It's the not the public, but the private finance sector, stupid.

Image: acknowledgements to the BBC.

The Autumn Statement reveals but one thing: the Chancellor and his advisers are both ill-advised and dangerously ill-prepared for the forthcoming prolonged Depression. (And if you think I exaggerate, let me remind you that 20 years after the Japanese debt bubble burst, Tokyo house prices are still falling, and the stock market is worth 60% less than 20 years ago. And the Japanese economy was in a healthier state then, than the UK is today, thanks to an export surplus.)

Today’s penalising of the innocent – public sector workers, pensioners and those hundreds of thousands of young people entering the labour market  – is a result of a deeply flawed economic analysis by the Chancellor of the causes of the global financial crisis.

No depression will be averted;  no government borrowing will be reduced; no economic recovery can be hoped for, until the cause of the crisis is correctly analysed and then addressed with appropriate policies.

For me an interesting angle on the day was the difference in emphasis between the official Treasury Autumn Statement, and the Chancellor’s speech. The latter was far more ideological of course; but the Treasury Statement does indicate some grasp of the scale of the crisis. The very first paragraph of the full Statement (on page 11) reads:

“The UK economy is recovering from the biggest financial crisis in generations. Prior to the crisis, underlying competitiveness fell and economic growth was driven by unsustainable levels of debt, with the UK seeing the greatest expansion in debt of all the world’s major economies over the last decade. As a result, the UK experienced the deepest recession of any major economy except Japan and the Government inherited a budget deficit forecast to be the largest in the G20.” (My emphasis.)

So the Treasury does get it. The country that enthusiastically hosts the biggest global banks in the world; that celebrates “London ..as the world’s pre-eminent financial centre” (to quote the Chancellor today) witnessed “the greatest expansion in debt of all the world’s major economies over the last decade” – and as a consequence, the public finances worsened.

From these simple facts much analysis flows.

The most important is this: Britain (and the Eurozone) are not facing a sovereign debt crisis. We are not facing a crisis of the public finances. Instead: we are facing the biggest ever crisis of the private financial system.

Why? Because the “greatest expansion in debt of all the world’s economies” is not going to be paid back.

“The greatest expansion of debt in all the world’s economies” must first be written off, ‘de-leveraged’ or paid down.

As this process grinds relentlessly forward, the banks that lent “the greatest expansion of debt in all the world’s economies” face bankruptcy – if not now, in the near future.

That is the crisis we all face. The bankruptcy of the global private banking system – based in our backyard.

The mobilising of finance for the Eurozone is to bail out private banks that engaged “in the greatest expansion of debt.”  Although you would not believe this from media reporting, its purpose is not to bail out sovereign governments. The stubborn refusal of German politicians (with whom I have some sympathy) to agree to further taxpayer-backed bailouts of the private finance sector means that private banks face imminent bankruptcy.

Which is the why the Polish Foreign Minister warns of an impending “crisis of apocalyptic proportions“.

Given this terrifying prospect, what do our Treasury mandarins and British Chancellor recommend?

First, that we make it easier for employers to sack people, and thereby increase unemployment and cut wages – making it harder for those employees to pay back debts.

Second that we cut public sector wages of those in employment – with which some of those private debts may have been paid back. Third, that we penalise future pensioners. For why? And fourth, that we try and rescue 200,000, but sacrifice hundreds of thousands more young people on the dustheap of unemployment. That policy alone will cut the nation’s income; income that could help the banks put balance sheets back in the black.

The Chancellor’s speech reminded me of the parent that knows his child is hiding behind the curtain, but instead looks under the sofa, inside the box, behind the dresser – everywhere except where the solution lies. A silly, but in his case, dangerous game.

The fact is that the solution does not lie with cuts in public spending; with austerity. We have had only eighteen months of synchronised austerity across Europe and already the British and world economy teeters on the brink.

The failure is not that austerity was not implemented; the failure is austerity.

Private money markets are not asking for deeper austerity. They are asking for a revival of economic activity. They are begging for governments to draw back from the policies that have caused output, investment and employment to fall off a cliff.

But that is hard for governments such as ours, gripped as they are by an antiquated and flawed economic orthodoxy. As David Graeber  explains so well in his book “Debt: the first five thousand years.” orthodox economists – believe it or not – do not understand the nature of money and credit. An unfortunate weakness for a profession majoring on the economy.

Nor can their jaundiced Scrooge-like minds accept that prosperity is caused by employment. Not by rich, ‘light-touch’ regulated bankers.

They find it hard to grasp that money/credit – that is not generated by savings, but begins life at the Bank of England – can provide a bridge to employment. But only if it is managed carefully, and not outsourced to the reckless greed, and fraudulent behaviour of bankers and their friends in government. (See today’s story about Hank Paulson’s “inside jobs” with Wall St.)

Orthodox economists like those in the Treasury and the Conservative party cannot grasp one simple but vital truth. Employment can generate the income needed to a) repay debt b) pay tax revenues to lower the budget deficit and c) restore both general prosperity and a sense of national well-being. All of which might be of some help to the private finance sector.

