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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 end of capitalism, and other questions

JamieSW — Fri, 26 Sep 2008 09:40:12 +0000

“So, we should be really, really wary of this claim that we’re hearing that free market ideology is dead, that this marks the end of, you know, of capitalism. You know, I’m sorry, that is not the case. It may be going dormant for a little while to rationalize these massive bailouts, but it will come roaring back, and the crisis that is being deepened right now through these bailouts will be invoked for even more radical deregulation, privatization, tax cuts and so on. ” – Naomi Klein

As the Anglo-American banking system goes into meltdown, all sorts of unlikely people are beginning to ask, ‘is this the end of capitalism?’ A couple of weeks ago it would have been ideological treason to so much as think such a beastly thing. Now, with ancient financial institutions keeling over everywhere you look, the question is cropping up all over the corporate media.

So what’s the answer? Well the answer’s ‘no’. Or if you want me to flesh that out a bit, the answer’s ‘no, now get a grip’. But really, the problem lies with the question. There are other questions we should be asking, but I’ll come on to that later. For now, lets look at what’s wrong with asking ‘is this the end of capitalism?’

What do we mean, or what do most people understand, by the term ‘capitalism’? Practically every economy you can think of is one where commercial activity occurs, where there are goods and resources which are privately owned and that are bought and sold for profit. Alongside this private sector sits a public sector where, in democratic countries, resources are owned by the public as a whole and distributed according to decisions made by their elected government. Pure capitalism, and pure socialism, remain purely theoretical.

Across the world, what you invariably have are mixed public-private economies where the debate is about which sector of the economy is responsible for the distribution of which resources, and how those responsibilities will be discharged (e.g, to what extent should the private sector play a role in the provision of education and healthcare?). That’s by no means an insignificant debate, but we should be clear on what that debate is about. It is not about whether or not we have the buying and selling of private property or whether or not we have capitalism. The debate is about what kind of capitalism we have in a democracy: which version of capitalism and what mixture of public and private economic activity will produce the end results valued and desired by a society organised on democratic principles.

Different countries strike the balance in different ways. As I’ve noted previously, the Nordic model has been far more successful than the Anglo-American neoliberal model in maximising the well-being of the population. The crisis of the last few weeks was born of the deregulated financial markets characteristic of neoliberal economies, wherein unrestrained greed drove debt to be managed in an increasingly reckless way – one which was proven conclusively to be unsustainable as the last of the pure investment banks on Wall St disappeared.

This is a serious malfunction of one version, not any and all versions, of capitalism. The collapse of institutions like Lehmann Brothers and the dangers of sub-prime mortgage lending don’t necessarily say very much about the forms of capitalism practiced in other countries. Neoliberals like to talk about their version of economics as though it is synonymous with capitalism itself, hence the talk of capitalism failing, but pretending there are no alternatives is just a neat way of sidestepping debates about what kind of capitalism societies should opt for.

Not only is the end of capitalism itself not occurring, it is not even being called for, at least not in any meaningful way. Only an infinitesimal minority on the left advocate the total abolition of all private property and commercial transactions. I hesitate to use the word ‘advocate’ because advocacy involves setting out serious proposals, and I’ve yet to see any serious proposal that explains how a non-capitalist society is going to be brought about. By that I mean a plan that describes in all the necessary fine detail how we get from here to there, dealing effectively with all the obstacles in the way. A plan that explains how we persuade the public to accept our proposed non-capitalist society, bring to power a government willing to effect the plan, and then enact the massive transformative program needed to entirely eradicate commercial activity and introduce a vast array of new social structures, habits and forms of interaction. Even if a workable plan of this kind, with a desirable end product, was formulated (I don’t completely rule that out) it would take many, many decades to implement. Such a plan does not exist, as far as I’m aware, even amongst those whose opposition to capitalism is the strongest.

No one, therefore, is proposing the end of capitalism itself in any serious way. For the most part, what’s called ‘socialism’ is just a take on how mixed public-private economies should be organised, rather than a total rejection of capitalism itself. Even the Venezuelan government, as it proclaims its mission to pioneer “21st Century Socialism”, allowed the private sector of the economy to grow relative to the public sector during its first decade in office.

Similarly, even the most swivel-eyed free-market extremists don’t advocate, in any serious way, the total abolition of the public sector and its replacement with pure capitalism. In fact, even in the neo-liberal citadels of Britain and America, the rigours of the free market are often quietly avoided and the state called upon for assistance. Think no-bid contracts for Halliburton in Iraq. Think of the UK arms industry’s incestuous links with government, where ministers on overseas trips (including the Prime Minister) practically act as salesmen for the likes of British Aerospace. Think of how the US economy boomed in the post war era, in no small part due to government defence budgets socialising research costs for technologies that were subsequently turned over to the private sector for profit; like aeronautics, computers and even the internet. Those who say they advocate the free market have very little to say about the nanny state when its nursemaiding the rich. Only when it attends to the needs of the public are objections raised.

The debate that occurs between left and right on economics is not between absolute socialism or absolute capitalism but between democracy and private power. The left does not oppose globalisation [.pdf], or even capitalism for the most part. What it takes issue with is a particular form of global economic integration that privileges the demands of private power and undermines the role of the democratic public sphere. The right does not object (aside from in rhetoric) to a role for the state within the economy, provided that role is to serve the needs of elites rather than those of the population.

