debt | ukwatch.net

Our debt-fuelled economy badly exposes us to the economic storm

eddie — Mon, 27 Oct 2008 15:05:46 +0000

It was not so long ago that Gordon Brown claimed to have abolished ‘boom and bust’. As we enter what everyone now thinks will be a deep and prolonged recession this claim is looking – being as generous as possible – a little over optimistic.

The government is keen to stress that the current crisis was not ‘made in the UK’, and it is certainly true that this is now a global crisis that no country can insulate itself from completely.

Having said that, we have long heard claims that the UK is in a better position to weather economic and financial storms because of our stable economy and sound system of financial regulation and macroeconomic policy…

If this is true it is a bit odd that only a few weeks ago the OECD argued that the UK was, in actual fact, the worst placed among the major developed economies. Rather than being in a better position than everyone else, it seems that we are in actual fact in the worst.

Why might this be?
If everyone on earth consumed as we do in the UK, we would need the resources of more than three planets like earth to sustain us

If everyone on earth consumed as we do in the UK, we would need the resources of more than three planets like earth to sustain us

The most obvious reason is that the crashing financial sector is much more important to the UK economy than to most others – even the US. At least until very recently, the financial sector accounted for 10 per cent of UK GDP, and a quarter of all income tax, and had been growing in importance since the 1980s at the same time as the importance of manufacturing has steadily fallen.

This has not just happened of course – successive governments have championed the growth of the financial sector, much to the irritation of manufacturers who have long complained that economic policy has been skewed towards the needs of the financial rather than the real economy. This seemed fine during the ‘long boom’, but looks very unwise now.

The second factor is consumption. As with the financial sector, the UK has the highest level of consumption (around 90 per cent of GDP) of any other G7 economy. Again, this has been growing steadily since the 1980s at the same time as investment has become less important.

The final piece of the jigsaw is debt. UK household debt is the highest of the G7 economies at 109 per cent of GDP and has also been growing fast in recent decades.

This does not sound like a stable, well-balanced economy equipped to withstand turbulent times, but one that has become increasingly dominated by the financial sector, and which is fuelled by unsustainable consumption based on ever higher levels of debt.

When commentators talk gravely about the dire impacts of falling consumer spending they do so with good reason. The UK economy has become less stable, less diverse and more dependent on consumption and debt – which has obviously been of great benefit to the financial services sector – than any other major economy.

As we look to rebuild from the ashes of the current crisis it is vital that we do so in a way that invests for the long-term to build a diversified, sustainable economy, where finance is the servant and not the master.

From fantasy finance to global crash

Ellie Keen — Fri, 10 Oct 2008 21:17:45 +0000

When corporations at the heart of American capitalism, Ford and General Motors, find themselves close to bankruptcy, there is no surer sign that financial mayhem is turning into economic disaster for the masses who actually work for a living rather than speculate with other people’s money and lives.

As Wall Street crashed (again) yesterday, the car giants found themselves in the eye of the storm, their shares valued at next to nothing. Sales have slumped as lending to consumers dries up. Both Detroit corporations had their credit ratings reduced to “junk”, making it impossible for them to borrow. Bankruptcy looms as the unthinkable becomes reality.

In Britain, the trade deficit between imports and exports is the biggest since the end of the 17th century. Paul Dales, UK economist at Capital Economics, said the data supported other evidence suggesting that Britain entered a recession in the past three months. Exports orders have fallen rapidly as the global economy goes into reverse.

So as finance ministers from the major economies began to gather for an emergency session in Washington, we had this admission from Alistair Darling yesterday: “The world economy is changing. Sticking with the solutions of the past is not an option. Now, more than ever, we need new ideas.” But this is the man who has been a willing, even fervent promoter of the no-alternative school which holds that global capitalism is the only game in town.

So all of their energy, as well as our savings, taxes, pensions, livelihoods, and council services, are devoted to the task of ensuring that the system survives. The “new idea” is that politicians pledge to work together to do “whatever it takes” to restore “stability”. The plan is that the bankers cash in and the rest of us take the pain. In that, all the major bourgeois parties are agreed in an outbreak of “bipartisanship”, which meant the House of Commons devoted an entire 19 minutes to the crisis yesterday. Democracy? It’s a luxury at a time of national crisis.

Certainly there can be no effective action to prevent the descent into an unprecedented slump. And the market speculators know it, selling shares not just in banks but in retailers and manufacturers. The souring of relations between Britain and Iceland, with the government using anti-terror laws to freeze accounts, shows how the breakdown of the global financial system turns friends into enemies overnight.

We’re not alone in pointing out that following the 1929 Crash, it took a decade and a half of the Great Depression and the destruction of surplus productive capacity and tens of millions of human beings in a world war. Only then, could the 1944 Bretton Woods agreement establish the basis for restarting the process of profit making and capital accumulation.

The post-war period of growth induced by a controlled expansion of the money supply began to suffer a series of worsening setbacks and shocks from the end of the 1960s. Control had given way to uncontrolled inflation and the Bretton Woods arrangements broke down in 1971. This left the world prey to three and a half decades of naked credit-led growth. This produced global corporations and subservient governments which encouraged gross over-consumption.

It had to end. More and worse financial shocks reverberated around the world throughout the 1990s. The bursting of dot com bubble in 2000 was the writing on the wall. When the outpouring of commodities bought on credit overwhelmed the consumers’ ability to service their debts by 2004, the game was already up. (NB Chancellor Darling).

Darling says that “All forecasters, including the International Monetary Fund, have been surprised by the profound impact of this shock.” Not us, chum. We wrote about it in 2004 in our book A World to Win. And we continued to study it until, at the end of 2007, we published A House of Cards, with its prophetic sub-title, from fantasy finance to global crash.

But Darling is right about one thing, sticking to “solutions of the past” won’t do the trick. A revolutionary break with the past is needed in opposition to international plans for bailing out bankers while ordinary people suffer. We’ll be discussing our solutions on Saturday week, October 18, at the Stand Up for Your Rights festival. And, we can promise you, we won’t be talking about how to save the present financial and economic system.

Debts the way to do it

Ellie Keen — Sat, 04 Oct 2008 14:44:13 +0000

AS SCHNEWS RASHLY TAKES ON THE CREDIT CRUNCH AND THE FUTURE OF GLOBAL CAPITALISM

“Whoever is to blame for this week’s scenes on world stockmarkets, only the most churlish anarchist would welcome them.” – the Guardian, 1st October 2008

Blimey… you spend 15 years struggling against global capitalism and then the bloody thing collapses of its own accord. Building societies, banks and all manner of financial institutions are going to the wall.. City wide-boys, hands bloody from their ruthless assault on the world’s poor, are flinging themselves in front of trains – and nobody’s had to lift a finger – let alone throw a Molotov.

Since our report on the welfare state for business (SchNEWS 647) western governments have continued throwing infeasibly large amounts of money at the free-falling financial markets.

‘Meltdown Monday’ was only the start (Traumatic Tuesday, Woeful Wednesday etc) as here in the UK, Bradford and Bungly went belly up and had to be nationalised – well it’s massive debts did anyway with Spanish bank Santender, already owners of Abbey, encouraged to pick up the best bits of B&B for a song. Halifax nearly collapsed and had to be sold to Lloyd’s bank – forget the monopoly issues just keep the sinking ships afloat!

Over in the States, Bush and his cronies are desperately trying to get through a whopping $700 billion bail out bill to shore up confidence in a financial system teetering on the edge. They failed initially, leading to further market plummets before persuading Congress to approve a revised deal this week (being voted on by the House of Representatives today).

The nattily named credit crunch appears to be getting more and more bite, so what’s it really all about?

The explanation tossed around by most mainstream media tells us that it’s due a rash ‘sub-prime’ mortgage lending – OK, but if you want to understood why it’s knock on effects are so threatening to the system it’s actually a little more complicated.

The comparative economic boom (ridden with such self-congratulation by the ‘golden’ chancellor at the time…er, a Mr G. Brown) since the last recession in the early 90’s has been based on massively increasing levels of debt. Not just individual consumers spending their way to prosperity on credit cards, but banks, all the other types of financial institutions, corporations and governments.

Household debt has increased from 50% of GDP in 1980 to 100% in 2007. Financial sector borrowing has gone from 21% to 116% of assets in the same period. In fact, a chief cheerleader of the brave new financial world was the former boss of now bust Goldman Sachs – one Henry Paulson. He took them from $20 billion in debts in 1999 to $100 billion when he left. Having helped cause the crisis, and getting rich off it, he’s now the man putting forward the bail out plan as US Treasury Secretary. Despite self-imposed limits, Governments have also ramped up their debt levels – achieved by privatising everything in sight and putting all the deals ‘off balance sheet’ (thanks, Gordon!)

So lenders now routinely now lend out more than the total assets of the company. It was all made possible by massive deregulation, the completion of the project started in the Thatcher / Reagan free market era, as big business and their lobbies finally succeeding in getting politicians completely in their pocket, and indeed direct pay. Light touch regulation gave way to feather light.

The confidence of banks to throw ever more cash around was underpinned by the invention of the Credit Default Swap (CDS) market. This allows organisations exposing themselves by loaning out money to buy a kind of insurance against a default on that loan. In return for paying small regular premiums, priced depending on the perceived risk of default, that organisation could think of itself as no longer exposed to any risk, able to reduce any provisions put aside in case of default (so called ‘bad debt’) – and therefore free to lend out even more cash.

A culture of risky, unsound lending was thus created. To make things worse, all these debt contracts are traded, and indeed speculated on. They change hands multiple times as different people estimate their current value and risk differently. A tasty profit opportunity for canny get-rich-quick investors, but difficult for buyers removed from the original business to assess what they’d really bought.

In effect this all meant that many billions of debt could be considered assumed by people only having to put up in hard cash a tiny percentage of that figure. No problem as long as house prices, shares, bond prices etc all kept rising and more debt could be given out cheaply and easily to anyone who might otherwise be close to default. A debt mountain was gradually accumulated. In 2008, the amount of debt in the CDS market is estimated to be more than $50 trillion. That’s over twice the value of the entire US stock market.

