For political reasons, Britain’s Broken Economy does not touch on the structuraldeficit or engage with arguments about the sustainability of public expenditure. This is because the ebook wants to focus on underlying structural problems, which are not high spending schools and hospitals, but badly performing banks and pensions, declining economic activity and poor wages and housing.

Refreshingly, it does not claim to have all the answers, recognizing the depth of capitalism’s failure in the UK over the last 30 years and the extremely difficult position that that failure places us in. After reading it will you will understand why the far left’s rhetoric betrays a weak grasp of reality and how far the Labour Party’s new leadership has to travel before Labour is fit for government.

The authors recognise that the ideology of neo-liberalism not only survived the financial crisis of 2008/9 but remains the dominant economic and social paradigm of our times. Socialist and social democratic ideas and movements proved to be too weak to exploit the ‘opportunity’ that the failure of financial markets presented.

In particular, the Labour Party – which made a virtue of free market approaches under Blair and Brown – desperately needs to develop a different ‘political economy’. After 13 years of governing, largely during boom years, Labour ended up letting down low and middle income voters who had to borrow to maintain living standards. To win them back, it has to re-think its ‘narrative’ (although, if it holds true to form in the long term, it may do so by choosing the most right wing reformist option available).

Above and beyond this, ‘the economy must be rebuilt and rebalanced away from the financial sector’. This is an extraordinarily difficult task, not, primarily, because of government borrowing but because we must meet a triple challenge: the growth of China (no mention of India or South America); the limits on growth from global warming and resource depletion; and the likely continuation of the crisis in the financial sector, which still rests on an unstable mountain of debt.

Depressing picture

The picture painted of the UK economy is truly depressing and belies the optimistic proposals made in the ebook later on. It’s hard to believe that we can get out of this mess easily. Here are some of the facts it presents:

• in 2007 banks invested £800 billion in financial products but only £50 billion in UK manufacturing
• ‘the asset bubble’ has vastly increased the value of homes, now the means by which most of us aspire to create personal wealth. However, this ‘does not represent wealth generation. Instead [this trend] redistributes wealth from non home owners to home owners.’
• ‘The state is actually funding all pensions paid at present’, whether public or private, through subsidies
• 60 per cent of pension investment is in ‘second hand assets’ (ie. it does not add to productive investment and drains money from the economy)
• the banking sector enjoys low profit margins on its products and can only increase the amount of profit by vastly increasing its output, hence its taste for repackaging and selling on bad debts
• wages have declined as a share of GDP in relation to productivity increases and profits (which explains why those of us who can, look to our assets to increase our personal wealth).

This last fact suggests there’s a glimmer of hope, at least it does to the authors. Taking their inspiration in part, from the economic policies of the Independent Labour Party of the 1920s, they recognise that economic growth can be stimulated by more equal income distribution in favour of low and middle income earners (who must by necessity spend a greater proportion of their income on goods rather than assets).

Trying to avoid the failed socio-democratic policies of the 1960s and ’70s, it states that a new political economy of the left must not only focus on consumption, but on investment too (although, didn’t Labour governments in the ’60s attempt to plan investments, with little success?).

It suggests creating a publicly-held ‘sovereign wealth fund’ (through some ingenious tax changes) and buying up existing companies to transform them into social enterprises; establishing democratic control of credit to allow renewable energy and green start-ups to flourish (this is assuming low and middle income voters want to consume these products rather than, say, enjoy more meals out and foreign holidays); providing tax relief on investments in new capital assets; separating investment from retail banking and creating greater tax transparency (which may sound dull but is, in fact, a prerequisite for democratic government both here and internationally).

Affordable housing

Some of these proposals seem sensible; others seem half-baked. The Green New Deal must rank as one of the most over-used policy ideas of our time! When all is said and done, it’s only about home insultation, is time-limited and, in employment terms, mainly benefits plumbers (although I don’t begrudge Keynesian measures to keep their businesses afloat). The most convincing proposal – one likely to generate high demand over a long time and create high levels of employment – is to build affordable housing, made available through various forms of ownership and control not just a mass council house-building programme.

The ebook contains another point which offers substantial hope – namely, that 28 per cent of those in employment work in the public sector or the ‘para’ public sector, providing public services. This part of the economy stimulates and helps to sustain a significant slice of the private sector too. By operating ethical procurement policies, and importing equality and human rights considerations into contracts with the private sector, the public sector can influence businesses in the UK to work in a more humane and sensible way while the economy grows. That way everybody benefits. It’s an encouraging thought, even though the coalition government is intent on changing this virtuous mix.

Overall, the authors seem to have more innovative and worked-through suggestions about the institutional structure of the new political economy than ideas about what economic activities we should be engaging in. But there are some interesting tax proposals.

Let’s hope this ebook creates a debate that develops in two parallel ways: first, that the political case for a left economic alternative is clearly articulated, based on ‘democracy [as the] prerequisite for a moral economy’; and secondly, that a greater number of credible economic policy initiatives are generated which reflect this principle.

Britain’s broken economy – and how to mend it is written by members of the New Politicial Economy Network and published by Soundings. It can be downloaded from:
www.lwbooks.co.uk/ebooks/BritainsBrokenEconomy.html

A lecture by Professor Richard Wilkinson, author of The Spirit Level, in memory of Richard Brown (Dept of Sociology, Durham University 1966-1993).

Monday 8th November 2010, St John’s College (http://goo.gl/maps/wnDg) , South Bailey, Durham, 6:30pm – FREE

Drinks and nibbles will be provided.

The Spirit Level: Why equality is better for everyone, by Richard Wilkinson and Kate Pickett, was published in hardback by Penguin in March 2009 and paperback in February 2010.