So the real question, in the midst of the Anglo-American banking crisis of 2007-2008, is how our version of capitalism is now going to be reformed, and specifically where the power will lie. We need not expect, as Naomi Klein points out here, that neoliberalism will automatically be replaced by some benevolent form of social democracy. On the contrary, state-corporate elites are already moving to exploit the political conditions created by the crisis to extend the same neoliberal model that caused the financial collapse.

In her recent book “The Shock Doctrine”, Klein describes how the neoliberalisation of economies (privatisation, deregulation, stripping away of public programmes etc) has often been rammed through the legislative process in times of crisis. This is because while the public often opposes these measures, crisis situations offer policymakers brief moments when democracy can be suspended or circumvented while people are disorientated by shock and briefly willing to acquiesce to “firm leadership”.

Klein points out that this is exactly what is happening now in the US, in respect of the emergency economic measures formulated by the Bush administration. What is being not so much proposed as demanded is a 0.7 trillion dollar buy-up, by the US taxpayer, of all the toxic and often worthless securities that have caused the current financial meltdown. It is demanded that no democratic, administrative or judicial oversight be applied to this process. It is demanded that legislators approach this in a “bipartisan” fashion and pass the measures quickly (that’s political language for not arguing and doing what the President tells you – now). The measures are being drawn up and will be enacted by people like Treasury Secretary Hank Paulson who, as head of Goldman Sachs, did so much to promote the reckless practices that caused the ‘Nightmare on Wall St’. In summary, the same people who wrecked the US economy are now demanding that the traumatised and fearful taxpayer gives them 0.7 trillion dollars to clean up the mess they made and hold them harmless from the consequences of their actions, no arguments and no questions asked.

You could call it crawling to the nanny state and begging for a hand-out. Klein, with perhaps a little more accuracy, calls it a “stick-up”. Either way, its not the free market, but it is very neoliberal.

Klein also warns that this is just the first stage. The US is already deeply in debt, and this bailout will make matters much worse if passed in its proposed form. The usual corporate lobbyists, think tanks and Friedmanite academics will then take that opportunity to demand that the books be balanced. This might involve chipping away at unnecessary public programmes like healthcare, education, public housing etc etc, while the essentials, like Washington’s gargantuan military (which costs more than the rest of the planet’s military spending combined) go entirely untouched. It might involve tax cuts for corporations and the wealthy. It will certainly involve exploiting the situation to push measures that serve the interests of the most powerful sections of society which, rather than theoretical “free markets”, is what neoliberalism is really about.

The scenario in the UK is only slightly different. Social democratic instincts still flicker in some corners of the political class. But despite Gordon Brown’s recent rhetorical tilt towards the left, New Labour remains a classic party of neoliberalism, and the Conservative party likely to succeed them in government by 2010 is even more so. In spite of current events, neoliberals could well dominate the policy debate on how to deal with the economic crisis on this side of the Atlantic.

Klein quotes neoliberal don Milton Friedman describing in candid terms how his disciples should use the Shock Doctrine to push forward their policies. “Only a crisis, actual or perceived,” he says, ”produces real change. And when the crisis occurs, the change depends on the ideas that are lying around. That, I believe, is our basic function: to keep the ideas ready until the politically impossible becomes politically inevitable”. An example is Chile in the 1970s, where Friedman had to wait until after a military coup had taken place to find a government willing to enact his policy prescriptions, which had been overwhelmingly rejected in earlier democratic elections.

The collapse of Western financial markets, whose devastating effects are only beginning to be felt, does not mark the end of capitalism, and may perversely only mark the acceleration of neoliberism out from the ashes of its own bonfire of the vanities into new and yet more dangerous territory. That depends entirely on who wins the current debate on what emergency measures should be taken and how the system should be reformed long-term. The neoliberals, led by Secretary Paulson, are keen to avoid that debate. Those who oppose them should note this, because it betrays the neoliberals’ fear, even expectation, that this is an argument they would lose. Our task is to ensure that the shock of the past few weeks is not exploited by its authors, but instead that its lessons are learnt and that failed economic models are replaced by something more just and sustainable. In formulating our own proposals, for the immediate and the longer term, we can begin by pointing to the more successful capitalist systems in place in other countries, and take things from there.

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.

Europe gripped by fear of global crash

Alex Doherty — Thu, 18 Sep 2008 09:24:02 +0000

Europe’s ruling elite has reacted with shock and disbelief to what they fear will be the most serious crisis for world capitalism since the Wall Street Crash of 1929.

The European Central Bank (ECB) responded to the bankruptcy filing by the US investment bank Lehman Brothers with a massive infusion of liquidity aimed at propping up European stock markets. On Monday, the ECB announced a one-day tender for 30 billion euros and declared in a statement that it “stands ready to contribute to orderly conditions in the euro money market.”

The action of the ECB was followed by that of the Swiss National Bank, which provided further liquidity as Asian and European stock markets tumbled.

Anticipating sharp falls in the British stock market, the Bank of England released £5 billion in fresh liquidity to ease markets on Monday.