Confidence started to collapse as the risks of sub-prime default got reassessed and foreclosure and bankruptcy rates started to climb. Banks panicked and realised they were caught in a kind of pyramid scheme. If people started defaulting in numbers nobody would have enough cash to pay out. The availability of cheap CDS contracts dried up and banks refused to lend to each other, wary that anyone of them could go under at any time. The cost of servicing the CDS exposures lept up, to the point where banks like Goldman Sachs and Bradford & Bingly couldn’t afford them and, unable to just borrow more to cover it, went swiftly bust. As credit availability goes down, the levels of debt exposure now threaten to bring down all types of companies, wrecking the economy from all sides at once.

Facing meltdown, governments have been forced to step in to avert complete collapse of the system. But it won’t work in the long term as they’re effectively giving a blood transfusion to a badly haemorrhaging patient. The bail outs may buy some more time – gambling taxpayers money for years to come on a high risk strategy financed through yet more debt (China and India have been helping by buying up US govt bonds, leading some to wonder whether this will see a further shift in the balance of economic power, but it’s all interconnected baby!) – but the fundamental flaws of capitalism will remain and bleed everyone dry in the end. In fact, the hand outs will just ensure that it’s the same old elite who will get richer as the system creaks on to it’s inevitable demise – it’s just a question of how long (end of the world in 2012 anyone?).

BACK IN THE REAL WORLD

In the meantime, what will it all mean for the average SchNEWS reader in the street? What’s gonna happen next?! If you’re poor, lacking large debts, a mortgage, share portfolio and high paying job, you might even enjoy the ride.

If the credit crunch triggers a full-blown recession we’re going to see a surge in repossessions of houses. Squatters paradise! The number of endless yuppie flat developments and ego-driven showpiece towers will plummet. Less 4×4s, less sports cars. The consumer slowdown will be good for the environment – economic collapse is the only realistic way of reaching those carbon emission targets! On the down side there’ll be less food available for looting from skips as bargain hunting shoppers clear out the aisles, but local food production will have to increase.

As the job queues swell, access to social services will become less punitive. When you’re one of three million as opposed to one of 300,000, there’s only so much hassle at the dole office to go round.

The wave of depression should throw up new political opportunities. For a long time in the developed west, the majority of the opposition to capitalism was essentially moral. Fair trade and charity was thought good enough to stave off the guilt of being disproportionately wealthy. But as the spoils of globalisation become increasingly only available to a smaller and smaller elite, interest in alternative ways of doing things should also increase.

Recent events have shown capitalism is a hothouse flower – it has to exist swaddled in a life-support system of regulations and laws protecting private property, allowing corporations to exist . Most importantly it requires the state to be a lender of last resort.

Despite the endless free market rhetoric we’ve been forced to swallow since the Thatcher era – the government has always functioned as a welfare state for the rich. This life support system has been filtering the real wealth upwards in society for years but now it’s all out on the open as the bankers stretch out their begging bowls.

It’s now been demonstrated to all and sundry (who’d previously not been reading SchNEWS) that the ‘free’ market is no such thing. Pundits might spew about ‘irresponsible’ lending and try to pin the blame on a few bad apples but in fact all the markets were doing is what markets are supposed to do – chase after the largest amount of profit in a single-minded ruthless way – and human beings are just a minor obstacle in that pursuit.

Perhaps as times get tougher, people might finally get it together to demand more fundamental changes – and not leave the super rich in charge of it.

Batting for bankers

tim — Sun, 28 Sep 2008 21:32:12 +0000

Gordon Brown’s plan to “nationalise” Bradford & Bingley is simply a smaller-scale replica of the Bush administration’s bail-out of a banking sector bleeding to death from self-inflicted wounds.

The Prime Minister is batting for the bankers, intervening, with our cash, to ensure a resurgence of banking activity and private profits.

As with Northern Rock, over which government dithered for six months, transfixed by fear over the N word, Mr Brown is not opting for nationalisation to extend democratic control of the economy.

He plans to land us with £41 billion of shaky B&B mortgages, which no other bank is prepared to take off its hands, while selling the 200 high street B&B offices and savings business to other institutions.

This is in addition to the £20 billion plus interest that the government still has invested in Northern Rock.

These huge figures dwarf the costs associated with such proposals as a decent state pension, free prescriptions, abolition of student fees, provision of student grants, renationalisation of rail and utilities, which have all been rejected by new Labour on cost grounds.

As with imperialist wars, for which Mr Brown decreed that “whatever is necessary” would be found, new Labour has infinite funds to bail out the private sector and nothing but soft soap for measures to defend working-class living standards.

While working people are expected to tighten their belts, accepting below-inflation pay rises and job losses – 20,000 of which are likely in Britain’s financial sector alone – the reckless profiteers in banking boardrooms are cosseted by cash hand-outs.

The PM played to the gallery at Labour Party conference, insisting on greater corporate responsibility and a curb on excessive pay-outs, which seduced some trade unionists into believing that a change of direction was in the offing.

Don’t be fooled. The details of his B&B nationalisation plan illustrate where his priorities lie.

He and Chancellor Alistair Darling claim that their ministerial experience means that they are best fitted to see us through this latest crisis of capitalism, but they reject the view that it has arisen largely as a result of their obsessions with reliance on market forces and minimal regulation.

The B&B collapse also marks the utter failure of building society demutualisation, with every single society that opted for conversion to a bank and engaged in a voracious profits campaign, based on borrowing cheaply on world markets to fund buy-to-let and overambitious 125 per cent mortgages, going belly up to be swallowed up by bigger banks or rescued by the government.

In contrast, Nationwide, which has remained a mutual, has thrived and been in a position to help smaller societies facing difficulty.
Surely a reality check is called for by government leaders rather than a suicidal steady-as-she-sinks complacency.

The government’s neoliberal strategy is a disaster. It has failed and there has to be a change of direction or the boardroom excesses of recent years will return to haunt us, as will today’s attempts to resolve the crisis at the expense of working people.

B&B should certainly be nationalised as an entity, prime assets as well as bouncing cheques, and this, together with Northern Rock, should form a national bank to offer probity and stability in contrast to the reckless greedfest of the private sector.

The week that changed everything

tim — Mon, 22 Sep 2008 20:57:49 +0000

The last week has changed everything. A series of extraordinary events in the United States – from the collapse of Lehman Brothers to the forced sale of Merrill Lynch, from the state takeover of insurance giant AIG to the Federal Reserve’s emergency bailout plan – has transformed the crisis in the financial markets into an argument about the very foundations of the model of economic governance that rules the world.

For three decades the ship of global finance has been steered by the economics of globalisation – the flawed neo-liberal economics of the Chicago school. Their navigational charts for deregulation and liberalisation have led the global economy into a financial hurricane of unprecedented intensity. This crisis will prove immensely destructive – of the value of assets like property, of jobs, of pensions and investments, and of the hard-earned achievements of companies small and large, everywhere. Above all, the crisis will damage the lives and the futures of millions of blameless citizens, most of them poor.

Orthodox economists did not see the crisis coming, even as the financial hurricane hit land on what I have called “debtonation day”, 9 August 2007. They still do not understand it. They failed to warn their paymasters or the captains, crew and passengers of the finance-sector’s ships. Even now, their intellectual and policy maps offer no way forward.

This is because orthodox, neo-liberal economic theory pays little regard to the role of finance in the economy. Systemic insolvency is not permitted in the assumed world of orthodox economics. Very few members of the Chicago school have read Irving Fisher’s Booms and Depressions (1932); and if they have read John Maynard Keynes on the theory of money and interest, it was only to malign or marginalise his rationale for the regulation of finance. Instead, they lionised free-marketeer Milton Friedman, trenchant enemy of “big government”.

But in the single week of 14-20 September 2008, the public and even much of the media began to register the scale of the finance sector’s and governments’ intellectual and policy failure. No one – it seems – is fooled anymore. Free-marketers now embrace big government with a fervour that embarrasses socialists. Even more conservative voices in the establishment media have begun to challenge the flawed economics that they have for so long championed.

The world may be moving on its axis, but the change has not yet gone nearly far enough: for neo-liberal economists remain at the helm of the global economy, and continue to disseminate potent mis-diagnoses of what is happening. These economists include the world’s major central bankers and finance ministers. It is vital that their economics and their three principal delusions are challenged if the global economy is to be steered safely out of this all-consuming storm.

Three delusions

The first and most important of these delusions is the belief that banks and financial institutions are illiquid, when in fact they are insolvent. Systematic insolvency is, again, categorically excluded from world of orthodox economics. It was the failure of central-bank governors and finance ministers like Alistair Darling and Hank Paulson to acknowledge insolvency in the summer and autumn of 2007 that has prolonged and deepened the crisis. It is the failure to recognise insolvency now that lies behind the apparently endless, and ineffective flow of taxpayer-backed liquidity from central banks.

Second, central bankers are – thanks to their reverence for orthodox economic theory – allowing illusory inflationary pressures to justify keeping interest-rates high, and refusing to relax monetary policy. Despite a spike in oil and food prices, inflation is now falling. The deleveraging of asset prices (think of the fall in property prices) will force down a whole range of prices and if not checked, could lead to deflation. Deflation will be far more devastating to the population as a whole than mild inflation. The 1930s and Japan since 1990 are sobering precedents here. Central bankers must escape from the gridlock of orthodox economic theory and act now to check the downward, debt-deleveraging, deflationary spiral.

Third and most urgently, central bankers and finance ministers have to escape the constraints of orthodoxy – and think system-wide fixes not quick fixes. To ban a few short-selling speculators is but tinkering with a system that needs comprehensive overhaul.

Four solutions

What then should be done? Here are four steps.