The current edition of New Internationalist (NI434. July/August 2010) tackles what I consider  to be one of the most crucial problems we face today, perhaps the most crucial. Headlined ‘Life beyond growth’, it deals with the conundrum that economic growth is not environmentally sustainable and causes a crisis in resources, yet if the economy does not grow, it collapses.

The resources nations depend on, such as oil, are drying up, and extracting such resources is less and less sustainable. This threatens the lifestyles all of us expect to lead. Furthermore, the reckless use of oil and other resourses to feed our lifestyles and habits has brought about a climate crisis which may be irreversable.

The Co-operative group is supporting the Transition movement and the Permaculture movement. I commend this decision because in these grass roots movements can be seen the beginnings of a different way of looking at our lifestyle expectations which take into account the depletion of resources and offer practical, collective ways forward.

The beginnings of the Transition movement are similar, in some respects , to the beginnings of the Co-operative movement, people coming together to address a common need.

Last November Co-operative members sponsored a joint Co-operative/Transition conference in Slaithwaite, West Yorkshire, attracting 200 delegates. There were speakers from both movements who spoke of the need for a co-operative approach to meet the challenge of the oil and climate crisis.

For more information about Co-operative campaigns: www.co-operative.coop/membership

For more about the Transition movement try: www.transitionnetwork.org or http://transitionus.org for a US slant.

For more about teh Permaculture movement: www.permaculture.org.uk

Despite prime minister David Cameron’s claims that the budget would somehow “protect the poor”, and Osborne’s now infamous remark that “we’re all in this together”, the Institute for Fiscal Studies revealed that the measures will hit the least well-off 10 per cent of the population five times harder than the richest over the next five years.

We shouldn’t be surprised, of course, for we have been here at the hands of Tory governments before, at the hands of coalition governments too. Far from kick-starting “a new politics”, the ConDem coalition has embarked on a depressingly familiar course under the depressingly familiar cry, issued most recently by Osborne, that such measures are “unavoidable” and “fair”.

In a cogent commentary on the budget, Guardian columnist Seumas Milne referred to “an iconic Labour movement cartoon from the early 1930s, when when another coalition came to power in the wake of a financial crisis and slump”.

The cartoon, titled ‘Equality of Sacrifice?’ (see below), shows four class steretypes on a ladder with a cloth-capped labourer at the bottom up to his neck in water. “Equality of sacrifice – that’s the big idea, friends!” says the silk-hatted figure at the top. “Let’s all step down one rung.”

Milne writes: “As the depression-era cartoonist highlighted, the idea that there can be any equivalence in belt-tightening for rich and poor is a nonsense. Even if the different income groups were paying proportionate shares, or the wealthy were actually shouldering a heavier burden, as Osborne claimed, the impact would obviously be far greater for those struggling on benefits than for beneficiaries of the boardroom bonanza.

“… the bare-faced deceit at the heart of the government’s claims has become brutally evident. Far from being a fair shares package that shelters the vulnerable, it’s now clear that the net effect of [the] announcements will be to hammer the poorest the hardest.”

That pre-war cartoonist was JF Horrabin and his image was first used on a poster by the Labour Party during the 1929 general election and, later, by PLEBS, an organisation connected to the National Labour College.

As for the Lib Dem leaders’ hand-wringing claims to have won concessions from the Tories, Milne hits that proverbial nail on its flattened head too, when he says: “In reality, an inexperienced Lib-Dem leadership has been taken to the cleaners.”

There’s nothing new in the Liberal and Tory parties combining to squeeze the poor, as an even earllier Labour movement cartoon makes all too clear. The ‘Political Washerwomen’ image (below) was first printed in an 1895 edition of the Labour Leader, organ of the early Independent Labour Party, and reproduced 90 years later in an ILP calendar, published at the height of Thatcherism.

Knowing there’s nothing new in the current government’s attack on the poor doesn’t mean we shouldn’t learn from history, however. The Labour movement can’t just sit back and wait for the Liberal-Conners to collapse, as Milne suggests it might, and the country to swing to the left. It took more than two decades and a lot of hard political campaigning from the birth of the ILP in 1893 to the formation of the first Labour government, and despite the depression of the 1930s it wasn’t until after the second world war in 1945 that Labour came back to power.

These old cartoons are a useful reminder that, in some ways at least, not much has changed, that many of the challenges that have faced the left down the years, still remain.

But much has changed too. The government’s social and economic attack on the poor and public sector is accompanied by an ideological onslaught built on three decades of cultural shift towards a consumerist and individualist society. After 18 years of Thatcherism, and new Labour’s timid response, persuading people that a small state isn’t the answer to a crisis will be hard work.

We’re in for some tough times under this Tory-Torylite administration. Yet, however bad the economy gets, winning the political battle will take more than wishful thinking.

—-

The Equality of Sacrifice cartoon has become a popular image with political bloggers in recent months, see:

http://peterhousehold.blogspot.com/2010/06/lets-all-step-down-one-rung.html

http://grayee.blogspot.com/

http://randompottins.blogspot.com/2010/05/new-age-of-austerity-but-not-for-some.html

“Any sensible person now would join an anti-capitalist organisation,” he says. “We have a duty to change our mode of thinking.”

Click here for Harvey’s RSA lecture in witty animation form (c. 11 minutes), thanks to the RSA Animate series.

You can also see the full lecture (c. 30 minutes) here.

Click here for more by David Harvey.

This week’s major intervention in the election campaign has surely been the call by the Institute for Fiscal Studies for the major parties to ‘come clean’ about their strategies for reducing the public sector debt, if elected. The IFS report has chimed strongly with the overall public attitude in this campaign, which is that politicians are all devious and untrustworthy. The media response to the report has therefore been to pander to this attitude by unthinkingly echoing the IFS position. The Guardian asserts that the IFS is “the leading economics think-tank” in the country, clearly implying that its views must be accepted without question.