Instead our policy and decision-makers are playing petulant, disgracefully irresponsible games with all our futures. And missing the biggest crisis of all: the imminent bankruptcy of the private finance sector.

 

 

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11 comments to It’s not the public, but the private finance sector, stupid.

  • Joe Smith

    I wonder if a government of national unity in the UK might help things? It is getting beyond a joke when two of the most class-based parties in the Western world are squabbling like a couple of angry kids while the UK economy burns around them.

    It is the cruellest stroke of bad luck that the worst form of economic class struggle for 30 years is erupting in the UK, just when the world economic system itself faces it’s worst crisis in 80 years.

    A government of national unity might help in the short term. In the longer term the British constitution needs to be reformed so that the monetarist ideologues of the Tory Party never again regain unfettered control.

    It is to Labour’s shame that they so ignored the power of the City during their time in power that a Tory Party with no democratic restraints is once more able, a la Thatcher, to wreak havoc on the British economy.

  • Charles Wheeler

    From Robert Sherrill, The Nation, Nov 29, 1990

    The Looting Decade:
    “If anyone still had faith in the system, the savings and loan adventure surely must have brought him to his senses and to his knees. The gambling debt of $500 billion ($150 billion plus interest and other incidentals)–or will it be, as some economists predict, a trillion four?–that the S&L industry left with the taxpayers has prompted even that deadpan Tory, George Will, to remark in wonderment, “We seem to have a capitalism here in which profits are private and we socialize the losses. Why are we, in effect–if you’re big enough, if you’re a huge bank or a savings and loan–why, in effect, are we guaranteeing everything? … What I’m asking is isn’t there a way to reform the system so that the taxpayers don’t get stuck with what happens when you have deregulation and risk taking that goes wrong?”

    The answer to his question is: No, there is no way to reform the present system, because the system is owned and controlled by those who are ruining it. Voters, ordinary taxpayers, have nothing to say about it.

    Martin Mayer, a conservative economic historian, has seen his world crumble and become meaningless. The capitalism he set his watch by has stopped ticking. He finds the thrift mess almost unbelievable: “Players entered the game through a government charter and continued to play, however severe their losses, in violation of all capitalist principle–courtesy of a government that continued to insure their borrowings. This was not an accident: it was public policy.”

    When he talks about “players,” he makes it sound like customers at a casino. And that in fact is what it has become. Capitalism has become the Big Casino, with players guaranteed against loss, because in effect they have bought the house managers. That is public policy.

    Mayer predicts plaintively that “future sociologists…will study the irruption of criminality into what had been conservative, even beneficent, organizations….They will seek to learn why the fiduciary ties that had set the unspoken, self-dignifying rules of a competitive society had been so grievously weakened in the late years of the twentieth.

    Nevertheless, though it is obvious that the tottering commercial banking world needs tighter regulations than ever, the industry and the Administration push on pell-mell for deregulation. In fact, the dismal condition of the industry is being used by the deregulating claque as their strongest, and weirdest, argument. Just as St. Germain, Garn, Pratt and Wall argued that the best way to help zombie thrifts recover was to remove all regulations so that they could “grow out” of their problems, now Bush, Fed chair Greenspan, Treasury Secretary Nicholas Brady, Seidman and others demand that the government dismantle what Seidman calls the “archaic laws” that for many years have controlled commercial banking. They, too, want to “grow out” of their perilous condition. What these laws do is protect the banking industry from its worst instincts by insisting that banks remain banks, and not become gamblers, hucksters and hustlers in other lines as well.

    The deregulators will probably make their big power-play next spring, when, under mandate from Congress, the Treasury Department must come up with its “reform” plans for the banks. You can expect the other side to try to sell some blind horses to us, like offering to swap a lower ceiling on deposit insurance for wholesale abandonment of regulations–as if the rotters wouldn’t be just as happy engaging in risky activity under a lower ceiling as they have been gambling under the present one. If there is a double agent to be on guard against, it will be Donald Riegle, chair of the Senate Banking Committee. He and the moneylenders are–could any old saw be more apt?–thick as thieves. Riegle is recorded as receiving $200,900 from S&L officials and PACs between January 1981 and May 1990–second only to California’s Senator Pete Wilson ($243,334). Now that S&L money is seen to be tainted, Riegle has scrambled to redeem his reputation by returning $120,000 of it. But the commercial banks have stuffed his pockets too, and there is no record of his having returned any of that money.

    Recently Greenspan–that trustworthy fellow who guaranteed the morality of Keating and was one of the chief boosters of junk-bond purchases by S&Ls–guided his Fed colleagues into a disastrous decision. They ruled that J.P. Morgan (Morgan Guaranty Trust) could trade and sell corporate stocks. With this cloven hoof in the door, other banks will follow, and that will be the death of the Glass-Steagall Act, which Congress passed in 1933 to separate commercial banks from investment banks and thereby control some of the outlawry that had caused thousands of banks to fail. Next they will probably be targeting the Bank Holding Act of 1956, which was intended to keep banking out of commerce, and the McFadden Act, which limits interstate banking.