First, a good place to start would be where Franklin D Roosevelt did in 1933 – by declaring a week-long bank holiday. The Federal Reserve, the Financial Services Authority (FSA) and the Bank of England could then take time and check the books of banks for well-hidden “toxic waste” – their massive undeclared liabilities, including more than $60 trillion of so-called “credit default swaps” (CDS). Only when regulators have a proper sense of the scale of the mess, can they take decisive and appropriate action. Right now they are sloshing buckets of our money about, unsure as to the whereabouts of the financial “weapons of mass destruction” that banks have concealed.

Second, there must be an end to “inflation targeting” – which is just a cover for keeping interest-rates high. High interest-rates are great for lenders/creditors, but a killer for debtors, and there are far more debtors in the economy than savers. If this financial crisis – and the planetary threat of climate change – are to be faced, there is a need for cheap (but not easy) money to help finance investment in energy security (for more on this theme, see the report I co-authored, A Green New Deal [new economics foundation, 2008]).

Third the Bank of England and the Fed should regain control over interest- rates – all rates. The interbank lending rate (the so-called Libor rate) should no longer be set by a closed committee of private bankers meeting daily at the British Bankers’ Association. Rates must be set by a committee accountable to society; and, when setting rates, it must consider the interests of all who make the economy work – labour and industry as well as finance.

Fourth, in order to again exercise control over all rates, the Bank of England will have to reintroduce capital controls. That might require a new international agreement, along the lines agreed at Bretton Woods in 1947.

All of this is doable as well as necessary. These are the initial system-wide fixes needed to deal with systemic threats; the public have every right to expect the guardians of the nation’s finances to implement them promptly.

If they are to do so, these guardians will need a new moral compass, new navigators and new helmsmen and women. But one thing that is not needed is a new navigation chart. That was provided by John Maynard Keynes in his The General Theory of Employment, Interest and Money (1936). Its ideas will today do just as well to restore the world to a period of stability as after the great depression of the 1930s. This was a period that Barry Eichengreen and Peter H Lindert (in The International Debt Crisis in Historical Perspective, MIT Press, 1991) described as “a golden era of tranquillity in international capital markets”.

To return to such a golden era, the money-lenders, speculators, and orthodox economists responsible for the gross failures exposed by the week that changed everything must stand aside – so that everything indeed can change, and for the better.

Student living - this isn’t Hollyoaks

Alex Doherty — Thu, 18 Sep 2008 09:32:15 +0000

With the beginning of the 2008/09 academic year fast approaching, students will soon be settling in to the realities of student life. For new students this means at some point they’ve made a choice: between studying away from home on the one hand and continuing to live with their parents on the other. Almost a third of students choose the latter option. This often means a long commute to a university chosen on the basis of its location instead of its merits – but at least these students have the security of a roof over their head. For those who have chosen to study away from home, often unaware of the true cost of student life, this means moving in to student accommodation and an ongoing struggle against poverty, unscrupulous landlords and, more often than not, appalling living conditions.

From the first day of the first semester there is one thing that all students can be sure of: their maintenance loan won’t be enough to keep body and soul together. Students are entitled to no more than £3000 non-income assessed, which rises to a mere £4600 for students from the poorest backgrounds. Compare this with an average rent of £60 per week (which works out at £3120 for the year) and then add on the rising cost of utilities, food and other necessities and the loan system is exposed for what it really is – a disgrace. The only way for most students to make ends meet is to work at least part of the time during the semester and burden themselves with overdrafts and credit cards the rest of the time. During the summer holidays when the loan has dried up students are forced to seek out whatever work they can get and have none of the usual rights to Job Seekers’ Allowance or other benefits that most workers can fall back on.

The Government has done nothing to make student housing more affordable. Most first year students looking to live away from home for the first time look to move in to university owned halls of residence. In this way they are guaranteed good quality housing at a cheap price. Thanks to PFI, these residences are now being opened up to profiteering vultures from the private sector. To give an example from a 2002 Unison report; at Luton University student nurses were told they had to leave their halls of residence and move into new PFI-built halls. Their rents shot up from £177 per month to £244 per month with at least one student being forced to sleep in their car! Besides incredibly inflated prices, these profiteers also force students to sign longer contracts, so that students living at university during term time are forced to sign 52 week contracts and pay rent even when they know they won’t be living there.

Besides being unaffordable, private housing is also a playground for bad landlords. Surely students ought to be able to expect landlords to fulfil their contracts as an absolute minimum? Apparently not. More and more students are living with damp, infestation, poor or nonexistent heating and unsafe appliances – to the complete indifference of landlords. Landlords therefore often get away with breaking the law – the long and arduous process through the courts will always favour the landlord in the long run.

All this begs the question: why is student housing in such a bad state and what needs to be done to improve it? The question of housing isn’t, after all, isolated to students. In the current economic climate more and more people are finding it difficult to keep up with their rent and mortgage repayments. The Tories and New Labour have no solution beyond opening housing up further to the private sector. PFI and private landlords only succeed in driving students to the breadline and ultimately out of education altogether. The only way to win our rights for both a decent education and decent housing is through the organised labour and student movements. The NUS and the Unions must organise together at the grassroots and fight to force the Labour government to act on the housing disgrace. The Labour government must adopt socialist policies now to assure workers and students alike affordable and secure housing:

No to privatisation of student halls of residence!

Begin a massive programme of decent social housing!

A living grant for all students!

Alistair Darling- New Labour implodes

tim — Sun, 07 Sep 2008 14:10:01 +0000

The August 30 Guardian interview with Britain’s Chancellor Alistair Darling was extraordinary in many respects. In the first place there can be few occasions that so dramatically reveal the sense of profound crisis within ruling circles in Britain.

Darling admitted to Decca Aitkenhead that the economic times we are facing “are arguably the worst they’ve been in 60 years… And I think it’s going to be more profound and long-lasting than people thought.”

Within 24 hours, he was accused of undermining confidence in Britain’s economy to such an extent that the pound hit a record low against the euro and a two-year low against the dollar. The FTSE 100 shares index also fell sharply.

Darling had committed the cardinal sin of stating openly, if still guardedly, that economically things are really bad and likely to get worse. His choice of 60 years was somewhat arbitrary. He could not mention the 1970s as many have done without raising the spectre of mass movements of workers bringing down governments. And references to the hungry thirties were similarly beyond the pale. But even such a partial acknowledgement as his was considered a serious blunder, even though only last week the Bank of England’s deputy governor, Charles Bean, had warned that the economy is facing a period “at least as challenging” as the 1970s.

Ian Stannard, a senior currency strategist at BNP Paribas, told the press, “Most people believed that things were probably deteriorating faster in the UK than the government was admitting, but the fact that we’ve seen the chancellor come out and admit that things are far worse have put sterling under pressure.”

The reaction was swift from both the government and the media. Prime Minister Gordon Brown instructed Darling to make a humiliating explanation of how he had been misinterpreted and was in fact focusing on the “unique problems” facing the “global economy.” Brown’s own speech to the Confederation of British Industry delivered Thursday was leaked in advance, in which he again emphasised that the problems facing Britain are international in origin, centering in the credit crunch, and that Britain was in fact well-placed to weather any downturn.

One senior Labour figure declared baldly to the Guardian, “Alistair must be insane. There is no rhyme, nor reason why he would want to talk like that.” The Financial Times declared scathingly that his “prognosis” on the economy “is too bleak,” whereas his fretting about the state of the Labour government “is nowhere near bleak enough.”

The ferocity of the reaction to Darling’s comments itself belies such efforts to belittle his estimation of the gravity of the economic crisis. Even as they were being made, reports were published that the British economy was at a standstill in the second quarter of the year, after a revision of figures wiped out the 0.2 percent growth reported earlier. The number of permanent jobs available had also plunged to its lowest level since 2001, with unemployment rising by about 70,000 this year and predicted to hit two million by Christmas. The manufacturing sector shrank for the fourth month in a row.

Mortgage approvals fell to 33,000 in July, the lowest since data was first collected in 1993, with the number of new mortgages issued down 71 percent in a year. House prices fell in August for the eleventh consecutive month and are now falling at an annual rate of over 10.5 percent.

Even as Darling was being decried for his candor by the Telegraph, the newspaper published an estimate by one of Britain’s foremost economists and former Bank of England policymaker, Charles Goodhart that “Britain is now facing a severe recession which will last for a year or longer and a worse housing crash than in the early 1990s”. Two days later, the Organisation for Economic Cooperation and Development (OECD) predicted recession for Britain, even while the other G7 countries will see either modest growth or a standstill.

If all that Darling’s interview confirmed was the dire state of the economy it would be interesting enough. But the chancellor’s comments provided a revealing glimpse into the deep sense of crisis gripping a Labour government that is on the verge of implosion. His interview reads like a cry of despair by someone who does not want to carry the can for Labour’s failure, but apart from this sees no way out.

Labour’s worship of the market

The government’s mantra, echoed here by Darling, that it is merely the victim of an unfavourable international situation should be opposed on many fronts. New Labour earned its place in power by breaking with reformism and embracing Thatcherite economic nostrums. It was the political vehicle through which big business set out to impose a discredited economic and political agenda on a hostile population.

With the Conservatives hated and unelectable after 18 years in power, it was Labour under Tony Blair and Gordon Brown that came in to continue where Margaret Thatcher and John Major had left off. Labour insisted that capitalism was not only triumphant, but that there was also no alternative to it. It was the best of all possible worlds, provided only that government abandon all attempts at national regulation and recognise the economic and political imperatives of globalised capitalist production and the need to be internationally competitive.

To this end old-style reformism must give way to government in partnership with corporate management, wholesale privatization of state assets and public services and unbridled speculation by the City of London presided over by a Bank of England set free from governmental control. Above all workers should heed the message from the government and their allies in the trade union leadership—that the class struggle was a thing of the past and participation in creating a globally efficient economy would raise all boats.