But why should the IFS be beyond criticism? Is cutting the public debt really an objective economic necessity, or is it actually a deeply political stance, reflecting the interests of the business and financial élites?

To answer this question, we have to look closely at the history of debates about the public finances over the last forty years. During that time, the theory and practice of economic policy has shifted markedly from mainstream Keynesianism of the early 1970s, to the unchallenged hegemony of free-market neoliberalism since the early 1990s. Although there have been many elements in this overall shift – notably privatisation of state enterprises, deregulation of financial markets and attacks on trade union rights – the public finances have consistently played a critical role.

There were two key campaigns in particular that have affected the UK: the first during the ‘stagflation’ crisis of the mid-1970s, and the second during the sharp recession of the early 1990s. Both were paralleled by related shifts in policy prescriptions all across the world economy.

In the mid-1970s, Britain suffered especially sharply from an unprecedented combination of high inflation and the return of mass unemployment. Attempts by successive governments to address these problems started under the 1964-70 Wilson administrations, and continued through the Heath years to the return of Labour in 1974. In the decade from 1964, restricting public spending might be necessitated when sterling was under pressure, but was not seen as the key to macroeconomic stability. Instead, the predominantly Keynesian policy mainstream favoured state initiatives in the form of incomes policies and indicative planning, aiming to reconcile the conflicting interests of employers and unions through the good offices of the state.

But by 1976 these efforts had ended apparently in abject failure, although Keynesians could argue that inflation was significantly the result of factors outside British government control – notably the breakdown of the dollar-gold link in 1971 and the oil shock of 1973. The result was the emergence of two policy platforms standing to left and right of the mainstream. On the left, Labour and the unions flirted with an Alternative Economic Strategy which centred on a radical extension of state intervention in the modernisation of British industry. On the right, the monetarists led by Milton Friedman offered an equally radical alternative diagnosis of stagflation, blaming it on the fiscal and monetary indiscipline of the government.

Following a sudden dip in Britain’s trade balance in 1976, a run on the pound forced Chancellor Healey to turn to the IMF for help. The public spending cuts that followed signalled an early victory for the monetarist right, and the end of the road for both mainstream Keynesianism and the leftist Alternative Economic Strategy.

Mrs Thatcher’s election success in 1979, followed by Reagan’s in the USA, heralded the return of pre-Keynesian economic and social conservatism.  In Britain, the fierce monetary and fiscal squeeze that ensued put manufacturing to the sword, while the abolition of exchange controls allowed the burgeoning wealth from North Sea oil to be invested largely abroad. Subsequently, while the Third World was devastated by the debt crisis of the 1980s, the UK and US financial sectors pressed forward with deregulation at home and expansion abroad, laying the basis for their joint dominance of global financial markets.

Breakneck expansion eventually led, as it always does, to unsustainable credit growth, overheated markets and a new round of inflation. When the bust came in 1990-91, coinciding with the fall of communist regimes across the Soviet bloc, the free-market right once again blamed excessive public spending. The result within the European Union was the strictures of the Maastricht Treaty, first negotiated in 1991 and finally enacted, after some resistance, in 1993. In relation to public finance, from now on all EU member states were enjoined to limit their fiscal deficits to 3% of GDP, and their aggregate public debts to 60% of GDP. Limits along similar lines had, by then, become a central feature of Third World aid packages from the International Monetary Fund and the World Bank; they were also imposed upon the post-communist ‘transition’ countries. The hegemony of neoliberalism was now complete.

What is most striking, and highly relevant to the assessment of this week’s IFS intervention, is that at no point did the monetarist economists – or their neoliberal successors – explain why any particular limit to public deficits and debt was economically necessary. Instead we are offered, then as now, an entirely circular argument. We are told that deficit cuts are necessary because international bond markets require them. So why do international bond markets require them? Because they think that cuts are necessary. And why is that? Because the economic experts say so!

Now it is certainly the case that any individual government which accumulates debts that are very high compared to those of other governments will find itself subject to special scrutiny by the bond markets, as the Greeks now know only too well, and as many Third World governments found out already back in the 1980s. We should of course make allowance for the pernicious effects of speculators, for instance the role of George Soros in our own 1992 crisis that forced us out of the EU’s Exchange Rate Mechanism, or the flight of hot money from East Asia in 1997. But a reasonable case can still be made that governments should, in normal times, avoid excessive reliance on borrowing, especially to fund current expenditure as opposed to capital investments.

However, from the standpoint of macroeconomic stability, and especially that of maintaining full or near-full employment, our overriding concern today should remain that of Keynes: the need for governments to sustain economic activity at a time when savings in the private sector greatly exceed investments. This need is met by absorbing excess savings through the sale of government securities, the proceeds of which are then spent.

And because we now live in an integrated global economy, this Keynesian precept should be applied at the global level, not at the level of an individual country. Thus, the continued growth and prosperity of countries with chronic trade surpluses, like Germany and China, depends in conditions of global recession on the willingness of other countries like the USA and Britain to continue to run trade deficits. As a corollary – and this is really an economic fact – there will be matching outflows of capital from the former countries, and inflows into the latter. Given the current reluctance of businesses and households in the trade-deficit countries to borrow and spend, it is their government borrowing that keeps the world economy going.

We can see, therefore, that the International Monetary Fund, the Bank of England, and Chancellor Darling and Shadow Chancellor Cable, are right to urge that government deficits should not be cut prematurely, because that would risk a ‘double-dip’ recession. As long as global savings continue to exceed global private sector investments, governments must continue to absorb that excess.

