first major rescue plan he announced in early October, to inject government capital directly into ailing banks.
The Europeans adopted the same just days later. And a month after that, U.S. Treasury Secretary Hank Paulson abandoned his own bank rescue plan and adopted Brown's recipe instead.
JONATHAN FREEDLAND: It was that plan which seems to have been adopted the world over, I mean, hailed the world over. That carries some weight here, so the people say, "Well, look, if the rest of the world thinks he knows the answer, maybe he does."
MARGARET WARNER: Conservatives fumed as Brown closed the polling gap, and last week, even before Brown could announce today's stimulus package, the Tories came out firmly against the idea. David Gauke is a member of Parliament from the Conservative Party.
DAVID GAUKE, Conservative Member of Parliament: The U.K. government is already borrowing huge amounts of money. And any tax cuts that we see now are going to have to be paid for by tax rises in the future.
MARGARET WARNER: But Brown also has to listen to his fellow Labour MPs, like treasury committee chairman John McFall, who have been urging more stimulus tax cuts and spending.
JOHN MCFALL, Labour Member of Parliament: If we do not do it, then we offer no hope to people who are struggling at this very moment.
MARGARET WARNER: Brown's announcement today leaves the British public hoping for a slightly cheerier tax cut-fueled Christmas. But they're bracing for a hard winter and a very tough year ahead.