For ten years, this provided the ideological justification for Labour facilitating by every possible means a historically unprecedented transfer of societal wealth to the super-rich. With the actual wages and purchasing power of working people in constant decline, and vital social services being gutted, Labour became ever more alienated from its former working class supporters. But it was able to maintain power to the extent that a speculative boom in house prices and a flood of credit allowed people to live well beyond their actual means.

Once this speculative boom burst internationally, it was inevitable that it would hit the British economy hardest of all and would signal the end of the Labour government.

The biographical material on Darling contained in Aitkenhead’s interview is sketchy, but revealing in painting a portrait of someone who was an ideal New Labour apparatchik.

She notes that while “A blaze of glitzier New Labour stars have since fallen… Darling survived, accumulating five ministerial posts on a stainless ascent to the exchequer last year. His career had been distinguished by an almost freakish absence of failure. He has never lost an election, he joined the front bench after just 12 months in parliament, and 20 years later he has never left. Only two other members of that first cabinet, Gordon Brown and Jack Straw, are still in government with Darling today.”

This rise to prominence is incredible because Darling’s own statements make clear that he is a political zero—someone with no connection to the Labour Party, old-style reformist socialism or the working class. Both his grandfathers were Liberals, his great-uncle a Tory MP in Edinburgh, and his father, a civil engineer, voted Conservative. He was educated at a private boarding school before studying law at Aberdeen where he stood for election in the student union, “but not for a party.”

He only joined the Labour Party 1977. This was a year during which Labour was in coalition with the Liberals and imposing IMF-dictated austerity measures that met with fierce resistance from the working class and ended with the 1979 “Winter of Discontent” and the election of the Conservatives. Darling’s response? “The Labour government in 1977 was in a terrible mess, and I was getting fed up looking at all these things on the television, and thinking, God, surely we can do better than that. I wanted to do things. But I was never really interested in the theory of achieving things, just the practicality of doing things.”

Later he tells Aitkenhead, “He doesn’t call himself a socialist—‘There’s nothing wrong with the term, it’s just not one I use’—and feels uncomfortable with political labels. Class envy is a mystery to him; he sees no point in raising taxes for the super rich, because, he says, it wouldn’t raise much revenue. ‘I’m not offended if someone earns large sums of money. Is it fair or not? It’s just a fact of life.’ Asked to define his politics, he offers, ‘Pragmatic’.”

The party’s over

Like his colleagues, it was precisely Darling’s “pragmatism,” his hostility to socialism, absence of “class envy” and relaxed approach to fabulous private wealth that made him so successful for so long. He was ideal material for government as far as the Labour Party and its backers were concerned because was ready to do whatever he was told, unencumbered by any extraneous ideological baggage.

He was in effect a true and unalloyed believer in capitalism.

That is why, as he states, “For 10 years as a minister, by and large I had a charmed life.”

And that is also why all this changed by the time of that fateful day in June last year when he was appointed chancellor by Brown, as Labour was attempting to distance itself from the Iraq war and the sordid record of Blair’s premiership. Instead, as his wife states, his life has been “a crisis a week.”

In an extraordinary passage, he states that although “we knew the economy was going to slow down”: “he hadn’t the faintest inkling of the financial crisis about to unfold before him. ‘No, no one did. No one had any idea’.”

“He can clearly recall the day last summer when alarm bells first began to sound. The chancellor was on holiday with his wife and their two teenage children in Majorca. ‘I remember I picked up the FT in the supermarket, as you do, and it had the European central bank starting to put money into the economy. I phoned the office to ask why they were doing quite so much. It didn’t surprise me that money was going in—there was concern going around—but it was the sheer scale of it. I said, what about our institutions? This was when Northern Rock started to figure.”

“Even then,” Aitkenhead continues, “the gravity of the credit crunch was still not fully clear. ‘No one knew how serious it was yet’,” she quotes Darling saying.

What then is the future for a party that was so enamoured of capitalism that the man it appointed as chancellor was apparently so blissfully unaware of an unfolding financial disaster sweeping the world economy?

Aitkenhead states that today, “the mood is so febrile, it’s even possible he won’t be chancellor by the time this interview appears.”

As for Darling, he doesn’t want a cabinet reshuffle that may see him replaced—“Frankly, if you had a reshuffle just now, I think the public would say, Who are they anyway? You name me a reshuffle that ever made a difference to a government, actually.” Nor does he want a leadership challenge against Brown, even though he makes clear he has little hope of winning the next election.

“This coming 12 months,” he declares, “will be the most difficult 12 months the Labour party has had in a generation, quite frankly. Both the general economic situation, and in terms of the politics. In the space of 10 months we’ve gone from a position where people generally felt we were doing OK to where we’re certainly not doing OK. We’ve got to rediscover that zeal which won three elections, and that is a huge problem for us at the moment. People are pissed off with us.”

Whatever Darling might wish for, there is little chance that Brown will survive the next months unscathed, less chance still that Labour will win an election under any leader whatsoever, and a distinct possibility of the party imploding. As if to underline such political realities, even as the government was attempting to recover from the damage inflicted by Darling the former home secretary Charles Clarke was busy telling the BBC that Labour is facing “utter destruction” at the polls and insisting that Brown must either improve the standing of Labour within a few months or resign as prime minister.

'Them and us' economy hits the rocks

tim — Thu, 04 Sep 2008 11:54:24 +0000

“The economic times we are facing are arguably the worst they’ve been in 60 years”, blurted out chancellor Alistair Darling in an unguarded moment on his summer holiday. “And I think it’s going to be more profound and long-lasting than people thought”, he added.

Darling’s words sent a chill through millions of working people as we leave the summer that ‘never was’ and prepare for a long winter. It is working class people who will bear the brunt of the recession that many economists believe has already begun.

It’s not just the chancellor. Bad news has spilled out from the City for over a week. The pound reflected the dire state of the British economy by tumbling to a new low. The normally cautious Nationwide building society said house prices are falling at £150 a day and the CBI, the bosses’ union, reported the biggest annual decline in shopping since records began in 1983.

A member of the Bank of England monetary policy committee has predicted two million people will be unemployed by Christmas. Over a thousand workers at Northern Rock are amongst the first to lose their jobs in this wave of redundancies, because the multi-billion pound rescue of the bank by the government does not include saving their jobs.

But some people don’t have to worry about a cold winter. Energy multinational Centrica’s shares rose in value when it announced its latest price increase for British Gas customers. Having blighted Christmas for these customers, Christmas came early for Centrica’s big shareholders a couple of days later, when it posted a profit of £992 million in six months. Meanwhile Shell oil recorded a profit of £4 billion in just three months – that’s £2 million an hour!

So while the rest of us tighten our belts and count our pennies, the super wealthy are doing very well. On the day that it was announced that pay increases are falling behind the rate of inflation, it was reported that in central London in July, houses priced at over £10 million rose in price by 1%, while the average house price in the same area went down. Many working people cannot afford to buy any house, but the super wealthy are buying more expensive homes than ever before.

In his March budget speech, Darling said: “Britain is better placed than other economies to withstand the slowdown in the global economy”. This is not true. First Margaret Thatcher and the Tories, and then New Labour, encouraged the decline of manufacturing industry and moved the economy onto one based on finance and services, lubricated by a flood of debt. This appeared to work for a period, but as The Socialist warned, would come a cropper in a financial crisis.

Now the mega rich who got us into this mess want working class people to get them out of it – we are expected to pay the price. But faced with this agenda, anger is growing and major struggles are inevitable. This anger and action will be accompanied by people drawing political conclusions, including the vital conclusion that a new workers’ party needs to be built.

The ‘Them and Us’ recession

Them:

* 37% pay increase for FTSE 100 chief executives last year
* £992 million profit for Centrica in first six months of this year
* £26.9 billion pumped into Northern Rock

Us:

* 3.5% average annual pay increases April -June
* 35% increase in prices to Centrica’s British Gas customers
* 2000 jobs to go at Northern Rock

Blindingly obvious

tim — Tue, 02 Sep 2008 11:47:36 +0000

Home Office Minister Tony McNulty is correct to point out that suggesting that economic recession could lead to an increase in petty crime, violence, racial abuse and far-right extremism was a “statement of the blindingly obvious.”

Unfortunately, the minister seems to assume that the recession is an act of God and the government powerless to influence matters.

While the international downturn in trade is a reality and the knock-on effects of the credit crisis detonated by the US subprime mortgage scandal undeniable, every country will undergo its own economic experience that is dependent on specific national characteristics.

And the level of the crisis that is already hitting Britain is conditioned by the pro-business policies pursued by new Labour.

Recession will not cause the problems itemised in the Home Office draft letter. There is already huge resentment in working-class areas across Britain that will be exacerbated by rising unemployment, mortgage defaults and a general depression of living standards.

Governments tend to appeal to the mythical Dunkirk spirit to ride the wave of hardships, but that is less likely when people can see clearly that there is no equality of sacrifice.

Indeed, new Labour has made a virtue of inequality, with Chancellor Alistair Darling simply the latest leading advocate to say that he is not perturbed by the prospect of hugely differing levels of income.

And this is not simply rhetoric. New Labour has presided over a widening gap in income and wealth more akin to Victorian norms than to a supposed modern democracy.

The revelation by the TUC PensionWatch survey that top bosses can retire on average annual pensions of £200,000, 25 times what the average worker will get and 50 times more than the basic state pension, illustrates a grotesquely divided society.

Employers and managers have, in recent years, launched a concerted drive against workers’ pension entitlements, while ensuring that their own are safeguarded.

The government has acquiesced in this process, lecturing workers about their own supposed fecklessness while running down the value of the state pension.

And its obsession with leaving economic priorities to be decided by the vagaries of the market has seen Britain’s manufacturing sector inexorably eroded, with over a million relatively well-paid jobs, complete with decent conditions and a pension, scrapped and replaced by a combination of McJobs and dead-end “training” schemes.

It has claimed that there isn’t the finance available to improve the state pension, take the railways back into public ownership or invest to defend manufacturing jobs.

But it has been able to find billions of pounds for overseas wars and £50 billion to bail out Northern Rock shareholders.