But still, why this obsession with restoring the deficit and debt ratios to ‘normal’ levels, once the global recovery has reached the point where private sector investment has recovered fully and cyclical unemployment has disappeared? There is, after all, no economic ‘law’ that dictates the 3% and 60% levels, or any other numerical values. The level of aggregate economic activity is entirely unaffected by the proportion of demand that flows through the public rather than the private sector.

The answer to this question, now as in the 1970s, lies not in economics, but in politics, or more specifically, in class warfare. It concerns the privileged position of private wealth within our restricted form of democracy. After 1945 the propertyless in most parts of the world, West, East and South, made remarkable gains in their well-being and in the strength of their political voice. By the mid-1970s, the propertied classes, whether capitalists, usurers, merchants or landlords, or indeed the Soviet-bloc bureaucratic élite, found themselves on the defensive on many fronts.

Many radical nationalist governments in the Third World continued to press for reforms in the governance of the world economy, challenging the new forms of economic colonialism that followed independence. In the Soviet bloc, the Prague Spring and the first stirrings of the Polish workers’ movement threatened the bureaucrats’ highly centralised power. And in the West, not only had new social movements challenged the elites on issues of gender, race and the environment, but workers were also advancing new claims to workplace democracy and economic security that seriously threatened the power of big business and high finance.

The neoliberal counter-revolution was the concerted response. For more than thirty years, the ideologists of neoliberalism, with economists to the fore, worked assiduously to construct a new common-sense about the economy based on the old liberal mantra: property rights, individualism and the residual state. By the time the sequence of localised crises that began in Britain on Black Wednesday in 1992 culminated in the global credit crunch of 2007, that work of construction was very largely complete.

Faced in September 2008 by an imminent total meltdown of global finance, the business and financial élites had no choice but to sanction a massive and collective rescue programme by the governments of the leading economies. There followed a period  during which neoliberalism appeared to be in disarray, and in both academia and the media, alternative voices could once again be heard.

But within about six months, the neoliberals had regrouped. In Britain, as the debate over Darling’s 2009 Budget already showed, their ownership of the economic common sense allowed them to steadily shift the focus of debate from exacting retribution and repayment from the banks, to blaming governments for assuming the vast fiscal deficits that have kept capitalism afloat. Meanwhile. those who spoke up for real alternatives – for Green New Deals, for radical reform of the banks, for a new international financial architecture – have been pushed back to the margins of public attention. All that matters now, apparently, is to make sure that the state is cut back.

And to make absolutely sure that this happens, the IFS message comes with a chorus of attacks on the competence, work effort and dignity of public sector employees. The accompanying relentless demands for ‘efficiency gains’ have a double purpose. On the one hand, they are a euphemism for cuts in public sector jobs and pay, heralding an assault on the last redoubts of organised labour while undermining continued citizen support for nurses, teachers and soldiers alike. On the other hand, they undermine our confidence in the provision of public goods, encouraging a resumption of the shift to private sector providers initiated under Mrs Thatcher.

Given these attacks on working people and their communities, it is surely time to summon up our collective courage and reject the lies and misrepresentations that are being foisted upon us in this phoniest of all elections. For at present, it really doesn’t matter what combination of Libs, Labs and Cons cobble together a majority at Westminster. The Institute for Fiscal Studies are sadly right about one thing:  the government that emerges will impose massive cuts in public spending. But they are not, repeat not, economically necessary.

Hugo Radice is a Life Fellow of the School of Politics and International Studies, University of Leeds. His recent columns on the crisis in the Yorkshire Post are available via his webpage: http://www.polis.leeds.ac.uk/about/staff/radice

Contact the author: h.k.radice@leeds.ac.uk

It’s now over a year since the world’s financial system went into meltdown in the wake of the collapse of Lehman Brothers in September 2008. At the time, there was much talk of a transformation of the financial system, of a revolution in state regulation of private finance, the end of neoliberalism, even a transformation of politics. Yet, as the crisis passes and the world economy starts to make its way up the long slope from recession, these bolder claims have been pushed to one side.

Instead, the political consensus among governments of the leading economies focuses on much more modest ideas: a tweak to the regulatory architecture here, a word or two against bank bonuses there, a broad but toothless declaration in favour of international stability over there. And, shamefully, the weasel words of the private financial sector, briefly silenced in shock at the scale of the crisis, now re-emerge warning against any actions that might restrict competitiveness, of the need handsomely to reward ‘world class talent’, of the need to be vigilant against burdensome regulation. The job of dealing with their past failings meanwhile falls to ordinary tax payers, public service users and the newly unemployed.

In the UK, with a Tory government waiting menacingly around the corner, the debate is all about the burdens of the public sector, the need to cut government expenditure and the failings of the political class. And in the USA, the shell-shocked political right, which looked down, if not quite out, after twin blows from the collapse of the American economic model and the Democratic triumph of November 2008, has now regained its feet and rails against the expansion of ‘big government’.

It is in this context that it is worth reflecting on what we have been through, the underlying dynamics of our financial system that lie at the heart of the crisis and the political challenges we are left with.

Financial crises old and new

Although, quite rightly, the recent financial crisis dominates our thoughts, it should be remembered that financial crises of one kind or another are recurrent features of the economic landscape. Since World War Two the dominant view has been that the problems underlying the 1930s bank crisis and Depression have been addressed, and that governments and central banks know how to avoid them.

