Writing recently in the Independent, Steve Richards captures some of the drama of the era we are living through.

We are experiencing “tumultuous” and “challenging times”, he says, adding that our society has been “engulfed by explosive political and economic crises at the same time”. He speaks of a “whirlwind of events” and focuses on how British politicians are responding.

Richards’ account provides a useful complement to what I want to say here in what is an experimental attempt to understand what’s happening to all our worlds. I am at the early stages of developing these ideas, so there are plenty of rough edges.

One could easily broaden Richards’ argument and go global referring to the so-called Arab Spring; the middle class protests in Israel against declining living standards; India’s movement against corruption; the growing discontent in China; and, of course, the Occupy movement which has spread to 1,000 towns and cities. We should also note the emergence of the global Avaaz movement, our home-grown version, the 38 Degrees petitioners, and UK Uncut, which has been occupying banks and shops from Fortnum and Mason to Top Shop.

While it would be wrong to suggest these political events all have the same causes, and each has to be understood within its own context, it is possible to identify some shared, underlying processes at work.

To try to assess what’s taking place, I want to suggest that we are experiencing three interlinked crises which feed into and off each other: a social crisis, an economic crisis and a political crisis.

Then I want to touch briefly on the nature of power in relation to current political struggles, drawing on ideas about visible and invisible power, and to suggest how an understanding of these ideas may help us to respond. In addition, I will consider some aspects of the very visible Occupy movement, including its struggles to create space for democratic politics.

Finally, I will suggest some political ideas that may help in formulating a progressive way to meet the challenges we face in these dangerous times. Here, I’ll make use of the ethical notion of ‘interdependence’ (as opposed to both independence and dependence).

Three questions

There are three questions I want to ask.

1. Where are we and how did we get here?

For this, I will draw on a critique and periodisation of the last three decades.

2. What is happening?

I want to suggest that, amid the huge shifts taking place, there are great dangers and real fears. But there are also some important opportunities that need to be grasped. In particular, elite power has been partly exposed by the crises and found wanting on a large scale. At the same time, democracy is playing second fiddle to the markets, to market power, and to the continuing rule of money.

3. What might be done?

Here the aim is to examine possible pathways out of the various interlocking crises. These alternatives need to be based on a moral critique of our world, and on ethically-based forms of left politics. For me, that means valuing many of the new movements for change but seeking to link them with actually existing political parties (a point that merits a much fuller consideration than is offered here).

Let’s start with a quote from the recently deceased writer and academic, Tony Judt. His book, Ill Fares the Land, while sometimes contentious, is none the less an impressive and persuasive review of contemporary life.

He begins: “Something is profoundly wrong with the way we live today. For thirty years we have made a virtue out of the pursuit of material self-interest: indeed, this very pursuit now constitutes what remains of our collective self purpose. We know what things cost, but have no idea what they are worth.”

He adds: “The materialistic and selfish quality of contemporary life is not inherent in the human condition. Much of what appears natural today dates from the 1980s: the obsession with wealth creation, the cult of privatisation and the private sector, the growing disparities of rich and poor. And, above all, the rhetoric which accompanies these: uncritical admiration for unfettered markets, disdain for the public sector, the delusion of endless growth.”

Of course, Judt was not unique in his awareness that modern society is deeply flawed, that something is seriously wrong. Many make similar claims from across the political spectrum, albeit with different explanations and solutions. However, I think Judt points in some of the right directions and would commend the book to anyone interested in reviving a morally-based, social democracy as the path to take.

I share with him the view that the last three decades have generated a moral vacuum, that ours is a culture which encourages isolated and self-serving individualism. The goal is to be rich, by whatever route, to declare and preserve one’s supposed independence, one’s detachment from the rest of society. And let the devil take the hindmost.

You can see where this leads on a daily basis, not least in popular culture. We have a good laugh at those poor unfortunates whose dreams lead them to make fools of themselves on programmes like the X-Factor, that popular theatre of cruelty. Their desire for fame and fortune reflect our society’s dominant aspirations.

Of course, those who do make a fortune believe they should keep all the proceeds because they did it all on their own. This is a society in which the rich go to great lengths to avoid paying taxes while many denigrate those who make false welfare claims. Meanwhile, no banker’s bonus can be too high or executive wage increase too large. Their rewards, they claim, are based on their “superhuman talent” for moneymaking. As George Monbiot points out, the evidence for this claim is somewhat lacking, but that does nothing to deflect its advocates.

The result for our society is massive inequality with all the socially corrosive effects that has, not least on young people. The riots were perhaps one symptom of this, the anger of the excluded and devalued.

Gideon Rachman, chief foreign correspondent of the Financial Times, provides a more analytical approach to what he calls our “troubled times”. In his recent book, Zero-Sum World, he identifies three distinct periods during the three decades referred to by Judt.

Rachman describes 1980-91 as the ‘age of transition’. These years witnessed the rise of a new right committed to liberalising economies and rolling back the state in response to the failings of the post-war settlement. The seeds of the economic crisis we face now were sown in this decade, particularly in 1986, the year of the Big Bang in the City, which released capital from many constraints triggering the pursuit of massive profits.