The government’s wars have not only been costly but have created a new enemy – international terrorism – which is used as an excuse to cut back human rights and to increase xenophobia.

This combination of crimes against working people makes new Labour unfitted to lecture anyone on the effects of recession. It is implicated up to its neck.

The only way to avoid the negative consequences in the Home Office letter is to fight back against the economic and social policies that cause them in the first place.

Economy hit by inflation and threat of recession

tim — Fri, 22 Aug 2008 18:34:49 +0000

There has been a host of statistics in the last few weeks that testify to the increasingly serious impact the financial crisis is having on the British economy and the living conditions of working people. The rise in the cost of living has outstripped pay increases for the first time since the 1990s—meaning that the average person is now officially worse off.

According to the Office for National Statistics, the annual inflation rate has doubled in the last six months, reaching 4.4 percent in July, the largest rise since this index, the Consumer Price Index (CPI), began in 1997. It was much larger than expected and more than double the Treasury’s target rate of inflation, raising fears that the Bank of England will raise interest rates. The more broadly based Retail Price Index (RPI) went up by 5 percent in the 12 months to July.

As well as a 26 percent rise in petrol and oil, there has been a 13.7 percent rise in food costs, particularly meat, bread, cereals and vegetables, and a 16 percent rise in utility bills. The rise in the CPI will in turn trigger a 6 percent increase in rail fares next January.

The prices that manufacturers pay for their materials and fuel have risen by a colossal 30.1 percent in the last year. They have posted price increases on their domestic sales of 10.2 percent, the highest since 1982.

Yet the Bank of England had predicted last year that the CPI would reach 2 percent. It has been forced to revise its estimates, and expects inflation to reach 5 percent or more, later this year. Just last May, it had predicted a 3.7 percent inflation rate for the year. Now it recognises that even the 5 percent figure may be optimistic, as the risks are high, particularly if inflation leads to higher wages.

But even more importantly, the Bank has revised its forecast for the economy downwards. It expects zero growth in the economy for the next year, despite a boost from exports as consumer spending and investment tumble.

Mervyn King, the governor of the Bank of England, told a press conference, “There is no point pretending that what is happening is not happening in the world economy—that this unique combination of higher food and energy prices on the one hand and a sharp dislocation in the financial sector on the other—is going to do anything other than make the next year a painful adjustment for the UK economy.”

King added that the country faced a period of stagflation. “The next year will be a difficult one, with inflation high and output broadly flat,” he said. He noted that since employment prospects were not good, “labour market flexibilities” might offset inflationary pressures.

But he could not avoid pointing out that there was a risk that the economy would spiral downwards into a deep recession. King said that there were “bound” to be one or two quarters of falling output as a result of the credit crunch and rising commodity prices. Furthermore, house prices had further to fall due to the banking sector’s inability to raise money in the capital markets and the consequent mortgage drought.

He made it absolutely clear that the Bank would “remain cautious”—code for refusing to lower interest rates to stimulate investment and the economy—despite the fact that wage growth was lower than inflation. “Wages do not make inflation,” he said. “It depends upon what happens in firms.” In other words, if companies believed that they could pass on their own cost increases onto their customers, second order inflation would appear.

The governor insisted however that “We will come through it; inflation will come down.” When asked why he was so confident, King replied, “We will take the action necessary to see that it does.”

What this means is that the Bank will raise interest rates to whatever levels are necessary and force the working class to bear the cost of adjustment.

Already unemployment has started to rise. The number of people claiming unemployment benefit rose for the sixth month in succession, increasing to 864,700. Last month saw the number of new claimants rise at the fastest rate for 16 years. The unemployment rate now stands at 5.4 percent. Total unemployment, including those jobless for more than six months and thus not eligible for unemployment benefit, rose to 1.67 million.

Redundancies rose by 13 percent between April and June. This is likely to rise further with more than 10,000 layoffs announced in the building and financial sectors since the end of June. A number of high profile city centre developments around the country have come to an abrupt halt, while British Land has held off signing construction contracts for the prestige 47-story development for the City of London known as the Cheesegrater.

John Philpott, chief economist at the Chartered Institute of Personnel and Development, said that the rise in unemployment was “gaining worrying momentum.”

Total employment would have fallen had it not been for the increasing number of pensioners taking jobs. Pensioners have been hit by the failure of the state pension to cover even the most basic needs, leaving ever more of those above retirement age in poverty and forcing them to stay in or return to work. The number of pensioners in work has risen by more than two-thirds since 1997 to 1.33 million, meaning that the employment rate for pensioners increased from 7.9 percent to 11.7 percent.

There has been a 47,400 fall in the number of job vacancies to 634,900. The trends illustrate how the credit squeeze and inflation are affecting employment. Particularly hard hit have been vacancies in shops, restaurants and hotels, which fell by 18 percent in the second quarter of the year as consumers have reined in their spending. Vacancies in the construction sector fell by 12.6 percent and in the financial sector by 9.9 percent.

Last week, a report from the British Retail Consortium (BRC) found that the fall in the housing market was affecting the demand for household goods and furnishings on the high street. Annual like-for-like sales were down in July for the fourth time in five months. The BRC said that shoppers were reluctant to spend on non-necessities, and they now included clothes in the non-necessity category. The supermarkets were the only high street traders to report significant growth on July 2007.

With fuel and food prices rocketing, more and more people are falling behind with their mortgage payments and face losing their homes. According to Ministry of Justice figures released a week ago, the number of court orders for mortgage repossessions rose to 28,568 in the second quarter of 2008, a 24 percent rise on the same period last year and the highest since the second quarter of 1992, when 30,587 court orders for repossession were made.

Adam Sampson, the chief executive of Shelter, the housing and homelessness charity, accused mortgage lenders of “still using repossession as the first, rather than the last resort, despite being urged not to.”

The Ministry of Justice also reported that the number of people facing bankruptcy rose from 17,847 percent in the first quarter of the year to 19,158 in the second quarter, an increase of 5 percent on a year ago. The number of creditor petitions—served by people who are owed money—jumped by 17 percent in the second quarter to 5,625. The number of debtor petitions—personal bankruptcies—climbed nearly 4 percent to 13,533.

According to Standard and Poor’s, the credit rating agency, UK credit card companies are seeing an increasing number of people walking away from the credit card debt. Companies have increased their charge-offs—defined as repayments of principal and interest which they no longer expect to receive—by an average of 6.9 percent in June, up from 6.62 percent in March.

The Bank of England’s warning of a recession sent sterling tumbling against the dollar and the euro. On Friday, the pound fell against the dollar for the eleventh day in succession to $1.85, down 6.5 percent since July.

Prime Minister Gordon Brown, who used to boast as Chancellor of the Exchequer that he had abolished the cycle of boom and bust, has made it clear that public sector workers will see their pay rise by no more than 2 percent even as prices rise, and has encouraged private employers to similarly limit their pay increases.

While the Labour government has bailed out banks and mortgage lenders on the point of collapse due to their own semi-criminal and reckless policies, it has done and will do nothing to assist the millions of working people struggling with mortgages, rising bills and debt.

The global financial mess: blaming the victims

tim — Mon, 11 Aug 2008 21:52:30 +0000

We now know that on 9 August 2007 – which I called “debtonation day” – central bankers and regulators finally woke up to the scale of bad debts on the balance-sheets of banks and other financial institutions. On that day blindfolds were removed and scales fell from the eyes – of at least some of the key players in the finance sector. The “guardians of the nation’s and the world’s finances” finally began to emerge from a long period of stupid and unforgivable denial of the havoc wrought on the international economy by the privatised, deregulated and globally integrated finance sector.

But it has taken more than a year for the wider public to realise that “debtonation day” was but the prelude to a terrifying prospect: large-scale and prolonged economic failure of a globalised, highly integrated economy, built on a financial house of cards.

The floating world

In creating huge burdens of debt, particularly in the Anglo-American economies, private financiers have defrauded and deceived tax collectors, investors and regulators – a level of deception partially exposed on “debtonation day”. Worse, they have burdened the productive sectors of the economy – the companies that you and I work for – with unpayable debts, which have already begun to hurt consumers, bankrupt key sectors of the economy in the United States and Britain, and to weaken the economies of (among others) Germany and Japan. Now the private-finance sector – represented for example by the management and shareholders of Fannie Mae and Freddie Mac and Northern Rock – are holding a gun to the heads of regulators and politicians. The demand is that losses be socialised or nationalised. The alternative, they warn, is global financial armageddon.

Until recently the vast bubble of debt these private institutions created was regarded by orthodox economists, regulators, politicians and investors as representing real, and possibly eternal wealth. Their delusions fed on the economic mantra that asset prices (such as property, commodities, works of art, racehorses, or commercial brands) were rising because of a shortage of supply and an excess of demand for assets: not because they were being powered upwards by the availability of “easy money” or credit.

By finally admitting to the unpayability of debts on their books, and by making write-downs and write-offs, banks were and are in effect admitting to extensive deception of their fellow-bankers, regulators and investors. Each day brings fresh news of the destruction of wealth – and fresh allegations, such as the revelation that Merrill Lynch wrote off $9.4 billion in July 2008 (see Jeremy Lerner, “Citigroup results set to lift US stocks”, Financial Times, 18 July 2008). This brings the company’s losses over the last year to $19 billion – losses largely suffered by investors, including pension- funds.

It is reported that the Massachusetts secretary of state promptly charged Merrill with “fraud” and “dishonest and unethical” conduct “for creating and implementing a sales and marketing scheme, which significantly misstated the nature and stability of the auction-rate market. As a result, thousands of investors were abandoned with illiquid investments…....” (see “Massachusetts sues Merrill over auction securities”, Reuters, 31 July, 2008).

These losses and alleged deceptions have generated deep distrust in the whole sector, which stopped making credit available in the week running up to 9 August 2007, and thereafter tightened up on lending to all borrowers. This shortage of credit led in turn to the bursting of housing and other asset bubbles in the Anglo-American economies, and in economies like that of Spain.