Yet we’ve had a succession of crises over the last 20 years, including the stock market crash of 1987 and recession of the early 1990s; a prolonged economic slow-down in Japan, from the early 1990s onwards; a financial crisis in Mexico in 1995, and then in Argentina; the Asian crisis of 1997, spreading from Thailand to Malaysia, South Korea and Indonesia; a crisis in Russia in 1998; and, in 2001-2, another crisis in Argentina. In addition, we have seen recessions in the US and other leading countries in 1981-2 and 1990-2; the debt crisis in Latin America in the 1980s; and more recently the dot com bubble and burst at the turn of the century followed by another recession in the US in 2001.

Indeed, you could hardly say that financial stability has been a hallmark of recent economic history. And, as Barry Winter rightly points out in his article ‘Lies, Hubris and Neoliberalism‘, at every juncture before a financial crisis we have had displays of unguarded hubris – pronouncements on the underlying strength of the economy and assurances that market fundamentals are sound – not least, Gordon Brown’s too-often repeated claim that new Labour had abolished boom and bust.

Two views of financial markets

As the economist George Cooper argues in his excellent short book The Origin of Financial Crises, mainstream economics contains, broadly, two contrasting views about how financial markets work. Here, I am primarily referring to asset markets (stocks, shares, property, etc) and debt markets, and the relationship between them, albeit in very simplified terms.

First, we have to remember that in any sophisticated economy, and certainly any modern industrial economy, credit plays a crucial and central role in enabling a much higher level of economic activity than would be possible if people and businesses only spent and invested what they already owned. An economy without credit would provide a much lower standard of living than one with credit, but this also implies that an economy with a credit industry needs to be regulated in some way.

Traditionally, what banks are prepared to lend to individuals and firms is based on the collateral (assets) that the borrower owns and the borrower’s likely return on investments – less collateral and higher risk mean higher interest rates, and vice versa.

Recent problems centre around this process because it means lenders must estimate the value of assets held by borrowers, and the prospects for investments or purchases, which in turn are also based on expectations about asset prices in the future. This is particularly clear in the case of mortgages, which we’ll come back to.

The first view of this process, the dominant one in economics, policy making and banking for many years, is that asset prices – the prices of stocks, shares, property, etc – are a true reflection of their value; that is, that asset markets are ‘efficient’ mechanisms. If the stock market is going up, that is because businesses are worth more, will be generating more income for shareholders, and thus are a reflection of the underlying strength of the economy.

On this view stock and share prices, property prices and company balance sheets will all be taken by banks and other financial institutions as sound evidence that lending can be increased. Generalised across the economy, it supports the view that expanding levels of debt – held by businesses and individuals – are ok, if asset prices are going up, because they are taken as an indication of the underlying strength of the economy.

However, the alternative view, one held by Keynes and the economist Hyman Minsky (who I’ll come back to), among others, is that asset markets are not efficient, that they operate in a quite different way to markets in goods and services, and in particular that they generate self-reinforcing but alternating cycles of growth and contraction.

On this view, in the boom phase, an increase in asset prices leads to increased lending, which stimulates the asset market, which in turn justifies increased lending, and so on. However, in this kind of self-reinforcing cycle, asset price increases are not simply a reflection of the state of the economy. They are themselves inflated by increases in credit and as such become a cause of economic growth, generating a false picture of overall health in the economy and of the credit-worthiness of borrowers.

What inevitably happens is that a self-reinforcing boom becomes a self-reinforcing crisis. The economy ‘flips’ (the trigger varies in different crises), confidence in borrowers decreases leading to a contraction of lending, forcing sales of assets to pay off inflated loans, leading to a further decrease in asset prices, leading to further loss of confidence … and so on.

Minsky moments

Named after Hyman Minsky, a post-Keynesian American economist, Minsky moments are not an economist’s version of Perry Como, but the points at which economies turn from boom to bust. Minsky was relatively neglected by policy makers and bankers during the years of neoliberal dominance, as indeed was Keynes’ view about the inherent instability of financial markets. Yet, back in 1974 Minsky noted:

‘A fundamental characteristic of our economy, is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.’

It follows from this is that financial crises – even in the view of these fairly conventional economists – are not driven by individual misbehaviour, greed, exuberance, or the absence of enough women on the trading floors. Instead, they are, in George Cooper’s words, ‘hard wired into the system’. (It’s not that the behaviour of traders is unimportant just, in his view, that the problem is more fundamental than that.) ‘Let’s be honest,’ Cooper wrote, ‘a static stable equilibrium has never been observed anywhere in financial markets.’

Hype springs eternal

The other important thing to note is that most policy makers, central bankers, politicians and financiers have not held this latter view of inherent financial instability – which carries with it a necessity for financial authorities to closely monitor and control the expansion and contraction of credit. They have instead held the view that asset and debt markets are efficient and tending towards equilibrium.

It is only because of this that we can understand how, shortly before every single financial crisis, we hear those hubristic declarations of economic health. Thus, before the dot com bubble of the late 1990s turned to bust we were told that the boom was a sign of a fundamentally new kind of economy based on perpetual growth. Similarly, in 2005-07 we were told that houses weren’t over priced, and that record levels in stock market prices were a reflection of sound fundamentals (and sound management) of the economy. And, in August 2007, we were told by the US Treasury Secretary that problems in the housing market had ‘largely been contained’.

Even as late as summer 2008, Bill Emmot, former editor of The Economist, wrote in The Guardian that this wasn’t a crisis, ‘it’s just a kerfuffle’. As Nobel Prize-winning economist Paul Krugman noted dryly, in credit-fuelled booms, ‘hype springs eternal’.

The unfolding crisis

So how did the crisis unfold? As we know its roots lie in the sub-prime mortgage market in the US.

In the late 1990s, the US and other leading economies experienced a boom and then a crash in investment in internet-based businesses, the so-called ‘dot com bubble’. In response to the downturn which followed the dot com bust in 2000, and to limit the economic shockwaves from the 11 September 2001 attacks on New York, the US central bank, the Federal Reserve, aggressively cut interest rates to pull the US economy out of recession. On the face of it this seemed to work, as growth in the US economy quickly resumed.