The German finance ministry, the Bundesbank (central bank) and the Bafin financial supervisory authority all tried to restore calm in German markets with a joint statement saying the exposure of German banks to Lehman was manageable.

Such reassurances by European central bankers, combined with massive infusions of cash, did little to calm fears on the markets. On Monday, the London-based FTSEuro First 300 index of leading European shares fell 5 percent, while the German Dax index fell by 4.7 percent—reaching its lowest level in two years. Bank stocks were especially hard hit.

Following the huge stock market losses on Monday and growing fears of a collapse of America’s largest insurance group, American International Groups (AIG), European banks intervened once again on Tuesday, with the ECB pumping in an additional 70 billion euros and the Bank of England a further £20 billion.

Once again, the massive infusions of cash failed to re-stabilise markets. On Tuesday, London’s FTSE 100 fell below 5,000 for the first time in seven years. German stocks continued to fall. The blue chip Dax index fell by 98.99 points to 5,965.17, a 1.63 percent decline. The main French CAC index also registered heavy falls of 3.78 percent on Monday and 1.96 percent on Tuesday.

Contrary to official protestations in Germany, the full extent of the involvement of Europe’s major banks in Lehman Brothers is massive.

On Tuesday, for example, it was reported that the German state lender KfW had transferred 300 million euros in swaps to Lehman Brothers on the very day it applied for bankruptcy, while the Swiss UBS financial group announced that it expects similar losses of at least 300 million euros due to its involvement in Lehman Brothers. UBS is the world’s largest wealth manager and has already been forced to write down assets of $37 billion in connection with the US sub-prime mortgage crisis.

According to the German business newspaper Handelsblatt, it is probable that the entire emergency fund set up by a consortium of German banks to guard against financial crises will be absorbed by the collapse of Lehman. The Deposit Guarantee Fund of the Association of German Banks (BdB) is estimated at $4.6 billion, a sum that is swamped by the 6 billion euros required to cover the liabilities of Lehman’s bankrupt subsidiary in Germany. The 6 billion euro loss from the collapse of Lehman is the largest single loss in German financial history.

Britain is even more exposed to the US financial crisis. Following the collapse of the Northern Rock bank earlier this year, Britain’s largest mortgage lender, the Halifax Bank of Scotland (HBOS) also faces bankruptcy. Its shares plummeted by 40 percent on Tuesday and it looks set to be acquired by Lloyds-TSB.

Other major European banks could be swept into the financial maelstrom, under conditions where between April and June the combined economies of the European Union already shrank by 0.2 percent. Britain and Spain, which have been hit by a severe housing crisis, are both estimated to already be in recession. According to the Kiel Economic Institute, Europe’s single biggest economy, Germany, will also be hit by recession this year.

With inflation on the rise throughout Europe, in many countries exceeding 4 percent, economic commentators have already raised fears of stagflation within the European Union.

French and German politicians have issued reassuring bromides declaring that the fundamentals of the European economies and banking system are sound and in better shape than the US. But economic commentators have sounded dire warnings to the contrary, emphasising that it is not possible for Europe to insulate itself from the ongoing collapse of US financial institutions.

Pointing out the implications of the threatened collapse of the insurer AIG, the New York Times noted that European banks owned three-quarters of the $441 billion in unregulated AIG securities held by a consortium of banks. These securities are tied to the plunging sub-prime mortgage market and expose European financial institutions to enormous risks in the event of an AIG bankruptcy.

Writing in the Frankfurter Rundshau on Monday, Jan Pieter Krahnen spoke of the “great dangers of a shock wave” enveloping German and European banks should confidence in the type of credit default swap deals favoured by Lehman Brothers and AIG be shaken in Germany. On Wednesday, the Süddeutsche Zeitung headed its interview with a leading finance expert, “The Worst is Yet to Come.”

A number of near apocalyptic commentaries have appeared in the British media, stating that the current crisis is at least comparable to the financial collapse of 1929.

Writing in the Guardian on Tuesday, economics editor Larry Eliot headlined his piece “This Week the Crash Went Nuclear, and Britain Will Feel the Worst of the Fallout.” He wrote:

“Clearly, the events of the weekend now make a prolonged and deep recession far more likely. Forget all the talk about soft landings, or a recession so short and sharp that it will barely be noticed. The way things stand, it is now a question of whether there is a complete meltdown of the financial system, with institutions crashing like ninepins, or whether a severe rationing of credit over a prolonged period leads to falling house prices, weaker consumer spending, lower investment and rising unemployment.”

“This is without doubt the most serious financial shock since 1929,” he continued.

In an article for the right-wing Daily Mail, Alex Brummer recalled that the first indications of the swelling international crisis began with troubles at a European bank.

“The crunch began,” he wrote, “on August 9 last year after the leading French bank BNP Paribas announced it could not value assets in two of its investment funds because of the toxic securities they contained.”

He went on to refer to “tens if not hundreds of billions of assets which have turned bad and might be worthless,” and concluded, “Only now at Lehman, Merrill Lynch, AIG and elsewhere is the true size of the black hole being recognised. At Lehman, for example, the figure for suspect or toxic assets more than doubled from £17 billion to £44 billion in the course of last weekend alone.”

