Like Ed Balls, Jeremy Corbyn is struggling to impress the judges

Leader’s proposals such as People’s QE would provide useful policy weapons but Labour has done little to turn them into mainstream ideas

When polling stations closed at 10pm on the night of 7 May 2015, the bookies would have given generous odds on Ed Balls doing the waltz on Strictly Come Dancing and Jeremy Corbyn leading the Labour party less than 18 months later.

Had things turned out a little differently, Balls would now be running the Treasury and Corbyn would have remained a backbench MP. Ed Miliband would have been at the head of a coalition government and there would have been no EU referendum.

In the intervening period, Corbyn has won not one but two leadership contests, both by thumping majorities. His opponents in the party have been routed and he now has the job of getting Labour ready to fight the next election. That will be no easy task.

Three months ago, the notion that the Conservative party would hold a double-digit opinion poll lead over the Labour party looked remote. David Cameron had just resigned after calling and losing the Brexit referendum and there were fears of a summer of financial and political chaos while the Tories chose a new prime minister. Labour had its problems but they appeared to be minor by comparison.

The mood has now changed. Theresa May is enjoying a honeymoon period and political pundits assume that she will trounce Corbyn whenever she chooses to go to the country, whether that is at a snap election next spring or if the current parliament is allowed to run its full five-year course. The conventional wisdom is that Britain is facing another prolonged period of uninterrupted Conservative rule.

But honeymoons - as Gordon Brown can testify - come to an end. Labour’s last prime minister looked the part and had an assured start when he took over from Tony Blair in the summer of 2007. Then the financial crisis broke, there were queues outside Northern Rock branches and it was never the same again.

May’s honeymoon could turn out to be similarly brief. While the risk of an immediate recession has receded, it is possible that the government will make a hash of the Brexit negotiations when they eventually start. Before that, though, there is the possibility that the supposed cure for the last recession unwittingly creates the conditions for another painful downturn.

This is what is happening. Interest rates are low everywhere and have been for years. The Bank of England, the Bank of Japan and the European Central Bank are still upping the amount of stimulus they are providing, even though it is almost a decade since the sub-prime mortgage crisis erupted in the summer of 2007.

The only major central bank that is even thinking about tightening policy is the US Federal Reserve. The Fed took the first tentative step towards the “normalisation” of interest rates (around 5% was the pre-crisis norm) last December and sent out signals that the cost of borrowing would be pushed up several times during 2016.

Since then, though, the Fed has sat tight even though unemployment is low and consumer spending is strong. With negligible wage pressure and last year’s fall in the cost of energy holding inflation down, the Fed has said it wants to see further evidence that the economy is strengthening before moving again. Wall Street has taken that as a strong hint to be prepared for a December rate rise although, on past form, it won’t take much for the Fed to again decide to leave policy unchanged.

In theory, the ability to borrow for the long term at ultra-low rates should be providing an incentive for US businesses to invest. That, though, is not what is happening. Rather than invest, corporations are borrowing money in order to buy back their own shares. This makes sense because, as Charles Dumas of Lombard Street Research has pointed out, the cost of money is below the yield on stocks.

But it also means the Fed has created the perfect conditions for a massive stock market bubble, which will pop the moment that interest rates start to rise. The US, courtesy of the dearth of investment, has weak productivity and inflation will start to pick up once growth accelerates to much more than 2%.

Ed Balls waltzing on Strictly Come Dancing. Had things turned out differently on 7 May 2015, he would now be running the Treasury. Photograph: Guy Levy/BBC/PA

The fear of the majority of the Fed’s policymakers is that an over-hasty move would send share prices sharply lower, leading to slower growth, higher unemployment and an undershoot of its inflation target. But delay means that the stock market bubble continues to inflate and that the bust – when it comes – will be even more severe. It is easy enough to envisage circumstances in which a panic on Wall Street leads to the second global recession in a decade.

What would this mean for UK politics? Labour had two problems during the 2007-09 crash. The first was that it was in power when the banks nearly went bust. The second was that it was ill-prepared ideologically to challenge the basis upon which the global economy had been run for the previous 30 years. New Labour had bought into the idea that there was precious little governments could, or even should, do to tame the power of global finance.

Clearly, Corbyn doesn’t have the first of these problems. If there is another financial crisis, it is going to happen on May’s watch. The more interesting question is whether Labour could respond to a fresh crisis with an economic programme that is intellectually coherent and politically attractive.

This is a tall order. Labour does not tend to win power when times are tough; rather it wins during periods when the mood is optimistic and when the economy is strong, as in 1964 and 1997. In 1945, it was impossible to portray Labour’s economic platform as dangerously radical, since state control of key industries had been necessary to win the war.

The UK has the same economic weakness as the US: private investment has been too low even with interest rates at record lows. Corbyn’s answer is higher public spending channeled through a national investment bank. There is nothing wrong with this. Indeed, it makes a lot of sense to remedy the UK’s infrastructure deficiencies when borrowing is so cheap.

Likewise, an idea that Corbyn floated in the 2015 leadership race - People’s quantitative easing - would provide a useful policy weapon in the event of another severe financial crisis. There is little scope for central banks to cut interest rates further and the current QE programmes have encouraged speculation rather than investment. People’s QE is a form of helicopter money: public investment financed by money creation by the Bank of England.

But Labour has done little to turn higher borrowing or People’s QE into mainstream ideas and is failing to counter the perception that it knows more about spending money than creating wealth. In that respect, Corbyn and Balls are alike: both are struggling to impress the judges.