However, the policy pursued by Federal Reserve chairman Alan Greenspan allowed large increases in the level of credit, most notably in the US housing market, and the dot com bust was followed by a housing boom. The end of the housing boom, from 2007 onwards, had a devastating impact – a world-wide ‘credit crunch’, a financial crisis which threatened the existence of some of the world’s biggest banks, and a deep recession. The reasons for this lie in the particular way banks handled lending.

Banks and other lending institutions had been lending increasing amounts to homebuyers, stimulating demand for houses and pushing up prices, leading to further lending – precisely the kind of asset boom described above. Low interest rates meant this lending spread from relatively lower-risk customers to ‘sub-prime’ borrowers, mainly people on lower incomes, many of whom were offered short-term, cut-price interest rates on mortgages as an incentive to sign up.

For banks and other lenders, such mortgages were inherently risky but this risk was mitigated by low interest rates and what seemed to be sustained economic growth. In addition, they protected themselves against this risk by selling mortgages on to other investors (banks, investment institutions, and so on). This process of ‘securitising’ loans, selling loans to other players in the financial sector, ensured that the risky loans were spread throughout the financial system.

In the face of increasing signs of inflation in the US, and concerns that some sectors such as housing were overheating, the Federal Reserve began to increase interest rates, from one per cent in 2004 to more than five per cent in 2006. This affected borrowers in many sectors but particularly those with sub-prime mortgages who saw their monthly payments rise rapidly. Many were forced to default, and because ownership of the loans was now spread so widely, the effects of mortgage defaults were felt by institutions that were, on the face of it, far removed from the US housing market.

Furthermore, because of the complexity of the financial instruments that had been created, no one was clear how much ‘bad debt’ was in the system as a whole and how much was held by each bank. Banks had to make provision to cover their own bad debts and were increasingly reluctant to lend to other banks because they weren’t sure how exposed they were. As a result credit rapidly dried up.

First effects

The first effects of the crisis began to show in summer 2007 when New Century Financial, one of the main sub-prime lenders in the USA, went bankrupt. The first effects outside the US showed when French bank ParisBas had problems. In response, central banks in Europe, USA, Canada and Japan began to pump more money into the system as banks became increasingly nervous about lending to each other.

In the UK, the run on Northern Rock in September 2007 exemplified some of the problems to come as uncertainty about the bank’s exposure to bad loans prompted savers to withdraw their money, fearful that the bank would collapse. At the same time, US banks started to reveal the extent of their exposure to bad debt – Merrill Lynch, for example, owned nearly $8bn in bad debt.

By winter 2007, the inter-bank lending rate (the interest rate at which banks lend to each other to fund their day to day transactions) reached then record levels, a particular problem in the UK economy given the UK banks’ reliance on wholesale lending markets (day to day borrowing from other banks) which grew from zero in 2001 to over £650bn in 2007. The end result for Northern Rock was nationalisation, in spring 2008, and in the USA the investment bank Bear Sterns was absorbed by JP Morgan Chase in a deal brokered by the Federal Reserve.

Despite these signs of restructuring, the underlying problems of the mortgage market remained. In summer 2008, UK house prices fell for the first time in 12 years and the US government was forced to bail out two of its biggest mortgage lenders, Fannie Mae and Freddie Mac, who together owned up to $5 trillion in home loans. In September 2008, amid increasing turmoil, Merrill Lynch was taken over by Bank of America and AIG Insurance was kept afloat by a rescue package from the US Federal Reserve.

However, that was also the month the US government declared it would not step in to save the investment bank Lehman Brothers which was forced to file for bankruptcy on September 15th  – the biggest casualty of the credit crunch so far. Shortly afterwards, the US government’s US$700bn package to rescue the financial system – its largest intervention in the markets since the 1930s – was held up by Congress, causing worldwide panic. The crisis spread rapidly to Europe, with a collapse in Iceland’s banking system and desperate efforts to shore up banks in other countries, including the UK, Germany and Ireland.

Throughout autumn 2008 we saw a succession of government and central bank interventions of increasing magnitude in the USA, UK, Iceland, Ireland, Germany, and elsewhere; a partial nationalisation of some of the UK’s leading banks; and interest rates slashed in an effort to stimulate inter-bank lending. By winter 2008, the US and Eurozone officially went into recession and the UK followed in January 2009. Even China saw a sharp decline in exports and growth.

Responses and lessons

The G20 meeting in April 2009 managed to reach some agreement about stimulating the world economy, and some commitments (largely lived up to so far) not to create further problems through trade protectionism and the like. However, more far-reaching proposals for financial regulation have been harder to achieve. Ongoing challenges to the USA’s world leadership (see my article, Superpower Headaches), divisions between Europe and the US, signs of recovery and a re-activated financial lobby have all curtailed some of the more far-flung rhetoric of March-April 2009.

Yet, the underlying risk of repeated boom-bust cycles has by no means gone away. The basic economic model, especially in the UK where the City has long dominated economic policy, remains susceptible to the dynamics of instability identified by Keynes and Minsky long ago. Most of the signals from the UK government point towards a reconstruction of the existing system, with limited changes, rather than fundamental reform. Even the nationalised banks are being packaged up to resume their former role, as if nothing had gone wrong.

Chancellor Alastair Darling even stated, in one of his more extraordinary moments, that nothing was fundamentally wrong with the system, we just need ‘better people’ in the boardrooms. If anything could demonstrate the paucity of vision, acquiescence with the status quo, and absence of radical ambition at the top of the Labour Party, this is it. ‘Never let a good crisis go to waste,’ Obama’s chief of staff, Rahm Emanuel is reported to have advised. It feels uncomfortably like we already have.