The Mail’s editorial declared, “For decades, we have worshipped at the shrine of gold. Prime ministers and presidents have bowed before its keepers. The monarchs of cash, arbiters of wealth, supposed founts of all wisdom, have bestridden Europe and the United States, humbling all in their path… Today, we awaken to discover that like so many wizards of Oz, these supremely confident figures are in reality foolish old men—and some young ones—mouthing hollow incantations from behind curtains.”

“A vision of capitalism stands discredited,” it concluded.

Willem Buiter, professor of European political economy at the London School of Economics, made one of the clearest statements on the global implications of the financial meltdown in the US.

In the Financial Times, Buiter said of the $85 billion bailout of AIG by the US government, “The largest insurance supermarket in the world, with a balance sheet in excess of $1 trillion, nationalised because it was seen to be deemed too big and too globally interconnected to fail!”

He continued, “The fear that drove this extraordinary decision is that AIG’s failure would increase counterparty risk, actual and perceived, throughout the financial system of the US and the rest of the world, to such an extent that no financial institution would have been willing to extend credit to any other financial institution. Credit to households and non-financial enterprises would have been the next domino to fall, and voilà!, financial Armageddon.”

Facing up to the crisis

Alex Doherty — Thu, 18 Sep 2008 09:19:36 +0000

The scale of the crisis engulfing the global financial system can no longer be in doubt. The events of the past few days have confirmed that we are living through the greatest meltdown since the Wall Street crash of 1929. For the second time in barely a week, an avowedly free market government in the citadel of laissez-faire capitalism has been forced to nationalise a linchpin of American finance – this time the world’s biggest insurance company, AIG – in an effort to prevent the toxin of collapse spreading further through the US economy.

That followed hard on the heels of the nationalisation of the mortgage giants Freddie Mac and Fannie Mae; the bankruptcy of the country’s fourth largest investment bank, Lehman Brothers – corroded by bad debt and bonus-fuelled speculation – and the forced takeover of Merrill Lynch. And a year after the credit crunch triggered the fatal run on Northern Rock, British high street retail banks are being sucked into the crisis: at one point yesterday the country’s largest mortgage lender, HBOS, had lost almost 70% of its share value since the start of the week.

Meanwhile, the impact on the real economy is becoming stronger: output in Britain is falling and official unemployment is likely to rise above 2 million next year – the real figure will be significantly higher. More than 100,000 jobs are expected to go in finance alone. The only question is how deep and prolonged the recession will now be.

What is certain is that the dominance of the free-market model of capitalism, which has held sway across the world for more than two decades, is rapidly coming to an end. When its high priests in Washington are forced to carry out the largest nationalisations ever undertaken outside the communist world, while intervening on an unprecedented scale across markets that were supposed to be self-regulating in order to keep the system afloat, the neoliberal order is transparently falling apart.

Naturally, market fundamentalists and ideologues will continue to preach the old religion. The Times argued yesterday that the unfolding of the banking crisis showed that capitalism and markets were working, however “brutal and unforgiving” that might sound. Such otherworldly dogma is not a luxury candidates standing for election can afford – and even John McCain felt obliged this week to attack Wall Street’s “casino [of] greed, corruption of excess”, while Barack Obama blamed McCain’s economic philosophy of deregulation and called for wide-ranging reform.

That is exactly what should be happening in Britain. But instead, across the main political parties, there is a striking and continuing failure to face up to the extent of the economic crisis or the sea change in policy it must herald. Britain’s political class appears to be wedded to the politics of the 1990s and the glory days of neoliberalism, clinging to the economic legacy of Thatcherism and unable to make the shift from deregulation to intervention that the times demand.

The government has the most to gain and least to lose by doing so. But it’s hamstrung by Gordon Brown’s paralysing caution and New Labour’s original Blairite embrace of market ideology, private provision and corporate privilege. When Alistair Darling declared on Tuesday that he was “extremely anxious” about speculative manipulation of the markets, he invited the obvious question of what on earth he plans to do about it – and why he and Brown insisted on the “light-touch regulation” that created the destructive derivative whirligig in the first place.

The Liberal Democrats could be capitalising on the early warnings from Vince Cable, their new superhero, about the debt crisis and his calls for the public ownership of Northern Rock. But instead of building on the tradition of Keynes and Lloyd George, their leader Nick Clegg has chosen this of all moments to orchestrate a symbolic return to economic liberalism, forcing through a commitment to cut both taxation and spending.

The issue is not, of course, the Lib Dems’ welcome proposals to redistribute the tax burden from the low to the high paid – it’s the new plan to pay for extra tax cuts by reducing the overall level of public expenditure. Not only are spending cuts the last thing the economy needs as it sinks into recession. But underpinning the new policy is Clegg’s personal ideological conviction that state intervention is dead – exactly the opposite of what is required in the face of the storms now sweeping away the neoliberal nostrums of the past.

It also gives political cover to David Cameron’s parallel enthusiasm for a smaller state, backed up by more charity provision for the poor. Much has been made of the Tories’ latter-day conversion to social liberalism, their new enthusiasm for fairness and their self-proclaimed “progressive” agenda. Certainly, their rhetoric is a long way from the confrontational style of the Thatcher era – even if the word “progressive” has, as the social democratic sage David Marquand argues, been largely gutted of any meaning.