    What Greenspan, Seidman and their gang say to critics is, Oh, we want banks to be banks, too, but we want them to be universal banks. Which can be translated to mean uncontrolled banks, banks completely unfettered by regulations that restrict their operations–in short, pretty much a return to the reckless and lawless 1920s and early 1930s, which, if measured by the drama and excitement of collapsing financial structures, had it all over the 1980s.

    Brumbaugh, for one, is dumbfounded by what he’s seeing. “The administration and Congress just don’t want to acknowledge the problem,” he says with a sigh. “This is déjà vu all over again. You can’t believe it’s happening, but there it is.”
    http://goo.gl/QIIE6
    ————————————————————————–

    The real Tragedy of this disaster is that it was not only predictable, but inevitable – largely because it enriched those with economic and political power at the expense of the rest.

  • Interestingly, Thom Hartmann interviewing Steve Keen in the US (see: http://www.debtdeflation.com/blogs/) refers to the UK government stating that it was not if but when the Eurozone would collapse and that was what the UK govt. were planning for.
    Also interesting on the same Steve Keen blog, the bunch of economists, Steve included,
    who have signed up to Econ4’s support for the Occupy movement.

  • I agree, mainly. Though raising demand with inflation still over 5% sets off alarm bells in my brain.

    Re your second last paragraph, I think the nonsense we get from “orthodox economists” is even more ridiculous than you suggest. You say that “Employment can generate the income needed to repay debt”. I suggest we don’t even need a rise in employment in order to reduce debt (not, of course, that I oppose a rise in employment).

    The way to reduce the dreaded “debt” which so concerns the orthodox, and WITHOUT a rise in employment is simple. First, print money and buy back debt. Second, to the extent that the latter is too inflationary, obtain some of the money for debt repayment from tax increases. As long as the inflationary effect of the former equals the deflationary effect of the latter, GDP and numbers employed remain constant, meanwhile the dreaded debt comes down.

    Having said that, I don’t think debt reduction is urgent given that we currently pay a negative real rate of interest on our debt. If you can rip your creditors off, why stop?

  • Ann

    Ralph…absolutely. Well said.

  • Ann

    Charles, thank you for this interesting comment…I think we need to align with the likes of Martin Mayer…decent people who believed much of the hype from Ayn Rand, Greenspan etc…Similarly it is my humble view that we should align with those decent bankers that very much dislike the new ways of Wall St. and the City of London…After all, there are few enough decent people about, so we should all stand together…You seem to have found a few…

  • Ann

    Joe, I fear that a government of national unity, dominated by the banker-aligned politicians in both the Conservative and Liberal Parties would be devastating for the British Labour movement…its purpose would surely be to silence the movement…so I would be vehemently opposed. It would also entrench corporatism.. of a kind mentioned above by Nick Berry.

  • Joe Smith

    I may have put my arguments a little badly. What I was getting at is that we already have a coalition government which excludes the Labour movement. Somehow we have to get the Labour movement into the loop again, and quickly. We cannot afford to wait to 2015, or whenever the next election comes. As each day goes by, the current coalition is wreaking havoc on the UK economy.

    The trouble seems to be, in the UK, as in Ireland, Greece, Italy, and elsewhere, the only coalition that seems to be allowed is one that is “supported by the markets”, which means one dominated by the Right. What about a coalition that is “supported by the people”, and includes the Left as well?

    I know this may appear a bit fanciful at the moment, but there is no harm in dreaming in what is a fast-changing situation. The markets round Europe have succeeded in “seizing the narrative”; it is time for the people of Europe to seize back the narrative.

    Otherwise voting across Europe becomes increasingly irrelevant, and “you can have any government you like, as long as it is supported by international bankers”.

  • Seth Rutledge

    This is a good article, do you have any references regarding the actual numbers about where the debt is? I would like to be able to argue against the prevailing belief that the problem is individual and government debt, as opposed to rampant speculation in unregulated environments; but I don’t feel confident that I have seen the numbers to back that up.

  • Ann

    Seth, thanks for this. The best source for debt is the McKinsey Global Institute Report, 2010: Debt and Deleveraging. The global credit bubble and its consequences. . http://www.google.co.uk/search?rlz=1C1SVED_enGB410&aq=f&gcx=c&sourceid=chrome&ie=UTF-8&q=McKinsey+Global+Institute%2C+2010.+Debt+and+de-lev

  • If you ( everyone) understood that all this money never existed it would be a different story altogether, the problem is that as this money disappears ( whether by paying it down or writing it off the coming years will require the austerity unimaginable proportions . The governments will fail, the governments will fall and the people will starve, as the economies will grind to a halt. It was all predictable, but everyone wanted all the toys, and no one cared. Either way, those who created this imaginary money will have to win to let us live, as I said in 2004, we are being sold in to slavery we just don’t know it yet. say this, but I told you so, tombstone001.blogspot.com

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