Passing through Canary Wharf yesterday and playing a game of ‘Spot-the-dead-bank’, I had a chance to develop my thoughts on the likely outcomes of the credit crunch, and how the Lib Dems can respond to them. I don’t pretend to be an economist, but I do pretend to be a politician. In my mind, there are two possible generalities of outcomes:

1) The current rescue package fails to rally the sector, and the remaining independant banks go under. Consumers shift their money into the government-owned banks. Credit becomes much harder to come by, and under far tighter regulations. The lack of access to credit depresses consumer demand, and sends many smaller businesses to the wall. Deprived of income from the City, the Government is forced to either raise taxes, slash spending or some combination of the two, cutting into economic growth any which way.

However, a crumbling pound and collapsing commodity prices represent a great boon to our manufacturing industry, which still makes up about 20% of our GDP. This may be the lowest proportion in the Western world, but it does give the lie to the ‘We don’t make anything any more’ refrain of the letter-writers of the Daily Mail. A weak pound will help make UK manufacturing exports competitive again – and give a point to the pool of unskilled labour in the North which the Policy Xchange decried recently. This will help our eventual recovery, but what’s more important here is its political effects.

In the event that the rescue package fails, Brown will lose the next election in 2010. However, having his fingers on the levers of the capital in the newly-government owned banks means that he will have the option to invest significant amounts in job-creating businesses in Labour-held areas, reinvigorating Labour’s core vote. Even if he does not do this, the expansion of manufacturing as a proportion of GDP will increase the influence of unions within the country and the Labour party, meaning that Labour will reconnect with its core vote eventually. Old Labour resurfaces.

2) The rescue plan succeeds. It is copied across the world, as appears to be happening now. Gordon Brown is lauded as the hero of the hour. Sensing his Falklands moment, Brown calls a snap election early next year, which he wins with a reduced majority. The inevitable economic downturn caused by the ossification of the City over the next few years takes its political toll, and the Tories get in with a small majority in 2014. But pictures of Gordon Brown opening bottles of champagne with City financiers (and all that entails) eat into Labour’s core vote substantially, allowing other parties to rise in its place.

So what does this mean for us? Option 1 will see the Tory rise continue, but abated by the fact they’ve been largely absent during the crisis, having no real ideas of their own. Playing the Vince card heavily in our Tory marginals may allow us to hang on to held seats, but the real gains will be made against Labour. Lower tax for the less well off will play well, and a reputation for economic competence will allow us to paint ourselves as the party to hold the Tories to account. We do comparatively well in 2010.

However, the eventual renaissance of Labour this represents does not bode well for our long-term prospects of governance. It may be that we see a repeat of the squeeze of the early 20th century.

Option 2, on the other hand, sees this situation reversed. We are heavily squeezed next year, and end up coming out worse. However, the decline of Labour means that we have a real prospect of ending up as the second largest party in 2015, albeit in a parliament that includes the BNP.

In campaigning terms, either option means that we’ll get the most bang for our buck by redirecting resources into Labour held areas now – for both long-term and short-term measures. However, Option 1 means that post 2009 we’ll need to refocus on Tory marginals, while 2 means maintaining our efforts against Labour.

Either way, I forsee Focuses with pictures of Gordon Brown in the City in the near future.