Rachman sees the period from 1991 until 2007/8 as an ‘age of optimism’ following the fall of Communism. These years (with some setbacks) were the high point of neo-liberal self-assurance as the right reshaped the world in its image, with the United States leading the way. ‘Things can only get better’ as the theme tune adopted by Tony Blair’s New Labour put it.

Since 2007/8, we have entered an ‘era of crisis’ with political and economic elites struggling to respond to events, seemingly inadequate to the challenges they confront. No-one appears capable of riding to the rescue, so they call in the supposed technocrats (many with links to Goldman Sachs).

As the Observer put it: “The only power world leaders have is to frustrate each other. The failure of the G20 summit has dramatically advertised the incapacity of the political elite to rise to the crisis.”

Crises and instabilities

This brings me to the crises we need to understand to help explain our current instabilities.

A crisis is perhaps best understood as a tipping point when events can change dramatically – choices have to be made, directions taken, and the world changes in important ways. In a crisis there are no simple ways of going back to what you had before, but it can take years before matters are resolved one way or another. Crises are moments of both opportunity and risk.

At present, we are experiencing three interlocking crises.

First, a social crisis, which some depict as a social and/or cultural recession. David Cameron’s notion that we are a broken society is a partial recognition that something is wrong. More profoundly, Jonathan Rutherford and the Labour MP, Jon Cruddas, talk about the “fragmentation of social life”.

For what it’s worth, I use the term ‘dis-located society’, one where the many social bonds between people, and between people and their institutions, have been dislocated, damaged or even cut, where the bonds between people and the natural world are strained, and, no less importantly, links between people and their histories are severed. The past becomes a lost terrain and people become prisoners of the present, something which forecloses on the idea that we might be able to shape a better and more generous future.

Put differently, the notion that we live in a shared world is declining, the idea that there is a common good which we can achieve together has faded. Ironically, the only time recently when I’ve heard a politician say we are all in this crisis together is when it is manifestly not true. Some float above our problems on oceans of wealth.

The English Defence League may be one response to this sense of loss of history and identity. Its supporters wrongly identify and blame Islam as the cause of this loss. Theirs is a cry of pain and anger, of nostalgia for a world that has gone, and rage at living in a world in which they have no purchase, no place and no value. Interestingly, many are football supporters whose clubs have become the property of the rich. The EDL attracts those who have lost their sense of belonging to society; outsiders who believe they have somehow been cheated of their rightful legacy. Their response is hideous and dangerous, but that should not blind us to its roots.

The rot in society – the moral decay – is becoming increasingly obvious at the top from where it sprang: the world of big money, big media, corrupted politicians and compromised senior police officers. In recent months all this has become more evident than it has been for a generation or more. It has entered the public realm and become part of everyday conversations.

We also have a political crisis. The first coalition government for 65 years is a symptom of this after the electorate rejected Labour without showing much enthusiasm for the Tories. This should be seen in the context of a longer-term growing disenchantment and cynicism towards politics and politicians, reflected most obviously in election turn-outs.

This disillusionment is reproduced elsewhere in liberal democratic states, including the US, parts of the Europe, and towards the European Union itself. And it takes even stronger forms in some authoritarian states where there is a growing hunger for democracy.

The political crisis is also clearly linked to what has been happening in the world economy. Our economic crisis follows the triumph of market utopianism, a period of out of control turbo-capitalism with its lunatic speculative frenzy.

Will Hutton argues that the economic crisis is due to “excessive competition”, to a form of “rank bad capitalism”. He says that bankers and financiers knew that in playing the system they could socialise the losses and privatise the profits. They grew their balance sheets by stunning amounts.

Alongside that we have seen the steady growth of what Guy Standing calls the ‘precariat’, a growing mass of permanently insecure, low-paid workers. This is most obvious among young people, whose futures look bleak regardless of their qualifications. A million young people in the UK are now jobless, yet the political director of the Taxpayers’ Alliance told Sky News “they should be getting jobs instead of protesting”. Who pays his wages, I wonder?

Power and visibility

In our society the power of the strong has been largely invisible, discreet, more hinted at than observable. It is a power that operates behind the scenes, with nods and winks, through private conversations, with lobby groups, via networks of privately funded institutions.

One sign that such power is being challenged is that we are now starting to get glimpses of what’s been happening for years – whether it’s bankers’ bonuses becoming public knowledge, or the media’s machinations, or how formal politics operates.

I learned recently that one in four or five people with permanent passes to the House of Lords are lobbyists for private interests. Washington is notorious as a home for major financial and business interests, based there to influence US politicians. It’s a huge but largely invisible empire.

Monbiot has been arguing that think tanks and lobby groups are the bane of democratic politics. They are the means by which corporations and the ultra-rich influence public life without having to reveal their hand. Their refusal to reveal their funding, and the British state’s failure to demand it, are deeply undemocratic. Nigel Lawson’s anti-climate change organisation is but one example of a group that declines to indicate who funds its activities.