Central bankers and elected politicians acted swiftly to refinance heavily indebted banks, and bail out incompetent managers and shareholders. However nothing has been done to remove the debt burden from borrowers in either the domestic or the corporate sectors. It was announced on 5 August 2008 that the British government is offering Northern Rock, a failed private bank now nationalised, a further £3.4 billion of taxpayer-backed funds. But the current Labour government in Britain has little consolation for their debtors. Northern Rock’s notorious “Together” loans were offered to a market of desperate people anxious to buy a roof over their heads in a rising market. These were set at 125% of the value of a property and six times the borrower’s salary. Now, the number of house repossessions by this government-owned bank has risen from 2,215 to 3,710 in 2007-08, an increase of 67%; more than two-thirds of 70% of these repossessions related to “Together” loans.

So while the British government is using taxpayer funds to socialise the losses of a bank whose gains were largely privatised, it is simultaneously punishing the Rock’s borrowers by evicting them from their homes. Herein lie the seeds of social upheaval and discontent.

The house of cards

The stupidity, poor economic analysis and sheer ignorance of those – central bankers, politicians, auditors – that have a duty to act as guardians of the nation’s and the world’s finances has had and will continue to have very grave consequences for the whole of the global economy, but also for millions of individual and corporate borrowers.

Their conduct stems in part from a failure of economic analysis. More precisely, the economics profession has failed to correctly analyse and alert policy makers to the impact of the finance sector – and of privatised credit creation – on the global economy. Indeed the economics profession has had a (not accidental?) blindspot for the role of haute finance in the economy, while at the same time encouraging its deregulation.

Now, just as the curtain is being raised on the house of cards built by the finance sector, so a cabal of economists is working to pull it down.

Their main concern is – of course – to protect the sector from governmental or democratic oversight and regulation, and to transfer private losses to taxpayers. To do so, they need to distract attention from the sector, limit debate, prevent a coherent analysis of the causes of the crisis emerging, and blind citizens to the “science” of finance.

The first tactic in the campaign to divert attention is to blame the victims. The most hapless of these are sub-prime borrowers – people in low-paid work earning $7 an hour in the poorest districts of Ohio (for example) who were persuaded by dodgy mortgage-floggers that they could take on a adjustable rate mortgage at “teaser rates”, go to the ball and have a roof over their heads.

The game of blaming the victim is conducted of course, in more elevated terms by the high priests of finance, and by the economics profession. One of these is Josef Ackermann, chairman of the board of directors of the Institute of International Finance, and chairman of the management board and group executive committee of Deutsche Bank.

Ackermann has explained the current financial crisis thus: “for the first time in history, a crisis triggered by US housing finance problems is having global ramifications” (see “How the banks can win back confidence”, Financial Times, 31 July 2008). No mention here of sub-prime borrowers, but the inference is clear: this crisis originated with those borrowers and with the property market, not with reckless credit creation by the private finance sector.

Others prefer just to blame “the bursting of the housing bubble” – which they would have us believe occurred simply as a result of spontaneous combustion. Alan Greenspan now argues that the “financial crisis is heralded, in fact defined, by sharp discontinuities of asset prices” (see “The world must repel calls to contain competitive markets”, Financial Times, 4 August 2008) In other words, it’s the spontaneous combustion of property and other asset prices, he suggests, that caused the financial crisis. We beg to differ and contend that it was the dramatic contraction of credit in August, 2007 that precipitated the collapse in asset prices.

The arguments put forward by Greenspan and mainstream economists has as its main goal the maintenance of the system of financial globalisation. To do so, they insist in effect that the crisis “is nothing to do with us, guv.” That way analysis of the role of the finance sector, and excessive credit creation can be avoided.

Yet another frequently repeated analysis is that the crisis was caused by the decision of the Federal Reserve to cut interest rates after 2001, in order to lessen the impact of an earlier crisis – the bursting of the dot.com bubble. So Chris Giles argues that “there is little doubt that the immediate cause of both the commodities price boom and the credit crisis has been low global interest rates” (see “Shifting down the gears…”, Financial Times, 5 August 2008).

Alan Greenspan, governor of the Federal Reserve, was indeed obliged to cut interest rates in 2001 as a reaction to the financial crisis of that time, tackling one of the increasingly frequent crises of international financial capitalism over the decades since deregulation began in the 1970s. The 2001 crisis was caused by easy, if costly credit (offered at high real rates of interest to corporates) blowing up and then bursting the dot.com bubble. It’s true too that Greenspan’s actions eased the crisis, and encouraged banks and other lenders to go on yet another spree, and lend even more recklessly. But if he had not acted, then the credit-crunch of 2007 would have occurred much, much sooner.

The fact is that while official rates of interest were low for a period after 2001, they had been much higher before. And even while official rates were low, few companies embarking on risky investment were able to borrow at these low official rates. But the credit-crunch occurred precisely because the scale and cost of debt was too high, so debtors began to fall into arrears and default.

The exit strategy

There is a frequently heard and self-justifying argument – expressed especially at times of crisis – that bankers have no responsibility for the amount of credit in the economy; they are mere intermediaries (like restaurateurs, one has said, “struck down by a sudden drying up of a food supply for which they have no responsibility”).

This argument is more than a little ingenuous. Bankers create their own “food supply” for serving borrowers: credit. Credit is not created by an outside body, like the Bank of England or the Federal Reserve. Thanks to the outsourcing of credit creation by central bankers and politicians, the provision of credit is overwhelmingly an activity undertaken by private banks, few of which have been, or are adequately regulated. The fact that credit (or “the food supply”) has dried up is entirely a function of the incompetence of bank managers like Adam Applegarth of Northern Rock, and of the loss of trust that he and others created between banks and other financial institutions. It has nothing whatsoever to do with governments.

The public – the borrowers, and therefore ultimately the victims of this vast private debt-creation machine – must not be fooled. Credit creation is a remarkable power, granted to banks and other financial institutions. By entering a number into a ledger, and guaranteeing the sum against an asset (like a property) a private financial institution can leverage very large sums of credit. The private sector has used these powers like a magic wand – to inflate a vast bubble of credit, or debt, which in turn inflated the housing and other bubbles.

Since JM Keynes and FD Roosevelt first argued that finance must be regulated – must be servant, not master of the economy – the finance sector and its apologists in the economics profession have lobbied, deceived, bullied and bribed regulators and politicians to prevent all effective regulation over its activities. They have also demanded the removal of all controls over the movement of capital and effectively removed central-bank control over the setting of interest rates.

On 9 August 2008, the anniversary of “debtonation day” it is incumbent on citizens to hold haute finance’s feet to the fire, and to demand strict regulation, transparency and oversight of the sector’s activities. But on this anniversary it is also important to begin to promote solutions.

I suggest that there are only two solutions to the credit-crunch. The first is a grand jubilee – the cancellation of all unpayable debts, the clearing up of balance-sheets, and the restoration of stability to the financial system. If this solution is unacceptable there is a second: to raise the incomes of the indebted, to enable them to repay debts, and to drastically lower interest-rates to enable companies to reschedule and repay debts.

If neither of these solutions are applied, the outcome will be the accelerated destruction of the financial system.

New Labour plc?

Ellie Keen — Thu, 12 Jun 2008 17:47:28 +0000

Recently support for New Labour registered at 23% nationally, the lowest since opinion polling began back in 1938. The party has lost 53% of its membership between 1997 and 2006 and will undoubtedly have lost considerably more since. It is struggling to pay off loans which with interest amounts to an estimate of between £24 to 28 million. Annual running costs amount to £25 million and private donors are understandably refusing to step up to the plate. And why would they? It’s not as if New Labour will do something for them that the Tories won’t.

As for the unions, calls to hold a vote on whether to disaffiliate are becoming more frequent. The GMB have threatened to withdraw funding from 30 Labour MP’s. Stephen Ladyman, vice-chairman of the party described the move as “tokenistic and hard-left”. That the kind of response is not likely to help mend bridges. Meanwhile senior officials in the Labour party, including Gordon Brown, could become personally liable for millions of pounds in debt unless new donors can be found within weeks. Almost unbelievably the New Labour response is to consider changing its status to a company – so that it would limited liability! Which is apt as they are set on privatising everything else.

The party has four weeks to find £7.45m to pay off loans to banks and wealthy donors recruited by Lord Levy, Tony Blair’s former chief fundraiser, or become insolvent. A further £6.2m will have to be repaid by Christmas – making £13.65m in all. The sum amounts to two-thirds of the party’s annual income from donations.

The figures are a conservative estimate as they do not include interest that will also have to be paid. A Labour source said that although the total debt was listed as £17.8m on the Electoral Commission website, the true level, with interest, was nearer to £24m.

The possibility that party officials and members of its national executive committee could become liable is being taken seriously by union leaders, and has been underlined by the decision of equity fund chairman David Pitt-Watson not to accept the post as Labour’s general secretary.

Though he was Brown’s candidate for the post, he declined the offer after receiving independent legal advice that he would be personally liable for repaying the loans and could be bankrupted if Labour’s finances collapsed.

The advice from City solicitors Slaughter and May said unequivocally that leading party officials and members of the NEC would be ” jointly and severally” responsible for the party’s debt.

The reason is that the Labour party constitution is framed like a local club or society, and has no provisionfor limiting the liability of its officials or managers.

A Labour source said: “The party’s constitution is like a five-a-side football club, or the local cricket club. The big difference is that the most club officials and managers could expect to have to fork out is an unpaid bill for hiring the pitch. In Labour’s case, it’s tens of millions of pounds.”

The advice was the sole reason why Pitt-Watson, a committed Labour supporter and former Westminster City councillor, turned down the job this month.

