Photo by Maz Kessler
Joan Walsh of www.salon.com asked me some questions on Occupy Wall Street and wrote this article:
As the Occupy Wall Street movement spreads to dozens more cities and towns, it’s waking many Americans to the unrivaled control Wall Street exerts over American politics and the economy. It’s also shining a spotlight on the crushing amount of debt carried by Americans today – debt that’s at the core of our lingering economic troubles, which many experts believe can never realistically be repaid.
In 2007, American debt was 100 percent of GDP; today, after an austerity binge, it’s down to 90 percent, which is still a stunning imbalance. Almost a quarter of all home mortgages today are currently underwater, 2 million homes are in the foreclosure process – and at least 5 million homes have already lost to foreclosure since 2007. American student loan debt is over $1 trillion right now, higher than American credit card debt, with the average student leaving school with about $24,000 in loans.
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Published in the Guardian Cif alongside responses from Jonathon Freedland and Sheila Lawlor:
Ed Balls said sorry for Labour’s record on ultra-light-touch financial regulation, and that must be acknowledged.
But apologies are just not enough. He and Ed Miliband must stop attacking his electoral base, “hardworking families”, many of whom are trades unionists.
As Balls recognises, unless urgent action is taken, this may be the gravest economic crisis in history – given the global integration of finance and the growth of world population.
So Balls must go further.
First, he must declare loudly and forcefully that Labour will never again be captive to neoliberal central bankers like Alan Greenspan; or private bankers like Sir Fred Goodwin of RSB.
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By Ann Pettifor. An edited version of this piece was published on Left Foot Forward, 14 September, 2011. This original, longer version posted 19 September, 2011.
The game is up. The 2007-9 private banking crisis that started with the unpayable debts of the US sub-prime sector, was never over. The crisis has now moved on to include the unpayable debts of sovereigns owed to private European bankers. It is increasingly clear that there is declining political and institutional support for further private bank bailouts. The dramatic resignation on Friday 9th September of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal Euro.
And so the age of liberalised, de-regulated finance appears to be over – at least in Europe. That is the conclusion of investors in both Wall St and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds.
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It has been a busy week in Australia – I will be posting in more detail very soon. But for now you can listen to an interview with me on ABC Radio National Breakfast:
For any of you in Sydney – come along to the Catalyst event: ‘Making the boom pay… if not now, when?‘. I will be speaking along with others, more details are here:
Wall Street plummeted as concerns over European debt and the US economic downturn spurred a broad sell-off. Photograph: Shen Hong/Xinhua Press/Corbis
Read my article from Guardian Cif, Friday 19th August:
As bank shares and stock markets plummet, and investors flock to the safety of government bonds; as obstinate EU leaders crucify their countries in a futile struggle to defend today’s equivalent of the gold standard; as British and American politicians adopt austerity policies and drive their economies closer to the cliffs of depression; and as most professional economists stand aloof from the escalating crisis – what lies ahead for ordinary punters like you and me?
First, let’s take look at the big political picture. This crisis is already sharpening the divide between left and right in both the EU and the United States. Studying a precedent – the implosion of the 1920s credit bubble in 1929 – we note that four years after that crisis erupted, the political divide sharpened decisively. The United States and Britain moved to the left. Germany chose a different path. After 1930, Germany’s Centre party under Chancellor Brüning adopted austerity policies that resulted in cuts in welfare benefits and wages, while credit was tightened. At the same time the German government engaged in wildly excessive borrowing from the liberalised international capital markets. The ground was laid for the rise of fascism.
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Tonight, Wednesday 3 August 2011 at 08.00pm BST (GMT +1), BBC Radio 4 will broadcast a debate which took place at the London School of Economics (LSE) on 26 July. This broadcast will be repeated on Saturday, 6 August, at 10.15 p.m BST (GMT +1).
Along with my colleagues Prof. Victoria Chick and Douglas Coe at PRIME we have written the following response to the debate:
Debaters considered whether Keynes or Hayek had the solution to the present financial crisis. The economist George Selgin and philosopher Jamie Whyte spoke for Hayek; Keynes’s biographer Robert Skidelsky and the economist Duncan Weldon spoke for Keynes.
On the one hand we are pleased that the BBC and the LSE now acknowledge rival positions to the present austerity policies of Western governments. On the other we are concerned that the debate might have served mainly to reinforce existing prejudices, rather than to clarify the substance of the matters under discussion, matters which – there can be no doubt – are of the most profound importance.
Lord Skidelsky provocatively but justly reminded the audience that in the early 1930s, the same orthodoxy driving western austerity policies directed the actions of Germany’s 1931 Bruning government and paved the way for the rise of Nazism. These actions – vigorously opposed by Keynes – were the final straw for a Germany crushed by defeat and the disastrous boom-bust cycle that followed their return to the gold standard. Reparations were easily circumvented by wildly excessive borrowing from financial interests around the world, in a manner that even Keynes did not anticipate. It was these financial and fiscal policies that brought Hitler to power.