This is an updated version of Will Brown’s talk at the ILP’s round table seminar, Crunch Times: Politics and the Crisis. To read a report of that event and link to other contributions click here.
To read other articles on the economic crisis, click here.

That’s the starting point for a Europe-wide online debate on the future of social democracy hosted by the Soundings and Social Europe websites.

“European social democracy needs a fresh start,” assert Jon Cruddas and Andrea Nahles in their introduction to the ‘Good Society debate’. “In the wake of the most severe economic crisis in decades it has become clear that social democrats have not paid enough attention to the development of a real political alternative to the dominant free market orthodoxy. When the demand for an alternative politics was there social democrats had very little to say.”

Cruddas, the Labour MP, and Nahles, a member of Germany’s SPD, published a paper in June called Building the Good Society to kickstart discussions across the continent. “This was meant to be the first point of reference in the debate that is needed to stimulate the development of a new social democratic identity,” they explain. “The ‘Good Society’ as the guiding principle for a new politics needs to be filled with life by a broad discourse that is truly pan-European in scope.

Supported by Compass and the Friedrich Ebert Stiftung, the project will run for the next six weeks when some 70 thinkers, politicians and activists from across Europe will publish papers on the Social Europe Journal’s website inviting comments and responses. Some of these are already online, including contributions from Neal Lawson of Compass, Labour’s Dennis MacShane and the sociologist, Zygmunt Bauman.

The aim is to find what Cruddas and Nahles call “a new political narrative” combining “sharp analysis of the shortcomings of the economies and societies we live in with an authentic and convincing vision for the future”.

To read their introduction to the discussion go to:
www.lwbooks.co.uk/journals/soundings/social_europe/discussion.html

For articles and opportunities to comment go to: http://www.goodsociety.social-europe.eu

Click here for a critical report of Jon Cruddas’s Compass lecture given at the London School of Economics in September.

Gary Kent argues that the global financial crisis makes the case for a Tobin Tax even more compelling.

Some ideas are nurtured for decades before they shoot to prominence usually to the surprise of those who have long advocated them. This could be the fate of the Tobin Tax, originally devised by the American Nobel Laureate James Tobin in the early 1970s to rein in short-term speculative trading and “throw sand in the wheels of global finance,” as he put it.

In the 1990s it was embraced by War on Want and others but was generally seen as marginal or utopian. It has now been given an astonishing boost by a very unlikely figure, Adair Turner, the chairman of the Financial Services Authority, in an interview with Prospect. Turner’s comments have caused a furore in the City but he is sticking to his guns.

French President Sarkozy says he will propose global taxes and caps for bank bonuses at the G20 summit later this month.

I first came across Tobin myself in the mid 1990s when the Commons Library was asked how much a tax on the flight of capital could raise – the Conservatives had just introduced a tax on airline passengers. The amount was so much one wouldn’t know what to do with the proceeds. This seemed ideal – a tax on the very few that would raise billions for the many.

To be fair, Tobin’s original aim was the stability of the international trading system rather than raising revenues. Since then, however, there has been a huge upsurge in the scale of international currency speculation, which requires some stabilisation and allows fundraising for socially useful purposes.

Before Mrs Thatcher lifted all exchange controls the traveller was restricted, from memory, to taking just £50 out of the country and this was recorded in their passports.

Now about a trillion dollars is traded every day. Someone once said that this sum was equivalent to the size of the Empire State Building, or maybe several of them.

Some on the left have objected to taxing speculation because it legitimises the trade – a tax on sin – and is reformist tinkering.

However, backers of the tax saw how speculation wreaked massive damage on many economies, regardless of the strength of their fundamentals, and how jobs and livelihoods were capriciously destroyed by currency traders only interested in making a fast buck.

One former trader says that he decided to sell or buy depending on whether the cranes outside his office were pointing east or west. This seems apocryphal but is still a telling indictment and campaigners have sought to minimise it rather than waiting for the system to be overthrown.

The Tobin Tax has had major support in France, including from President Mitterand, and it’s enjoyed support from smaller European governments too. It was also very nearly adopted by the European Parliament.

A delegation from War on Want, plus Labour MPs and MEPs (and myself) visited a Treasury minister to press the case, but they were not then biting.

Over the last decade, the rough edges of the proposal have been smoothed and the idea finessed by War on Want and others in the Stamp Out Poverty coalition, which campaigns for additional sources of finance to bridge the massive funding gap needed to bring the world’s poorest people out of poverty.

They have published research by the economist Rodney Schmidt that advocates a currency transaction tax of 0.005%, which would raise about £20bn a year.

The issue has been kept on the parliamentary agenda for a decade with occasional meetings and motions. Labour MP Dave Anderson tabled a Commons motion on the issue in April which briefly outlines the case for the tax.

It reads:

“That this House notes that the global financial crisis has made meeting the Millennium Development Goals by 2015 significantly more difficult and requires a substantial new source of revenue; further notes that recent moves to end the secrecy of tax havens signals a willingness to redraw rules in the financial world; recognises that the foreign exchange market has continued to grow and that market volume now exceeds $1,000 trillion a year; believes that it is an anomaly that currency transactions are exempt from taxation since all other parts of the financial market have attracted transaction duties in recent years; endorses the proposal for a currency transaction levy at a rate of 0.005 per cent, which is high enough to yield potential revenue of about $33 billion a year but too small to alter market decisions; further believes that this measure affords little scope for avoidance since this market is fully electronic, and collection automatic; recognises that a precedent for a currency transaction levy has been set by the UNITAID international drug purchase facility, which is mainly funded by aviation levies that are collected nationally and pooled internationally; and strongly recommends that the Government supports consideration of a currency transaction levy at the forthcoming G8 Summit in Italy where large-scale financing instruments will be discussed under the auspices of the International Health Partnership.”