Monbiot says that the Liam Fox scandal is “enmeshed in a web of corporate influence about which we know little”. Thanks to the efforts of some journalists, the curtain has been lifted, slightly.

Monbiot argues: “Today, sponsorship by millionaires explains why free market think tanks outnumber and outspend think tanks arguing for public services and the distribution of wealth… These organisations wield great influence in public life. But we have no means of discovering on whose behalf they do it.”

But the fact that they are more exposed is, at least, a start. As he says, “the undeserving rich are now back in the frame”.

In contrast to the power of the strong is the countervailing power of the weak, the power of the many, the 99 per cent. It has to seek visibility to gain a hearing; it has to occupy and demonstrate, to keep up the pressure, and to mobilise people. It only happens when people feel deeply moved to step out of their ‘normal’ lives. It can be tiring and demanding, as well as exciting and empowering. Like waves, it ebbs and flows.

It’s what the journalist, Madeleine Bunting, calls the “slow burn of new perceptions and new questions” which open up new political possibilities. “It is about seeding questions in people’s minds,” she says.

This need for visible power brings us to the Occupy movement which, by October, involved 950 actions in 82 countries, sparked by earlier movements in Spain and other Mediterranean nations, and linked to events in Tunisia and Egypt (now experiencing its second wave of struggle). In the Middle East, the struggles were against dictatorships which introduced neo-liberalism with all its insecurities and instabilities.

Here, Occupy stands in contrast to another occupation – the invisible and quiet occupation of land in the City of London by private corporations. More and more land is being quietly privatised, making land ownership an important political issue again.

As Dan Hind wrote on the Open Democracy website: The aim [of the Occupy Movement] is to create a venue for democratic deliberation and open debate in a place normally associated with secretive privilege.”

It’s slogan, “We are the 99%”, is powerful and succinct. Bunting describes the activities she found during her visit: “Everywhere there is the hum of strangers talking to each other about politics, accompanied by a sense of relief that finally people have a space.”

The protest is raising a debate about the prospect of putting the morality back into capitalism. As one contributor to a recent Observer discussion asked: “How can we we organise social and economic relations in a way that promotes some understanding of the common good, so that we recognise our deep dependence on one another?”

Let’s not underestimate the spread of this debate. Even the Financial Times, for example, says: “Today only the foolhardy would dismiss a movement reflecting the anger and frustration of ordinary citizens from all walks of life around the world… the fundamental call for a fairer distribution of wealth cannot be ignored.”

A declaration of interdependence

This brings me to the notion of ‘interdependence’, a morally-based concept that is increasingly securing an airing, although it has been around for some time. I begin by offering a few quotes which bring out the points I want to make.

Will Hutton writes: “I think the agenda for getting out of [the crisis] is a recognition that there is a co-dependency between the public and the private. Excessive competition is self-destructive.

“Obviously, wealth generation comes and is driven by entrepreneurship and most of that comes from the private sector. But the private sector does not exist in a kind of social vacuum or a public vacuum. It is co-produced with the public sector. You need tax revenues to invest in universities, to build ports, infrastructures, railways.”

Andrew Rawnsley says: “The Greek economy is just 2% of European GDP and an even tinier portion of global DP. That one slight country could dominate a summit of Earth’s mightiest [the G20] was a reminder – if anyone needs reminding – of the interconnectedness of the world. An infection that starts somewhere small can quickly spread to places which are much bigger.”

Mike Rustin puts it like this: “This system has failed through the instabilities of unregulated markets, the result of what happens when the power of property and capital are unrestrained by relations of interdependency and reciprocity with other social forces, or by governments which represent their interests.”

Our society has been hell-bent on promoting independence at all levels, from to the personal to the national. We have lost sight of a crucial truth: no-one is really independent, no family, no community, no society, indeed no nation state, nor the EU or the US. We watch the Tories demanding that EU leaders sort the Euro crisis while refusing to help, even though our economy depends on it hugely with half the UK’s exports going to the EU.

In the 18^th century the US produced a Declaration of Independence. Today we need to declare our interdependence; and this should be a guiding feature of the world we live in, from the personal to the international.

As Rutherford and Cruddas put it: “The task of living necessitates interdependency with others, and this interdependency leads to questions of equality and justice”.

In the 17^th century the poet, John Donne, wrote: “No man is an island”. Updated to include women too, this should be the motto for better times.

Of course, there are some who will fight this idea tooth and nail, often to preserve their powers and privileges, but we are the 99%. Our lives interact visibly and invisibly with others; we are linked to each other by many threads. Universities exist because past generations fought for a right to education that was denied to them. We may be fighting for that again.

No social gain, no advance is permanent. We need vigilance if we are to defend the reforms we have won (and to honour the memory of those who fought for our benefit). As long as we have markets and capitalism, there will be a need for countervailing forces to prevent their excesses.

In that way, we pay our dues to generations as yet unborn, not just ourselves. The world they inherit is being made now. To learn from the errors of recent decades, we have to begin to recognise that we are not just individuals but part of wider interdependent collectivities.

It would be a small step in the right direction. And, at the moment, small steps could just provide a pathway towards a better future.