But when it comes to the core social and economic choices, all the signs are that Cameron’s Tories plan to follow precisely the same agenda of corporate privilege, deregulation, privatisation of public services and low taxes for the rich inherited from his Conservative predecessors via Tony Blair. Already George Osborne is moving away from his commitment to stick to Labour’s spending plans, while Cameron has declared that redistribution of wealth and income is an “approach that has run out of road”.

But that agenda is precisely the model that has delivered today’s financial breakdown. And as a result, the leaders of the party expected to win the next general election – tied as they are to City and corporate interests – have even less to say about the crisis carving a swathe through finance and the wider economy, and what to do about it, than Brown and his unfortunate chancellor. Beyond calling for better bank deposit protection, Osborne seems to be utterly at sea.

This all represents a woeful failure of institutional politics. But it is also a gift to anyone prepared to push a new agenda that breaks with the failed market orthodoxy and faces up to the reality of our times: that only decisive public intervention and regulation can begin to deal with the economic – or, for that matter, environmental – crises we face. For any Labour politician thinking of standing against the prime minister, that has to be the starting point.

s.milne@guardian.co.uk

Madness of the market

tim — Sat, 13 Sep 2008 15:51:18 +0000

Once again, capitalism has shown its cuddly, people-friendly face with the collapse of holiday giant XL Leisure Group.

Around 85,000 people stranded abroad, several hundred thousand advance bookings dishonoured, staff finding out that they didn’t have a job in mid-flight, over 1,700 jobs potentially vanishing and the Unite union not even being informed by the company that it was in trouble with its refinancing arrangements after a major bank pulled out on August 14.

And yet, in the full knowledge that it was, indeed, in trouble and desperately trying to arrange a bail-out, the companies in the group continued to take people’s cash and make bookings that there was precious little chance that they could honour.

Not that this implies any dishonesty or deliberately dodgy dealing by the companies. Far from it – at least in the terms of the market economy.

The logic of capitalism meant that they had to continue trying to trade their way out of trouble and that same market-oriented logic said that they could not allow any hint of trouble to become public knowledge because people would obviously then cease to book with the companies, thereby sealing their fate.

Indeed, as late as August 31, a company spokesman was saying that “the XL Leisure Group is experiencing strong trading, with bookings for 2009 already outperforming last year.”

But, as for the long-suffering passengers, they inevitably get the sticky end of the deal and, the less well off that they are, the stickier it becomes.

Granted, customers well off enough to book full package deals through travel agencies are covered by the CAA air travel organisers’ licensing scheme and will be offered repatriation flights or their money back if they have an advance booking.

And, if they booked by credit card, their card insurance should cover them.

But people not having credit cards to book with, or booking a flight only, because they could not afford the full package, will face an extra fee to get home.

And it’s not only the passengers. The staff have an even worse situation to deal with.

No jobs and an industry that is contracting by the day, with airlines such as Alitalia and Zoom either collapsing or in terminal decline and a resulting glut of unemployed staff on the jobs market.

So, who is to blame for this situation?

In 2004, the Times reported that a major British bank “is poised to become the largest oil trader in the City of London as banks rush to profit from the soaring oil price and booming oil speculation market.”

In 2008, that same bank pulled the rug out from under XL because of financing associated with fuel. In other words, a major oil speculator shuts XL because the company can’t pay the price for fuel that the speculators have driven up.

And the bank’s partner in financing XL – a major Icelandic bank – acquired the still-profitable French and German XL subsidiaries on Friday morning after the rug-pulling exercise, in what can only be described as a perfect example of asset-stripping, although it would probably claim that it was saving what could be rescued from the stricken company.

But the fact remains that, if the company was stricken, it was the banks that did the striking.

Talk about having your cake and eating it.

It is difficult to imagine a better example of the amoral chaos of market capitalism or, for that matter, a better reason for social ownership of banks and big businesses generally.

Left talk but no fight against Labour government

tim — Sat, 13 Sep 2008 15:45:49 +0000

At the beginning of the week, the reports of what to expect at the Trades Union Congress (TUC) at Brighton were apocalyptic.

Amidst what is almost universally acknowledged as the worst economic situation for decades—and possibly since the 1930s—there was talk in the media of a new “Winter of Discontent”, or the conflict between the trade unions and the Labour government of James Callaghan that ended with the Conservatives coming to power under Margaret Thatcher in 1979.

Ballots are planned for protest strikes in November against the government’s below-inflation 2.45 percent wage ceiling by the Public and Commercial Services (PCS) civil service union, the National Union of Teachers, the local government union UNISON and the UCU college lecturers union, which involve up to one million workers. In addition, the Prison Officers Association (POA) called for a general strike against the government’s failure to rescind the anti-union laws. It also moved an amendment to add the word “strike” to demands for action against the government-imposed wage cap.

Prior to the congress, the TUC issued a series of reports highlighting the bitterness felt by many of its affiliate’s members, and called for the government to change course. A survey found that 13 percent of respondents—equivalent to three million workers—are not confident they will be in their job in a year’s time. Another found growing disenchantment in the workplace, with 42 percent of workers questioned believing their pay has not kept pace with inflation and 46 percent saying the amount of work asked of them has increased.