This has attracted 45 supporters from the three major parties and two smaller ones. Shirley Williams has also been a keen supporter for many years and used to know James Tobin.

The usual argument against Tobin is that it would require international agreement to make it work and that this won’t be forthcoming. However, Will Hutton has put his weight behind Turner’s “bombshell” which he says “would reduce the volatility, volumes and general craziness while striking at excess bank profitability and huge bonuses” and also be “a nice source of income to finance global public good ranging from poverty alleviation to health”.

Hutton rightly suggests that such a tax is practicable because: “Settlement systems are ever more centralised, making evasion harder. Politically, western governments have given 10 trillion dollars’ worth of support to their banking systems. They can, like Sarkozy, just tell their banks to comply with the tax or else lose government guarantees and access to liquidity. None of the world’s top 20 banks would dare refuse.”

Avinash Persaud (chairman of Intelligent Capital, chairman of the Warwick Commission and a former banker) recently wrote in the Financial Times that “financial transaction taxes are not only commonplace, but have become easier to enforce” and the real question today is not their feasibility but their desirability.

He reminds us that most foreign exchange transactions are now settled in one place, the London-based CLS Bank, and concludes, “if transaction taxes were levied in these centralised settlement systems, they would be very expensive to avoid”.

He adds: “It is hard to argue that anything is not feasible today after governments have engaged in whole-scale bank nationalisation and credit guarantees, pushed budget deficits into double figures, become the buyer of last resort of assets they would not normally touch with a barge pole and threatened to legislate against private sector pay. Where there is a will there is a way.”

Will Hutton suggests political benefits too: “But just imagine how electrifying it would be if Gordon Brown made a speech along Turner’s lines, proposed a royal commission to assess what kind of financial services industry Britain now needs and committed himself to trying to find international consensus on a Tobin tax. Intellectually, the case is unanswerable. Politically, it would define the last months of his prime ministership.”

A Tobin-type tax is not a panacea by any means but could increase the stability of global markets and raise revenues for reducing poverty and tackling environmental damage.

I suggest that campaigners link up with think tanks and unions to work out how to turn this old idea into a new campaign that would, with other iconic issues, lift the morale of the Labour movement in the relatively few weeks left before the General Election.

With ministers, MPs and MEPs, they could give traction to a Tobin-type tax and the possibility of global markets providing some of the tax base for global social democracy.

Read Gary Kent’s update (15 November) on the campaign for a Tobin Tax in Tribune following Gordon Brown’s growing interest.

The annual conference in June of the journal Soundings, Politics after the Crash, provided a valuable and unostentatious forum for the left to discuss some of the key issues of our time. This short report by Barry Winter focuses on the contribution made by the opening speaker, Paul Mason, the economics editor of BBC Newsnight, supplemented with quotes from his recent book on the financial crisis.

Mason argued that after two years of economic meltdown, we are in a better position to develop a thesis about what has been taking place over the past 20 years. The fall of communism in 1989 seemed to promise a new capitalist era – the end of history and a pure and final form of capitalism. “Free markets and democracy would conquer the world”, writes Mason in his recent book, Meltdown: The end of the age of greed (2009: 171-2), but it proved transitory. We have come to the end of the period of neo-liberalism.

According to Mason, neo-liberalism leached into a new form of capitalism based on global networks and information technology, ‘info-capitalism’. Margaret Thatcher never anticipated the global rise of the banks: the dominance of finance and debt-fuelled growth emerged in the wake of the 1997 crisis.

He sees the present economic crisis as the end point of the ability to postpone the problems for capitalism, following the strategic defeat of the working class in the 1980s. On top of that there has been a ‘great doubling’ of the global working class, an extra 1.5 to 2 billion new workers unleashed onto the world. Capitalism now draws upon a globalised workforce stretching from a bus stop in Leigh, Lancashire, to a slum in Shenzhen, China. This means a massive change in the terms of exploitation.

The Chinese working class has also changed substantially in the last 20 years, from subservience to a willingness to strike – and they have been achieving some victories. With a workforce of 200 million, China has been providing the world with cheap goods which not only had a long-term deflationary impact globally but ensured cheap credit in the West. That period is now over.

Closer to home, Mason referred to the studies of the US political scientist, Robert Putnam on the way social cohesion has been destroyed in the West. We have seen the atomisation of the traditional working class. Migrant labour is more likely to retain collective identities. While in cities like Birmingham there is a greater social mixing, in towns like Burnley apartheid divides the working class. People in two hostile worlds lead completely separate lives

It took two centuries for the British working class to build a culture, to develop the social cohesion that led to their own brass bands, to rugby, and to miners’ galas. It was torn apart in 20 years. We cannot return to that time.

The new capitalism has taken the form of an “abrasive, selfish, unequal society” with repeated financial crises. Deregulated banking “brought the entire economy of the world to the brink of collapse”.

Mason concluded that the question for us is whether it will be possible to insert a new narrative of social justice into these developments, and this depends “on the willingness of ordinary people to impose limits, standards and sustainability on capital – and the willingness of the state to take control where market forces lead to disaster”.

References:

• Mason, P. (2009) Meltdown: The End of the Age of Greed, London: Verso.

• Mason, P. (2007) Live Working or Die Fighting: How the Working Class Went Global, London: Harvill Secker.

• Putnam, R. (2000) Bowling Alone: The Collapse and Revival of American Community, New York: Simon and Schuster.

For further information about Soundings go to: www.soundings.org.uk