But the reverberations inside the party have been enormous. Earlier this month the GMB union’s executive decided to indemnify its two members on the NEC – Debbie Coulter, the union’s deputy general secretary and a former Labour party conference chairwoman, and Mary Turner, GMB’s president – to protect their homes and savings. A GMB spokesman told the Guardian: “They told the executive they would not continue to sit on the NEC unless they were indemnified. It’s too much a risk for them.”

As leader of the party and a member of the NEC, Brown is also potentially vulnerable. Other prominent members of the committee are Harriet Harman, the deputy leader; her husband, Jack Dromey, the party treasurer; Pat McFadden, minister of state at the department for business; Angela Eagle, exchequer secretary at the Treasury; Dawn Primarolo, public health minister; and former ministers Keith Vaz and Janet Anderson.

Anderson said last night: “I am very concerned and we should look into the situation immediately. If this is the case, I can’t see how anyone, unless they are very wealthy or are indemnified, like in the case of the GMB, can serve on the NEC. I can’t see who would want to be general secretary following this advice.”

The party’s financial plight can be shown by the current negotiations taking place with banks and donors.

The Co-operative bank, whose £2.61m loan is due to be repaid on June 30, has told the party it wants its money back, even though it is getting 7% interest. The bank has asked the unions to offer loans to Labour so the party can pay its debt, but some are refusing to do this. Paul Kenny, the GMB’s general secretary, has told the Co-operative bank it will refuse to help unless the bank withdraws its de-recognition of the union, which represents staff at Co-operative Funeral Services.

Three other loans are due to be repaid on June 30 and July 1. They are a £1.54m loan from Unity Trust bank, also at 7%; a £1m loan at 6.75% from Nigel Morris, founder of the Capital One financial group, and £2.3m from Sir David Garrard, a property developer. He had already extended the loan by 15 months from April 2007.

Labour is hoping that the donors can be persuaded to extend the loan period. Sir Richard Caring, owner of the Ivy and Caprice restaurants, has agreed an indefinite extension of his £2m loan, due to be repaid last March. He has agreed to give 180 days notice if he wants it repaid.
The party’s financial crisis could be compounded this autumn. Three of the biggest unions, Unison, the Communications Workers Union and the GMB have tabled motions at their annual conferences this month calling for members to disaffiliate from Labour. If this goes ahead, Labour would lose £4m of its £19m a year in donations.

The Labour party is said to be investigating whether it can change its status to a limited liability company to protect its officials and NEC members – but such a move could be open to legal challenge until it clears its debts.

Book Review: Who Runs Britain?

tim — Sat, 31 May 2008 21:19:43 +0000

For more than a century writers and politicians on the left have been predicting that the capitalist system would shortly collapse under the weight of its own contradictions. Again and again capitalism has proved these prophets of doom wrong. However the start of the 21st century has coincided with a financial crisis every bit as great as any that has gone before. If things go on as they are, Karl Marx may be proved right after all.

There is a paradox here. The Labour government which took power in 1997 seemed to mark the final victory of capitalism. The new prime minister Tony Blair and his chancellor Gordon Brown both explicitly repudiated the socialist system which all previous Labour governments had embraced while acknowledging the victory of free market ideas.

Indeed they went far further than any previous 20th century administration in forming an alliance with what George Orwell used to label the boss class. As Robert Peston demonstrates in horrifying detail in this extremely important book, a small group of super-rich effectively dictated large tracts of government policy.

Corporate buccaneers were allowed access to Blair’s Downing Street and Gordon Brown’s Treasury in a way that was entirely new. Nothing like it had occurred even under Margaret Thatcher.

In return for comparatively derisory financial contributions to the Labour Party these businessmen and entrepreneurs received what amounted to a general exemption from the obligation to pay taxation. The effect of this decision was the creation of private wealth on a scale that has not been seen since before World War One and probably not even then.

New Labour’s decision to cultivate the super-rich – a class which is now lavishly repaying Tony Blair in kind as he jets first class round the world from boardroom to corporate jamboree – has not been without terrible cost.

The thesis of Robert Peston’s book is that the losers have been the ordinary, middling people who benefited from the restrained shareholder capitalism which flourished in Britain from the end of World War Two.

This capitalism was based around large, accountable public companies – Marks and Spencer, ICI and so forth. By the late twentieth century these were no longer owned by private individuals but overwhelmingly by large and seemingly impregnable pension funds.

The senior management in these companies were paid generously (perhaps quarter of a million a year) but not lavishly. The real beneficiaries from the profits made by these large public companies were not private individuals but members of the large final salary schemes which guaranteed security in retirement to millions upon millions of ordinary employees.

These large corporations were socially responsible and financially conservative. Above all they were strongly biased towards financing investment through equity rather than borrowing – a prudent approach which helped guarantee long term survival at the expense of short term profit.

Robert Peston quite brilliantly shows how the fiscal changes introduced by Gordon Brown in his early budgets destroyed this relatively benign system of shareholder capitalism. Acting on the self –interested advice of a small group of corporate marauders from the private equity industry, Brown systematically put in place the conditions for the emergence of a novel and highly destructive kind of finance.

This structure was based on debt rather than equity. It was designed to create giant private fortunes rather than the even distribution of wealth. Brown’s changes actively disadvantaged the prudent and careful public companies that preferred equity to debt finance. Within a short space of time it completely destroyed the British pension funds that were until very recently the envy of the world.

One of the great merits of Robert Peston’s book is that he knows the hedge fund managers, private equity moguls and politicians involved intimately. He has talked to them, and understands their point of view. Some of them are certainly friends of his. But he has something very rare in any kind of journalism: the ability to write with the insight and understanding of a genuine insider – and the dispassionate clarity of an highly intelligent observer.

This is why I do not believe that anybody else apart from Peston would have been able to write this unique guide to our contemporary predicament. It shows how Tony Blair and Gordon Brown’s New Labour government have hollowed our public domain, unthinkingly destroyed and created a barbarous economic and social structure.

New Labour’s structure is not merely unethical, however. It is also desperately unstable. The shameful surrender by the state to an untrammelled capitalist class has destroyed large parts of the public domain and created genuine conditions for a crisis in capitalism in the months and years ahead.

The most important of these is an explosion of public and private debt. Numerous public assets – ranging from hospitals and schools to great businesses – can only survive through huge debt repayments. This kind of financing works in boom times but is destined to fail when an economy turns sour, as ours is starting to do.

The second has been the destruction of large parts of the public domain and the creation of a tiny class of super-rich at the direct expense of a broad mass of ordinary people. As a result many of the institutional protections against social and political instability have vanished.

There are too many lazy mistakes in this book. A volume as significant as this ought to be footnoted. Above all it is poorly designed, occasionally giving the impression that it is a collection of essays rather than a coherent and rigorously argued document. The chapter on Marks and Spencer, for example, while well-informed, has little thematic connection with the remainder of the text.

Peston never seriously tries to answer the question – Who Runs Britain? – posed in the title. It is hard to tell whether his editor at Hodder & Stoughton has done a wretched job or the whole thing was produced in a tremendous hurry. This is a pity because Peston has produced a truthful guide to our times. It deserves to become essential reading as we slide deeper and deeper into an economic, political and moral morass.

House repossessions rising sharply

tim — Mon, 26 May 2008 21:22:50 +0000

Figures released by the UK Ministry of Justice (MoJ) on May 9 showed a marked increase in homeowners facing court action for repossession of their homes. The figure of 37,740 for the last three months was an increase of 17 percent on the last quarter and a 20 percent increase on the figures one year ago.

Repossessions have risen in most of the English regions. The figures indicate that lenders are quicker to resort to the threat of court action. A press release issued by the housing charity Shelter explained that at the time of the last housing crisis in 1991, there were 2.5 court actions initiated for each repossession that went ahead. Last year the figure was five.

Adam Sampson, Shelter’s chief executive, stated: “The worst fears of thousands of homeowners are now becoming a tragic reality. Mortgage lenders should be helping homeowners stay in their homes, but with some, it’s a case of miss a couple of payments and you’ll find yourself in court.”

Shelter estimates the likely total number of repossessions this year will be around the 53,000. During 1993 at the height of the economic turndown, figures for repossession peaked at just under 60,000.

The Citizens Advice Bureau (a charity offering advice to people, especially on debt) issued a statement in response to the MoJ. It said: “We have seen a very sharp rise in the number of people coming to us with mortgage arrears, and evidence that in too many cases lenders are using court action as a first rather than last resort.”

A BBC2 “Newsnight” report by Paul Mason featured a regional breakdown of the figures finding a correlation between the numbers of repossessions and falling house prices. They showed an increase in repossessions of 23 percent in the West Midlands, 32 percent in Lincolnshire, 37 percent in South Wales and 44 percent in North Wales. In each case house prices in the regions were markedly down. The only region to buck the trend was London, where repossessions were slightly down and house prices were still rising.

Repossessions in Shrewsbury were up 111 percent, Haverford West up 91 percent and Skegness up by 76 percent. All were low income towns. Families who had struggled to get on the property ladder were now coming under pressure. Adam Sampson interviewed for the programme said that vulnerable families now being hit by job losses, sickness or marital break-up were under threat.

The programme made the point that the last time repossessions were as high was in the economic downturn of the early 1990s, but the big difference was that we are not seeing unemployment significantly rise yet. But it is clear that job losses are increasing. The Chartered Management Institute has just reported an increase in the number of managers who are being made redundant. The figure is up by three percent on last year.

Savings levels, which have historically been low in Britain, have fallen dramatically. According to a report from Call Credit, the reference agency, millions of families are using what savings they have to survive in the face of rising mortgage payments food and fuel costs.

Those who have no savings are sinking further into debt. Debt agencies report an increase in the number of professional workers in well-paid jobs who are turning to them for advice. Community Money Advice, a charity which provides advice throughout the UK, has experienced an 85 percent increase in clients.

“The rise is huge because of the big increase in middle class debt,” said Jane Elliot, coordinator of Transact the umbrella organisation for debt advice services.