Another report, “Do the super rich matter?” pointed to the growth of a fabulously wealthy elite under the Labour Party governments. While one needed at least £50 million to be among the UK’s 200 wealthiest people in 1990, one would now need £400 million to be included. The report urged the government to raise taxes on those earning more than £100,000 a year.

The TUC also criticised the “big six” energy firms for making £1.6 billion last year, while raising prices by 42 percent, and called for a windfall tax on power companies to fund a rebate for poor households.

As the congress events unfolded, the unions’ threats were exposed as largely empty bluster, meant to mollify and deceive their own discontented membership.

Delegates backed the idea of some sort of “coordinated action, a national demonstration and joint days of action” against the government’s pay policy, but voted down the strike call demanded by the POA. Its call for a general strike over the anti-union laws was also rejected, supported only by the RMT transport union.

Writing in the pro-Labour New Statesman, Jeremy Dear, the nominally “left” national secretary of the National Union of Journalists, commented cynically, “So we’re ready to threaten the government with a series of leaflets and angry newspaper articles—but no TUC-led industrial action.”

The TUC, far from seeking a confrontation with the government, is doing everything possible to avoid one. Labour is heading towards electoral disaster, with the Independent newspaper’s “poll of polls” showing its support “flatlining” while the Conservatives are set for “an overall majority of 174 seats”.

Without the support of the trade unions, Labour would be finished. They provide fully £9 out of every £10 received by the party. Yet far from mobilising against Labour, the TUC’s most strenuous efforts were made to oppose any leadership challenge to Prime Minister Gordon Brown. TUC President Dave Prentis said of Brown, “I believe he will continue to be [prime minister] until the next election. Of course we want him to. He is the leader of the Labour Party and he is Prime Minister of this country.”

The most likely leadership challenge to Brown is from the Blairite Foreign Secretary David Miliband. This prompted one of the few genuinely angry reactions from a leading union bureaucrat. Interviewed by the Observer on the eve of the TUC congress, Derek Simpson, joint general secretary of UNITE, “accused Miliband, in a stream of swearwords, of being ‘smug’ and ‘arrogant’,” the paper reports.

“In terms that caused fury on the right of the party, he also said Miliband would take the country back to the ‘failings of Blairism’ and could be a worse choice as Prime Minister than the Tory leader David Cameron.”

Simpson may as well have saved his breath, as Miliband and the rest of Labour’s cabinet took part in a series of high-profile media events to make clear their support for Brown. The foreign secretary said Brown would “prove people wrong” by winning the next general election.

At a private dinner with the TUC leaders Wednesday, Brown was able to give what was reported as “relaxed, 20-minute speech” during which he “cracked jokes” and was “was warmly received”. More than a dozen cabinet members joined him, including Miliband.

Brown did not deign to address the TUC conference, left instead to Chancellor Alistair Darling. Before this appearance, the TUC had officially backed calls for a rather paltry £1 billion windfall tax on the energy companies. To put this tax in perspective, Blair and Brown levied a much larger £4.5 billion surcharge on the privatized utilities in 1997.

Again conflict was predicted as Brown had already rejected the windfall tax in favour of a scheme to provide some aid for loft insulation. Gerry Doherty, general secretary of transport union TSSA, said, “Darling will get a tough time from the public sector unions. There is bound to be some sort of demonstration.”

At the event, only a small number of UCU college lecturers held up banners saying that food, housing and education were “not an additional extra”.

Darling took the occasion to call for pay restraint and to reject calls for a windfall tax on the energy companies. Michael White of the Guardian summed up the response of delegates as, “They didn’t dance in the aisles, but they didn’t riot either”.

To complete this somewhat pathetic picture, Deputy Labour leader Harriet Harman’s speech was supposed to be a sop to workers’ anger at growing social inequality, and provide something the trade unions could cite approvingly.

Though she stated that the inequality of opportunity between “the rich and poor” and “the north and the south” must be overcome, she dropped references to “socioeconomic class” in her published speech.

The TUC bureaucrats gathered at Brighton are fully aware that they are sitting on a powderkeg of social and political discontent. The rhetoric of the lefts and the call for protest strikes are an attempt to provide a safety valve through which to release these tensions, but nothing more. That is why, even now, the only discussion of a break with the Labour Party at the congress was confined to a fringe meeting hosted by the Morning Star, the daily paper of the ever-declining Stalinist Communist Party of Britain. PCS General Secretary Mark Serwotka vaguely called for a new party and Bob Crow of the RMT argued that there would be a need for a new party at some point, while UNITE General Secretary Derek Simpson reportedly argued for changing the Labour Party from within.

The entire union bureaucracy is opposed to any struggle that might threaten the fundamental interests of the major corporations or the Labour government. They are not the representatives of the working class, but social policemen who owe their privileged status to their intimate relations with big business and the state apparatus at municipal and national levels.

Control of union assets is one source of their privileges, but it does not translate into a desire to defend their members. As a definite social layer, their existence is bound up with maintaining a position as valued “social partners” of industry and government.