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This is based on a recent talk to the Politics Society at Leeds Metropolitan University.

Click here to read Markets, Movements and Morals, Barry Winter’s review of Tony Judt’s Ill Fares the Land.

‘Moral capitalism: It’s Miliband who captures the mood of the times’, by Steve Richards, was in The Independent on 8 November 2011.

Gideon Rachman’s Zero-Sum World: Politics, Power and Prosperity after the Crash is published by Atlantic Books.

‘Ethical Socialism’, by Jonathan Rutherford and Jon Cruddas, was published in Soundings, 44, Spring 2010.

Guy Standings’ book The Precariat: The New Dangerous Class, was published in 2011 by Bloomsbury.

The talk was given by Michael Green, one of the authors of The Road from Ruin: A new capitalism for the Big Society, and the host was the Institute for Public Policy Research (IPPR). This was one of their quarterly series of informal seminars held under the title Cafe Politique in Manchester Museum’s cafe.

Green, an experienced financial journalist, said his book tries to draw lessons from financial crises since the 17th century and attempts to sketch out what can be done to create ‘a better capitalism which serves humanity’. His message contains elements to please both left and right but his aim is to identify how to move to a more socialised economic system.

Green believes blame for the financial crash of 2008/09 should not lie with bankers alone, nor with ‘financial innovations’ such as collaterised debt obligations which are usually identified as the underlying cause. In fact, he says, these instruments have their uses and potentially can play a part in future economic development. He drew a parallel with the South Sea Bubble, and its French equivalent, pointing out that when Britain did not ban paper money the consequences were quite different and more fruitful than those suffered by the French who took a more stringent path.

He looked at the current alternatives for building a better financial system and dismissed them.

First, he disagreed with the premise that financial innovations should be treated as inherently toxic. Then he went on to say that the remedy contained in the ‘Basle 3’ agreement  – that is, that banks should hold higher capital reserves – would prove to be a ‘Maiginot Line’ in the battle against further crises and would simply be out-flanked by the banks. In any event, Lehmann Brothers – whose demise famously came to symbolise the crash – had higher capital reserves than those required by ‘Basle 3’. Finance capital, he observed, would simply ‘find ways to cheat around the rules’, although he didn’t question the lack of accountability and transparency within finance capital that this implied.

He also dismissed the idea that banks should be allowed to go under saying that our finance system was too interconnected for this to happen in isolation. He was able to point to two crashes in the USA (one in the 1890s, the other in 1907) which were worsened by a similar approach. Because of this, the notion that investment and lending functions of banks should be separated is false.

Finally, he also dismissed the idea of a Tobin tax on financial transactions because, he said, such taxes do not make markets more stable. Banks have considered the impact of the tax and have already devised ways of using it to their advantage to generate profits. Where they are unable to do this, they will pass on the extra costs to customers. He also posed the question: is market volatility a cause of crisis? Presumably, the answer is ‘not as much as some people think it is’, although he didn’t elaborate.

Different measures

Instead of these approaches, Green suggested that we need different measures of economic success. At the moment, economic theory is dominated by the ‘efficient market hypothesis’ which claims that shares generally represent the true value of a commodity. The recent financial crisis was so profound as to indicate this is not the case. Ratings agencies and accounting must change. He cited the Institute of Chartered Accountants as unexpected pioneers of a new way forward in their recently founded ‘financial innovations laboratory’.

More radically, he stated that GDP as a measure of economic growth is at best ‘a questionable tool’, which does not measure the real wealth of society. However, he was careful to acknowledge that this is not an original criticism. In fact, the economist who invented GDP eventually disclaimed it because it did not take account of domestic work.

He also said that the governance of financial institutions was in need of substantial improvement. Boards are often poorly qualified and stuck in ‘group think’. Investors do not scrutinise them and are content to track portfolios (misled by efficient market hypothesis). Pension funds in particular need to be reformed and the fiduciary responsibilities of board members must be expanded from their current limited role in scrutinising efficiency, honesty and reasonableness, to include wider ethical aspects.

The following discussion ranged around a number of subjects, but again and again people asked him, in one way or another, if it wasn’t really capitalism that was the problem. His response was simple: ‘I can’t think of an alternative system.’

A French woman challenged his scepticism about regulation. ‘In France,’ she said, ‘capitalism is more muzzled… The laws are powerful because the people are powerful.’

Green said that regulation leads to perverse consequences and cheating. Instead, there should be a different paradigm for capitalism. He pointed to Fair Trade, which is developing a more sustainable market in basic commodities, comparing it to the finance sector which offers poor products often sold badly. Finance, he said, needs to come up with something like the Fair Trade label, and develop a more empowered consumerism.

He praised microfinance and the social impact bond introduced by the last Labour government. And he mentioned other developments and initiatives which are trying to define a more ‘long-term’ capitalism, including ‘tomorrow’s company’ and the UN Principles of Responsible Investment.

Overall, I don’t think he was saying anything new but that at least he recognised our economic woes are a result of systemic failures in capitalism rather than public sector waste, and that these failures cannot simply be addressed by technical alterations to financial regulation.