For the moment those in well paid jobs are managing to hang on to their homes. But they are disappearing beneath a mountain of debt. A further increase in the number of repossessions is likely as the impact of the credit crunch deepens. Sections of the population who would once have thought of themselves as financially secure are increasingly being drawn into the morass.

A Shelter report issued in January of this year showed how the crisis in the finance industry is impacting on house repossessions. They note “dramatically rising house prices have made home ownership less affordable to the majority of first-time buyers,” which means people borrowing many multiples of income to finance the purchase.

The sub-prime mortgage sector is not as big in England as in the United States, but the report notes that “levels of repossessions in the sub-prime sector are 10 times higher than in the mainstream sector.”

The report also pointed out the growing trend of people with multiple debt problems re-mortgaging in an attempt to simplify and resolve their debts. The report says that “Households who are experiencing financial difficulty can face a barrage of aggressive marketing encouraging them to address their debt in some way. These arrangements are often debt consolidation loans … converting an unsecured, low priority debt into one that can result in the loss of their home…. Shelter advice workers report that the party seeking possession of the client’s home is increasingly a second charge lender whose charge on the property can amount to as little as a few thousand pounds.”

Figures issued by the Royal Institute of Chartered Surveyors (Rics) show house prices falling across the country, resulting from a fall in demand. Around 40 percent less mortgages were issued over the last year than over the previous year. The Halifax bank (a leading mortgage provider) is expecting prices to fall a further 10 percent over the next couple of years.

Ian Perry, a Rics spokesman, told the Independent, “The real issue is the collapse in the number of housing transactions, which has very real implications, not just for the property industry but also the high street and the wider economy.”

In spite of recent Bank of England interest rate reductions, mortgage lenders are becoming increasingly reluctant to sell mortgages to people, reflecting fear of the still ongoing impact of the sub-prime crisis in America which has led to the credit crunch and the severe tightening of money supply.

A recent BBC TV programme, “The Truth about Property,” explained that a year ago there were around 15,000 mortgage products on offer. Today the figure is 4,000. Also lenders are demanding big deposits and in most cases will not lend more than 90 percent of the value of the house. The programme featured Simon Elkin, married with two children and earning a good salary of £50,000-plus as a wedding photographer. He had savings and a good credit record, yet was unable to obtain a mortgage.

A growing phenomenon is the rise in so called Mortgage Rescue companies. They offer to buy houses from people in difficulty or under threat of repossession. The Shelter report says of these schemes that “advertising is often misleading, implying that borrowers can stay in their homes on a long term basis … the company will buy the property at a price far below full market value and rent it back to the former owners on an assured short hold tenancy that gives minimal security of tenure.”

Currently these types of schemes are unregulated. The tightening of the mortgage market is also affecting people who took out mortgages to produce rental income, which mushroomed over the last few years. Many people bought property as a secure income for the future. They are also subject to the tightening of the mortgage market and when mortgages are due for renewal end up with more expensive ones, often costing more than the incomes they get from rents. These properties can become subject to repossession, leaving the tenants with no home.

Attacks on the welfare state that began under Thatcher and were enthusiastically endorsed by Labour have hit housing provision. Currently mortgage holders, who through loss of job, illness, etc., are forced to turn to the state for financial support may be entitled to help from the Income Support for Mortgage Interest (ISMI) scheme. The Shelter report of January 2008 shows how this has been eroded. “This safety net was cut back in stages as a reaction to the rapid rise in claims,” the report explains, “during the housing market crash of the early 1990s. The ability of the current safety net to deal with the effects of economic recession, or a collapse of the housing market, is untested. Many fear that the current arrangements would lead to significant hardship and rapid rises in repossessions.”

When the government cut back on ISMI, the expectation was that people would be able to rely on Mortgage Payment Protection Insurance policies. But only a quarter of mortgages are covered by these insurance policies. Those without protection tend to be the less well-off. Also the report notes, “Payment protection insurance policies in general … have been criticised for being inadequate, because they do not cover many common reasons for falling behind with payments …”

Also under attack over the last three decades has been the provision of social housing. Currently around four million people are on the waiting lists of councils or housing associations. A Local Government Association (LGA) report published May 16 expects this to rise to five million by the year 2010 and that around 50 percent of councils cannot meet current demand.

“With the banks overstretching their credit facilities,” Paul Bettison, LGA chairman explained, “it could well mean that in the coming months councils will have to pick up the pieces as people end up on social housing waiting lists.”

A catastrophic housing crisis is unfolding, of which the government is fully aware. Labour’s housing minister, Caroline Flint, inadvertently let the cat out of the bag when a photographer caught details of a cabinet paper she was carrying. One line read, “Given present trends they will clearly show sizeable falls in prices later this year—at best down 5-10 percent year on year.”

Breaking the Chains

tim — Thu, 22 May 2008 23:31:47 +0000

In May 1998, 70,000 people from across Britain and the world formed a human chain around the G8 summit in Birmingham demanding an end to developing country debt.

It was a huge demonstration on an issue which had received little public attention, made all the more impressive by the huge range of people who showed up for the protest. They came from all walks of life and from all points on the political spectrum.

The issue of debt was catapulted to the top of the G8 agenda, leading over the years to a whole programme of debt cancellation for some of the poorest countries in the world. It was a turning point in the ability of ordinary people directly to pressure world financial institutions.

Ten years later, $88 billion of debt has been wiped out, but stringent economic conditions have been attached by international financial institutions the World Bank and IMF, including trade liberalisation and privatisation.

These conditions mean that debt cancellation in itself has become a form of domination to those countries participating. For example, the IMF refused to allow Zambia to employ more health-care workers, even when the Canadian government offered to foot the bill for five years. Malawi was similarly declared “off track” for daring to borrow money from domestic banks to deal with food shortages caused by a drought.

So harsh are many of these conditions that some countries, such as Kyrgyzstan, Bhutan, Laos and Sri Lanka, prefer not to enter the debt relief scheme.

And, although $88 billion has been cancelled, poor countries are still shelling out more than $100 million a day in debt payments on a total external debt stock of $2.7 trillion.

For every $1 that developing countries receive from rich countries in aid, they return $5 in debt repayments.

Based on an “ethical poverty line” estimating that everyone needs $3 per day to live on, we have calculated that around $400 billion of debt is still “unpayable” – governments cannot repay that debt while still providing basic services to their people and abiding by their human rights obligations.

The debt issue put global economic issues on the protest agenda in Britain for the first time. Since then, the WTO, World Bank, IMF and a host of other institutions have come under attack for the injustice and iniquities being visited on the developing world by globalisation. But debt remains key to understanding the globalisation process.

The genesis of the crisis lies in a world economy saturated by dollars in the 1960s and ’70s, as the dollar replaced gold as the currency of exchange, and the world paid for a growing US budget deficit.

When oil-exporting countries in OPEC reduced oil supply in 1973 and oil prices soared, much of this profit was again deposited in dollars in Western banks. Banks, eager to reduce the supply of dollars, to prevent a collapse in the dollar price and to make profit, lent out more money to developing countries, many of which were newly liberated from colonialism. Little thought was given to how useful these loans were or to whom they were being lent.

Then, Ronald Reagan came to power in the US. Interest rates soared and the price of commodities, on which many poor countries depended, slumped. Poor countries earned less for their exports and paid more interest on their loans. They had to borrow more simply to repay the interest. The debt crisis was born.

Today, these debts are like a new form of empire and lie behind all manner of problems facing the world, from the food crisis to climate change.

Take Haiti, the poorest country in the western hemisphere, which, in recent weeks, has been gripped by violent protest against the rise in food prices.

Haiti still owes $1.3bn to international creditors like the World Bank. Some 40 per cent of this was run up by Papa Doc and Baby Doc, who stole parts of these loans for themselves and used the rest to repress the population. When the US flew Baby Doc out of Haiti in 1986, he is estimated to have taken $90m with him.

In the 1980s and ’90s, like all indebted countries, Haiti had to follow structural adjustment policies designed by the World Bank and IMF, including cuts in government expenditure on health and education, privatisation and the removal of import controls. Indigenous Haitian industries were wiped out.

In 1995, the IMF forced Haiti to slash its rice tariff from 35 per cent to 3 per cent, enriching US business through soaring imports. A country that was self-sufficient in rice is now dependent on foreign imports at the mercy of global market prices.

Today, 80 per cent of Haiti’s population live in poverty as defined by the World Bank, earning under $2 a day, and the average life expectancy is just 52 years. Yet Haiti failed to qualify for debt relief under the heavily indebted poor country initiative, which was established in 1996 to make the debts of the most severely indebted poor countries more sustainable.

It has recently been allowed to join, but it could spend several years jumping through economic hoops until its debt stock is cancelled. So, while some Haitians are reportedly eating dirt to quell their hunger, their government is forced to send almost $1m each week in debt service to wealthy banks supposedly established to fight poverty.

Study after study has shown that the debt which has been cancelled has translated to money being used to eradicate poverty.

In Uganda, for example, debt cancellation allowed the government to abolish school fees, leading to a doubling of enrolment and almost completely eliminating a pattern whereby girls were denied the opportunity to go to school because it was too expensive. It is estimated that nearly 20 million Africans are in school today largely because of savings afforded by debt cancellation.

This treatment must be extended to the remaining countries that require cancellation. On top of this, much of the remaining debt is unjust and should be cancelled outright on the grounds of illegitimacy.

The Suharto regime in Indonesia was reputed to be one of the most corrupt and brutal governments in modern times. Suharto stole up to $35bn from his country and killed up to 1 million people in political witch-hunts, yet the World Bank still lent it $30bn. Today, the Indonesian people continue to pay $2m every hour for their former dictator’s debt, while 100 million Indonesians live in poverty.

In a similar way, the Democratic Republic of Congo continues to pay ex-dictator Mobutu’s debt and South Africans continue to pay apartheid debt.

We call for an immediate end to unpayable and unjust debt, as well as root-and-branch reform of the international lending system in order to prevent a future debt crisis from occurring.

Ten years on, justice requires debt cancellation more urgently than ever.