It was possible for the unions to secure certain gains and social reforms from the employers as long as economic life was largely organised on the basis of national production. But with the development of globalised production, the defence of jobs and living standards now demands a coordinated international struggle of the working class led on the basis of irreconcilable opposition to the profit system. The union bureaucracy has developed in the opposite direction. It has abandoned the struggle for reforms and integrated itself ever more closely into the apparatus of corporate management and the state.

As a result of their repeated betrayals, the unions have lost over half their membership from their post-war peak in the 1970s. The number of employed union members fell to just 28 percent in 2007. But even this is a distorted figure, since union density in the public sector is 59 percent, compared with just 16.1 percent in the private sector.

The full extent of the political decay of the trade unions found its most finished expression in a call meant to coincide with the congress issued by Rory Murphy, the former head of the Amicus union, now part of UNITE.

Writing for Personnel Today, Murphy recommended the TUC change its “outdated” name to something like the “Organisation for Workers’ Rights or The Centre for Improvement” and then seek a merger with the main employers’ organisation, the Confederation of British Industry.

He urged, “If the TUC is unsure of its role, and can’t change, might the unthinkable need contemplating? If we are truly to make progress as a society, should the TUC consider amalgamating with the CBI to fight for fairness and justice for all workers and employers? Are the aims of both organisations so widely apart that such an idea is a non-starter? After all, what is the real difference in seeking ‘to improve the economic or social conditions of workers’ and helping ‘create and sustain conditions for business to compete and prosper for all’.”

There is no way that the unions, organising millions of workers as they still do, will not experience an eruption of opposition to the government within their ranks. The TUC congress confirms, however, that workers within the unions, as well as those who are un-organised, are faced with mounting a combined offensive against the union bureaucracy that is just as fundamental as that they must wage against the government and the employers. This requires the construction of independent rank-and-file workplace organisations to take the struggle out of the hands of the union leaders, as part of a broad political movement for the construction of a genuinely socialist and internationalist leadership.

Tough times? Spare a thought for the wealthy

Alex Doherty — Wed, 10 Sep 2008 11:13:51 +0000

Are you feeling the pinch as the credit crunch bites hard? Is Gordon Brown holding down your pay below inflation?

Well, spare a thought for a much-overlooked group who are also suffering – company executives.

A report by accountancy firm Deloitte found that the salaries of the bosses at Britain’s biggest 350 companies rose by a mere 6.2 percent over the past year – down from 7 percent last year.

With captains of industry on an average annual salary of just £1.08 million, a 6.2 percent rise amounts to paltry £66,960 extra a year. Just how is your average company director supposed to cope?

Luckily salaries form only one part of their “total remuneration package”. Bonuses, share plans, pension contributions and “long-term incentive arrangements” mean that fortunes are continuing to soar.

Sam Laidlaw is the chief executive at Centrica, the parent company of British Gas, which last month announced half-year profits of almost £1 billion.

As a reward for arranging a 35 percent increase in gas prices, this year Laidlaw is expecting to be awarded an extra £1 million on top of his earnings last year.

In addition he will be given £366,000 in lieu of pension payments and £64,000 in perks including a company car and medical insurance.

In total, Laidlaw will pocket some £4.8 million.

But it’s not just the energy bosses who have found a way to survive these tough times.

A TUC study entitled Do The Super Rich Matter? compares the fortunes of Britain’s wealthiest today with those of each decade since the 1850s by looking at the size of estates left when they die.

It shows that today’s super rich today are far wealthier than any of their predecessors.

Privilege

In real terms, the biggest fortune until the 2000s was the £36.5 million left by Sir John Ellerman in 1933 – which would be worth around £12 billion today.

Next was the £14 million estate of the Duke of Westminster in 1899 – equivalent to £10.6 billion today.

But the richest man in today’s Britain, steel magnate Lakshmi Mittal, is worth a staggering £27.7 billion.

The report points out it was necessary to be worth £50 million in today’s money to be among Britain’s 200 wealthiest people in 1990, but that now you would need more than £400 million.

When the celebrity rich are excluded, it becomes clear that most of today’s super-rich have made their money not through “enterprise and hard work” but from the difficult job of being born into privilege.

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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.

Fixation on the market

tim — Sun, 10 Aug 2008 21:14:22 +0000

The dreadful figures on the soaring rate of house repossessions give added emphasis to the decision of the Bank of England monetary policy committee to maintain interest rates at 5 per cent.

This was a decision that hit hard the struggling mortgage payers in the interests of controlling inflation which, it should be pointed out, is none of the mortgage-payers’ fault but can be attributed largely to fuel profiteering, speculation, oil and gas company super-profits and the resulting transport cost rises which affect almost every commodity.

It also brings into sharp focus the Financial Services Authority warning to lenders earlier this week that specialist mortgage firms are “too ready” to take court action against borrowers.

But these are not the only factors which have affected and damaged the 18,900 families who have lost their homes in the first six months of this year or the 45,000 whom the Council of Mortgage Lenders forecast will fall victim throughout the full year.

The real elephant in the room is, as seems to be increasingly the case, the policies of a government which point-blank refuses to abandon its fixation with the market and take real measures to solve a housing crisis which is totally of its own making.