The book sounds like a piece of journalism – surveying the field rather than opening up new terrain – but it serves as a useful reminder that there is no great private sector recovery waiting to charge over the hill to our rescue. Indeed, all of us, whether employed by the private or public sector, can expect some hard times ahead. Indeed, as Green alluded to, there may be much worse on the horizon if the far east (China in particular) is also riding a real estate asset bubble.

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The Road from Ruin: A new capitalism for the Big Society, by Michael Green and Matthew Bishop, is published by A&C Black. £14.99. More information at: www.theroadfromruin.com

Deputy Prime Minister Nick Clegg will launch the IPPR’s Northern Economic Futures Commission to develop a ten-year strategy for economic growth in the north in Leeds on 20 July. More information at www.ippr.org

For the second day in a row Government Ministers have been unable to defend Cameron’s lie that the public sector pension scheme is ‘going broke’. The claim was made by Cameron in a speech on Monday 28^th June. Yet, it wasn’t the Labour opposition leading the scrutiny of this latest piece of Tory mendacity but the BBC Today Programme’s Evan Davis.

On Wednesday 29^th Treasury Minister Justine Greening was unable to identify anywhere in Lord Hutton’s pension report where he supported the claim that the pension system was unaffordable. Repeated questioning by Davis reduced Greening to confused evasion. Yet despite having a full 24 hours to rustle up a defence of Cameron’s claim, on Thursday, Minister for the Cabinet Office and Paymaster General Francis Maude similarly floundered around when subjected to the same question.

In the same programme PCS Union leader Mark Serwotka gave a fairly effective defence of the union strike action. His first line of argument was that the government had no intention of negotiating seriously on the key pensions changes, something Maude was unable to contradict. But it was when Serwotka raised the issue of affordability that Davis returned to his key point. On this Davis was on solid ground because Hutton’s pension report shows that the cost of public sector pensions will in fact fall as a proportion of GDP from this year onwards. Hutton’s argument for reform is about fairness and cost saving, not affordability, and Maude and the government simply have no answer to this.

Maude’s only response – ‘as has often been pointed out the pensions system is unaffordable’ -was itself revealing. One of the government’s most successful tactics has been to repeat a line so often that it becomes accepted as true. The economic crisis being Labour’s fault and public debt being unaffordable are the most obvious and successful examples. The kind of broad brush, man of the people, claim that ‘hey look chaps, the system’s going broke’ is classic Cameron. And it is thanks to Davis’ intelligent questioning, an economic expert on his own ground, that such claims have been exposed as false.

Part 3: the 1950s and the 1980s

The 1950s

Mark Wickham-Jones argued that some important reasons why Labour did not do so well in the 1950s have been neglected. Apart from a team at the US embassy at the time, producing monthly 60-page reports, there was no research undertaken on the party’s policy. This stressed that policy-making was highly pragmatic, based on notions of trial and error.

The party was also highly insular in its outlook, adopting a patronising and dismissive attitude to other social democratic parties. It was slow to take seriously the Coal and Steel Community (the first moves to European unity) and when it did so, it declined to participate. It reserved its praise for the United States. There is no evidence that it looked at Sweden’s sophisticated model of social democracy. The party’s highly empirical outlook meant that it was not interested in theoretical issues of this kind. In sum, the party was insular, nationalist and a-theoretical, and it drifted along in a piecemeal fashion.

Pat Thane looked at why Labour stayed in opposition in the 1950s, set against the bitter divisions between Nye Bevan and Hugh Gaitskell. The Labour Party had difficulty in coming to terms with mass affluence and women voters. It was slow to notice that the Conservatives were not presiding over mass unemployment. It was hostile towards affluence and saw consumer goods as a betrayal. It attacked hire purchase, fridges, cars, vacuum cleaners, televisions, supermarkets, and singled out washing machines, in particular. Opposition to washing machines may have done more to alienate women voters than anything else.

The party only saw women as housewives. Yet until 1951, working class women were more loyal to Labour than working class men. Meanwhile, in 1955 the Conservatives introduced equal pay for public sector workers. Having resisted equal pay at the time, Labour included it in its 1959 manifesto.

As a result, the 1950s was a decade in which women’s support for the Conservatives grew, particularly between 1955 and ‘59. Middle class women swung against Labour’s austerity. The party’s anti-pleasure rhetoric – which offered no counter-attraction – alienated many. Herbert Morrison was perhaps the only leader who understood what affluence meant for working people. Others retained a lofty hostility towards materialism.

Labour’s discomfort with affluence is understandable. By 1951, the party leadership was exhausted and found it hard to adjust to the new realities. It was Anthony Crosland who, for good or ill, nudged the party into an accommodation with affluence and markets.

Discussion on the 1950s

Anne Perkins, journalist and author of a biography of Barbara Castle, said the party in the 1095s was unwilling to raise its horizons. It did not try to lead opinion, even on issues like ending the empire.

Dennis MacShane, MP for Rotherham, argued that one of Labour’s great unspoken problems was the Communist Party’s political role and negative influence in the trade unions. In Sweden, the trade unions defeated communist attempts to become a hegemonic force.