With financial interests still firmly in the ascendency and reactionary right-wing forces increasing their grip in the United States and much of the Western world, we must not forget these lessons from history, which formed the background to the original debate between Keynes and Hayek themselves. The stakes are high indeed.
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The austerity brigade is rattled. Young Daniel Knowles over at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and Office for Budget Responsibility – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ that notorious womaniser, President Bill Clinton.
Bill gets it. On the deficit that is. Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s speech:
“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”
Daniel Knowles challenges his hero, on these grounds:
- “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
- “The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update: I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.)
- Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.
The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.
So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ – say the government invests £1 billion in libraries. What would happen next?
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Bernard Madoff’s 90ft yacht ‘Bull’ is offered for sale in Monaco for €3m this week. Image source: associated press.
I learnt to my cost that the role of Cassandra is no fun. Why “Apollo’s cursed gift is a source of endless pain and frustration.”
While it is possible to note that the ‘tectonic plates’ of the financial system are shifting and that those shifts presage a ‘financial earthquake’…unless one can get the timing of these things right – one’s insights are, rightly, scorned and ridiculed.
But I am now more attuned to the signs.
In the run-up to the 2007-9 crisis advertisements for yachts started appearing in the FT’s ‘How to Spend It’ magazine. First, there were one or two. Then more. Then they expanded and became double-page spreads. The vast backgrounds of sea and sky, set against the shiny white of the boats were blinding to the casual, disinterested reader. But as the credit-fuelled asset bubble expanded, text on these glossy ads disappeared. There was just the sea, the sky, the vast burnished white boat and some numbers: $7 million.
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I thought long and hard before refusing to sign the letter calling for a Plan B. Not because I do not think it is urgently required. But because the letter called for “clamping down on tax avoidance and evasion, as well as by raising taxes on those best able to pay.”
It goes without saying, I hope, that of course I support ‘clamping down on tax avoidance and evasion’ – but do not support ‘raising taxes’. I had asked the originators of the letter if we could debate this point, and later the words “those best able to pay” was added, without informing me. Even then, I may not have signed it. The fact is that with the UK’s rate of unemployment; with businesses facing a very hard time because of the rise in VAT and the cuts in government spending, and with banks effectively refusing to lend to SMEs and others (except at very high rates of interest)….this would not be the moment to raise taxes.
But I want to make a bigger point. By calling for taxes to be raised, the letter implicitly suggests that the deficit can be financed through increased taxation. In this sense, it echoes the orthodox line: that government expenditure is like a personal or corporate budget and that ‘savings’ (i.e.cuts or increased taxes on e.g. VAT) have to be found to finance it. That ‘we cannot afford to spend’. That the ‘money has run out’ and we need to find more – from somewhere, preferably taxation.
I strongly disagree. First, to reiterate: the government’s budget is not at all like individual, household or corporate budgets. Individuals cannot engage in ‘quantitative easing’. The Bank of England, on behalf of government, can, and indeed has done so, in order to support the financing of the UK government’s deficit. Individuals and corporates do not necessarily generate income from spending. The government can generate income from investment in public works. It’s a form of income called tax revenues. Third, individuals and corporates can go bankrupt. The government cannot – not even Zimbabwe.
Given these facts, the best way to finance the govermemt’s budget is by increasing, not cutting, the government’s income – from increased economic activity. In this sense we can make a comparison between governments and individuals: as Prof Chick and I note in our latest update of “The economic consequences of Mr O” –
“Just as work makes things affordable for an individual, so too for society. A nation’s prosperity follows from its employment, not the other way around.”
What the VAT rise and cuts in government spending do, is to cut economic activity – and therefore employment – and with it income from economic activity for the government.
And this, I fear, is what raising taxes would do too. And I do not want to be party to that.
Apropos the last post: we dissidents are not alone. Have belatedly come across David Malone’s excellent post (written earlier but somehow missed by me) on the same theme – the airbrushing of the financial crisis from all political discourse. David goes further and highlights the implications for democracy and the rule of law. I hope he does not mind if I reproduce a few paragraphs for the benefit of those that have not already read it.
It really is very good.
“The official narrative today is that the plan of recovery is working. The narrative focuses on the rise of the stock markets to almost pre-crash heights. The failure of housing or commercial property markets to recover and the fact that unemployment is hideously high is simply no longer part of the recovery narrative. These things have been dropped. What has been added has been the ‘shocking’ level of public, national debt. In the new narrative the cause of the ballooning of public debt has been steered away from facts about the cost of the bail outs or how the disintegration of the speculative bubble caused a subsequent collapse of real economic activity. The new story is that the debts we have now are nothing to do with the banks and their temporary difficulties. They are due to a deeper incontinence in public spending.
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