Throughout the life of this Labour government, it has steadfastly refused to reverse its disastrous policies on council housing, attempting to drive a wedge between councils and their tenants with so-called arm’s-length management organisations, bribes to force occupants to relinquish their status as council tenants in favour of housing associations, reinforcing the ring-fencing of councils’ housing revenue accounts and blocking any attempt by councils to pick up their former role as the premier suppliers of social housing in this country.

This has led to a dearth of affordable housing at the lower end of the housing market, driving hard-up families into mortgage deals that they cannot afford, simply because there is little or no alternative except an over-priced and insecure private rented sector.

This, in turn, increases the scarcity of houses for sale at the bottom end of the market yet again and thus drives up the prices, overheating the housing market and making housing ever more expensive and ever less affordable, until such time as lenders get panicky as they see their borrowers becoming over-extended and start pulling in credit availability, causing the so-called credit crunch which then makes mortgages even more expensive.

Yes, of course, greedy mortgage lenders carry a portion of blame, lending even to those who clearly can’t afford it on the basis of trousering their commission and moving onto the next victim, leaving the families in their wake with a headache which gets worse as the bank tries to halt inflation by hitting those on the bottom of the heap.

But the majority of the blame must rest with a government which, for purely right-wing ideological reasons, will not countenance the public supply of anything be it health, housing or transport.

And it is the same government which handed over interest-rate setting to the bankers, in the certain knowledge that bankers’ solutions rarely benefit the low-paid. This government should be squeezing the profiteers in the oil and power supply industry until the pips squeak. Instead, it chooses to be an audience on the spectacle of bankers squeezing the poor, while it does its best to make the problems worse by ensuring that the low-paid remain exactly that.

A Green New Deal

Tim Holmes — Mon, 21 Jul 2008 11:38:42 +0000

If you thought a growing economy was bad, try living through a recession. Environmentalists routinely denounce the “mantra” of economic growth, pointing out – quite rationally and entirely correctly – that infinite growth on a finite planet does not make mathematical, let alone ecological, sense. But the idea of a no-growth, steady-state economy has always sounded like pie in the sky – and you have only to read the papers every day to be reminded why. The credit crunch and looming recession in the UK illustrate nicely how the economic system knows only two options: growth or collapse. During good times, it seems almost impossible to imagine how anything could ever go wrong. Hence the willingness of investors and banks to snap up mortgage-backed securities without worrying how “toxic” these might turn out to be. In bad times, the reverse is true.

It is tempting for environmentalists to welcome recessions: after all, if you believe that rampant consumerism is killing the planet, then a sudden decrease in consumption can only be a good thing. A falling property market means that the pressure to concrete over the countryside is lifted. With higher fuel costs, people drive less and buy smaller cars. My local allotments association, once rather neglected, now has a waiting list of several years. Talk of new car-share clubs abounds, and more and more people are breaking the driving habit and taking to the roads on their bikes.

What is particularly noteworthy about the present economic crisis is that it has not – so far, anyway – led to a drop in oil prices. With the world’s largest oil-consuming country, the United States, in full-scale recession, and other western countries beginning to follow suit, the ensuing drop in demand for oil ought to lead to downward pressure on crude prices. That it has not produced such pressure – and the price per barrel continues to hover just below $150 – suggests that fears about long-term supply, often aired by the so-called “peak-oilers”, are well founded.

Combined, the credit crunch and oil crunch have delivered a double shock to the world economy. And with climate change raising the risk of weather-related damage to crops, and so driving up food prices, one group of thinkers has begun to use the term “triple crunch” to describe the present situation.

This group, which launches a landmark report on 21 July calling for a “Green New Deal”, consists of two former directors of Friends of the Earth, the Guardian’s economics editor, Larry Elliott, the Green Party MEP Caroline Lucas and Andrew Simms of the New Economics Foundation, among other luminaries. The report is still under embargo at the time of writing, so I cannot delve into it too deeply, but what I find striking and novel about its content is the clear attempt to bridge the credibility gap between whimsical environmentalism and the harsh real world of everyday economics.

The Green New Deal Group is not talking about incremental changes, however. It is calling for nothing less than a return to pre-war Keynesianism – complete with big increases in public investment spending and much tighter controls on international finance – with a “war economy” social mobilisation harnessed, this time not towards fighting fascism, but towards heading off ecological crisis. What is novel is that this call is directed not just at stabilising the climate, but also at stabilising the economy – lower interest rates and higher government spending are aimed at ending the credit crunch as much as tackling the oil and climate crunches.

Indeed, everywhere you look, environmental thinkers are embracing the market. All the various greenhouse-gas-regulating frameworks under serious discussion depend crucially for their success on high carbon prices sending a signal through the market rather than through direct government regulation. The recent Time for Plan B report from the US-based Earth Policy Institute calls for 80 per cent cuts in carbon emissions by 2020 – but sees this, crucially, not as a belt-tightening sacrifice, but as an opportunity for renewed growth.

For example, to achieve Plan B’s target of three million megawatts of new wind capacity in the next 12 years we’ll have to put up 1.5 million turbines. That seems an unfeasibly large number, until you consider that 65 million cars are produced worldwide each year. Indeed, the report suggests, some of the turbines could be produced “on idled automotive assembly lines, reinvigorating manufacturing capacity and creating jobs”.

Keynes would have been proud.