Another speaker said that in the ’50s, while all was not lost, Labour lacked a strategic sense of where it was going. The Tories, however, looked at the impact of affluence on Labour voters. Labour’s supporters did not shift to the Conservatives but they did become more instrumental in judging competent governance.

David Howell said that by 1959 electoral homogeneity begins to break down. During the 1930s, Labour did better among the affluent working class which was most unionised.

Mark Wickham-Jones argued that affluence posed complicated questions for Labour. What was notable was how quickly the party plunged itself into turmoil following the fight over prescription charges. There was no attempt to unify the party in these years.

The 1980s

Gerald Kaufman and David Owen were asked to address the question: Why was the 1980s such a bad era for Labour?

Gerald Kaufman pointed out that over the last century Labour have been in office for only 33 years. The real problem for Labour is that the Tories will do anything to get back into office because they are less in interested in politics than power. He described himself as being on the left and a former member of the Tribune group.

Since the 1950s (when he was first actively involved with the party), he has seen the party engaged in unnecessary turmoil. For Labour the post-1970s was a period of phoney ideological turmoil. It saw Tony Benn’s discovery of the working class as a kind of ‘noble savage’. The election of Michael Foot – itself a sign of the growing split – made it impossible for Labour to win the general election. His preoccupations were based on genuine convictions. He was a great scholar but not a party leader.

As a result, this was a period of utter chaos in both the shadow cabinet and the Labour Party. Labour MPs were so scared of their constituency parties, which were dominated by the far left, that they were afraid to speak their minds. His own CLP, Manchester Gorton, was controlled by the hard left. Yet the clashes were about next to nothing.

Later he added that the party became embedded in factionalism and produced barmy policies. It put its own political convictions ahead of the party’s electoral fortunes. The key moment was the deputy leadership election (when Benn stood against Healey) with corrupt and capricious trade unions, and hard left constituencies making the running. In one of his final remarks he said that the day Labour caves into pressure to restrict immigration is the day that he leaves the party.

David Owen said the question to ask is how the Labour Party and Ed Miliband as leader (who he supports) can win next time. The lesson of the 1970s is that it takes time to recover from economic recession. Labour lost in 1979 long before the ‘winter of discontent’, when it supported 17 per cent pay rises for Ford workers. This raises the question of the trade union links with the party which need rethinking. The unions played a constructive role in terms of incomes policy for three years and Jim Callaghan should have been more flexible about low paid workers.

Michael Foot was a disaster for the party, he said. This could have been avoided if Callaghan had stood down earlier to allow Denis Healey to be elected. The agreement with the unions over the party constitution – one member one vote and the electoral college for electing the leader – was a fatal error.

Labour now needs to consider how it can win the centre. Ed Miliband has considerable potential and has shown coolness and steadfastness under fire from the Conservatives.

In response to a point made by Mark Wickham-Jones that Michael Foot was more a symptom than a cause of Labour’s problems, Owen said that was a fair criticism of what he had said. The right of the party had shown slackness by placing too much reliance on the block vote to give them support.

Greg Rosen said that the main reason why the party was in opposition was a divorce between the aspirations of Labour activists and Labour voters. The party moved in a direction which many voters were not prepared to support. The party was also on the wrong side of the argument about council house sales, something it had earlier looked into introducing itself.

Labour was both too radical and too conservative at the same time. The left’s alternative economic strategy failed to answer questions about how to achieve industrial growth; it was not workable. Benn’s support for worker co-operatives, like Meriden, was a failure. The fratricide and hatred reached its peak in the 1980s. The SDP was pushed out of the party and then condemned for leaving.

However, while the left did at least point out the economic problems, the right did not even recognise them. The lesson for today is to look at Labour’s record to see what did and did not work.

Postscript

The conference did raise important issues about Labour’s history, not least the contexts for its internal conflicts. The array of informed speakers was impressive; the performance by the two politicians rather less so. Indeed, by the time we reached the 1970-80s, the level of analysis deteriorated – ‘blame the left’, was Kaufman’s rather bitter, simplistic message.

I don’t think it’s unkind to say that, having learned nothing and forgotten nothing about the period, Kaufman had next to nothing to teach. What was wholly absent was any consideration of Labour’s record in office, let alone, any assessment of how, in responding to the UK’s economic decline, it acted as the midwife to Thatcherism. However, some of us, who were also active during the period, were allowed to respond and given a hearing.

During the 1980s, the ILP often argued for a different direction to the Bennite left. That said, the speakers made no mention of the paternalism, condescension and contempt shown by Labour’s leading parliamentarians towards party members. Not only was the Labour Party highly undemocratic and unresponsive to the wider party, but the parliamentary leadership was manipulative and anti-democratic. For example, when Labour Party conference voted by a two-thirds majority to abolish the House of Lords (sufficient for inclusion in the party manifesto), Jim Callaghan stopped it by threatening to resign.

Sure, they were difficult times. Sure, there was an overreaction, but when people’s voices go unheard for long enough, that’s what happens.

Mark Wickham-Jones is professor of political science at the University of Bath. He is writing an about of Labour’s relationship to social democracy in the postwar period. He wrote Economic Strategy and the Labour Party: Politics and Policy-Making, 1970-83.

Pat Thane is professor of contemporary British history at King’s College, London. She has written on the history of the Labour Party, inequality, and women and citizenship.

Sir Gerald Kaufman has been an MP since 1970. He is known for his description of the Labour Party’s 1983 manifesto as ‘the longest suicide note in history’.

Greg Rosen is a public policy consultant, a columnist for The Scotsman and chair of the Labour History Group.

This is part 3 of Barry Winter’s report. Click here to read part one, and here to read part two.

For a lively, amusing and pithy assessment of the day’s proceedings, read Harry Barnes’ very fair report: http://threescoreyearsandten.blogspot.com/

Part 2: the 1930s

David Howell disagreed with Hobsbawm’s notion of Labour’s continued forward march during the 1930s; the pattern of support was more complex.

Electorally the ‘terms of trade’ were changing radically. The party’s performance in the north and Scotland was uneven and it lost its outposts south of Nottingham, except London (where there was support for the London County Council led by Herbert Morrison).

Labour’s share of the vote in the 1929 election, in which it came to office as a minority government, was reduced in 1935 when it lost to a coalition. In 1937, it gained Coventry, a growing industrial city. Yet, in nearby Birmingham, for every Labour councillor there were five Conservatives.

Labour’s support was not class-based but based on particular occupations and communities. Elsewhere Labour was seen as the outsider.

The 1931 general election saw a clearing out of a generation of Labour MPs born in the 1860s or earlier. The second generation, born in the 1880s, saw the party’s former leader, Ramsay MacDonald, as an anathema. With its own political style, the new generation shared a mistrust of intellectuals. Labour leaders Herbert Morrison, Hugh Dalton and Stafford Cripps were among those who were stigmatized in this way.

The 1930s was a period of political splits and divisions: the Communists emerged as a third party on the left; Oswald Mosley led a breakaway to the right; the ILP sheered off to the left. As a result, trade unions were seen as rescuers of the party, such as the transport workers led by Ernest Bevin.

At the outbreak of the Second World War, Labour was far from office. Had there been an election in 1939, the Conservatives under Chamberlain would have won.

What changed the situation were:

1. the military failures which destroyed the credibility of the government
2. Labour joining the wartime coalition and the growing legitimacy of planning and Keynesian economics which exorcised the demons of the 1931 economic crash
3. the geographical mobilization involved in war in which a generation moved to the left favouring social reform
4. the growth in trade unionism associated with the war effort and the revival of communities as a result of which Labour politicians were seen as natural leaders. In the armed forces, for example, there were long discussions about politics and political leadership, as illustrated by a letter from a young army officer which describe a debate on political leaders ranked Roosevelt first, Stalin second (supported by the fitters), and Churchill third.

Andrew Taylor looked at the other side of the equation, the nature and predominance of Conservatism as a political and ideological formation and how it responded to developments

It’s important to remember that although the decade was known as ‘the hungry ‘30s’ that experience was not universal. It was also a time of rapid development and a prosperous new economy. As well as industrial decline in south Wales and Tyneside, there was growth in towns like Luton and Coventry (based on the car industry). This helps to explain Conservative successes.

The Tories were anxious about the prospects of Labour’s forward march at the time, sufficiently so that they contemplated introducing proportional representation to stop Labour.

The core problem for Labour was how to go beyond its traditional areas of support. For the Conservatives, it was how to secure its heartlands and to expand to win seats in areas such as the depressed, industrial town of Stockton-on-Tees (which they did).

With the rise of Stanley Baldwin as party leader there was a less hostile attitude towards industrial disputes and trade unions. He took the critically strategic decision not to destroy Labour but to domesticate it. While he liked to be seen as the steady and reliable ‘Uncle Stan’ to the working classes, the other Baldwin was to use state power to defeat the 1926 miner’s strike.

After 1926, however, the Conservatives showed relative restraint towards the unions. Rather than any attempt to crush labour, Baldwin sought to build bridges with trade union leaders, including the General Secretary of the TUC, Walter Citrine.

The party also developed as a sophisticated, highly organised, political machine. It was good at propaganda, with Baldwin’s close, intimate ‘fireside chats’ on the radio. He was replaced as prime minister by Neville Chamberlain, an unimpressive speaker who had been a reforming minister of health.

What stands out about the Conservatives in the 1930s was their ability to adapt, to turn themselves into a popular and attractive party to the wider electorate. Labour did not display the same ability.

Hester Barron reviewed election results in the north as a case study for examining the claim for ‘the forward march of labour’ in the 1930s. She noted that in the 1931 general election Labour lost seats to the Tories and National Liberals, including mining seats in County Durham. Sedgefield, for example, where miners were 34 per cent of the male electorate, voted for a Conservative with mining links. Consett, where 55 per cent of male voters worked in mining, was won by a National Liberal. In Jarrow, the Conservative candidate overturned a 9,000 Labour majority.

Most of the recently enfranchised miners’ wives voted Conservative or National Liberals. In Stockton, Harold Macmillan regained the seat he lost in1929 with an appeal to women voters. This was at a time when 19 pits had been closed in the first half of 1931 because of the recession.

There was no such thing as a safe Labour seat in the 1930s. The working class was not Labour’s natural constituency: their vote had to be earned. It was a very volatile period and the 1931 election itself was conducted in an atmosphere of anti-Labour hysteria. Later she added that it is important to remember how new the Labour Party was as in the ’20s and ’30s.  It had not had time to work through the ideological issues.

Discussion on the 1930s

David Howell agreed that the 1930s was very volatile. The political career and changing allegiances of Oswald Moseley demonstrates this. Constituencies changed hands between the three parties. Political identities were being remade. There was economic orthodoxy in each party; there were iconoclasts in each party. The ideological spectrum on economic issues was spread across the parties, including support for Keynes.

Labour voting by men was determined by their workplace experience. Women’s political formation was more domestic and more privatized, giving the Tories the advantage here.

Andrew Taylor said that the Conservatives first used an advertising agency in 1929. It ran a sophisticated campaign, targeting property owners, calling for safety first – but it lost. However, it was a sign of the changes taking place. Labour was bedding down. Its underlying support was stable but it was not widening its support. The Tories were also bedding down and they had ‘loads of money’.

His work on the Yorkshire coalfields suggests that, at best, Labour was a shadow organisation and the closeness of the party and the unions led to tales that the party was ‘full’.

David Howell teaches politics at the University of York. Among his many publications are British Workers and the Independent Labour Party 1888-1906, MacDonald’s Party: Labour Identities and Crisis 1922-31, and Attlee. He also wrote the ILP pamphlet, The Rise and Fall of Bevanism.

Andrew Taylor is professor of politics at Sheffield University. He has written extensively on trade union politics, including the National Union of Miners. He jointly edited Labour, the State, Social Movements and the Challenge of Neo-Liberal Globalisation.

Dr Hester Barron lectures in history at the University of Sussex. She wrote The 1926 Miners’ Lockout: Meanings of Community in the Durham Coalfield.

This is part two of Barry Winter’s report. Click here to read part one, and here to read part three.

Harry Barnes’ report on the event can be read here.

Andrew Gamble began by offering some opening pointers to Labour’s lost decades. First, the long Conservative hegemony which means that it has been in office for two-thirds of the last 90 years. Since 1918, the Conservatives have held office 11 times compared with Labour’s six.

Although Britain had the largest industrial working class, Labour has been out-competed electorally. Until more recently, the Tories were never out of office for more than six years. It meant that when they won an election they had an experienced set of politicians, unlike today’s government.

Since 1918, there have been three broad, long economic cycles with financial crises in 1931, 1949, 1976 and 2008. Labour was in government for each of these financial crises.

During the first period from 1918-45, we saw the ‘forward march of labour’, as the historian Eric Hobsbawn describes it. The labour movement grew in confidence and electoral support, marked by the triumph of the 1945 general election. Hobsbawm then identifies 1948-78 as the period when that march was ‘halted’. The 1980s saw the fracturing of the Labour Party and the formation of the SDP in 1983. Labour was out of office for 18 years.

This raises a number of questions:

• why Labour was so prone to divisions?
• why the party is associated with economic crises which have shaped its fortunes?
• why the Conservatives been so successful?

Progressive parties are caught between the hope and expectations of its supporters and the actuality of being in office, leading to disillusionment and recrimination. Such parties need to protect their core interests; to offer the politics of aspiration by reaching beyond their base; and to retain the politics of principle, holding on to certain values and ideas that define them. Failure in any of these areas creates a problem. Failure in all three is serious. Following past defeats, the Labour Party has suffered from heresy hunting although not on this most recent occasion.

Labour and similar parties have to offer both a politics of hope and to demonstrate their economic competence. This is a difficult time for social democratic parties in Europe. They are suffering from a shrinking working class base. And it should be remembered that Labour has never won more than half of the electorate. Today, all parties are minority parties; 35 per cent of the electorate does not vote.

There are also long-term trends that have to be taken into account: the processes of financialisation and individualism, plus the media’s influence. These have led to the dominance of fiscal conservatism, and social democracy is now faced with some difficult choices.

Andrew Gamble is professor of politics at the University of Cambridge and author of  The Spectre at the Feast: Capitalist Crisis and the Politics of Recession.

This is part one of Barry Winter’s report. Click here to read part two, and here to read part three.

Harry Barnes’ report on the event can be read here.

Devised by “local campaigners, those who rely on or support good public services and those who work to supply them”, the new website aims to build the “broadest possible” opposition to the government’s agenda.

Its objectives are:

• to gather and map information and personal testimony about the cuts and their effects
• to show that there are alternative economic approaches
• to provide resources and tools for campaigners and campaign groups.

It includes a list of local events, a rolling update of where the latest cuts are falling, an interactive map, and a rather well-produced video which points an accusing finger squarely at the banks.

www.falseeconomy.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.

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.