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.

George Osborne was presumably aiming at himself and his friends, when he vowed “to speak truth to power and wealth” at the Tory party conference this week, but dare he speak economic truth to the rest of us? – simultaneously published on Left Foot Forward >

On the narrowest of bases, he might still claim he spoke “truth” to the weak and powerless when in the House of Commons debate on the economy on August 11th he made this challenge:

“Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year?”

It was a ‘brave’ claim when he made it, and it’s looking even ‘braver’ – and more disingenuous – now.

Following very recent revisions to US and UK data on GDP for the first half of 2011, the position is as follows, broken down into different quarters:

UK growth:

Q1    +0.4%   (revised down from the previous +0.5)

Q2    +0.1%   (revised down from the previous +0.2)

Total: +0.5%

US growth:

Q1   +0.1%

Q2   +0.325% (revised up from 0.25%)

Total: +0.425%

So by the triumphant margin of 0.075%, taking the period in total isolation, Osborne just scrapes home. But this ignores the fact the UK quarter 1 figure of +0.4% followed the disastrous Q4 figure of -0.5%, compared to US Q4 growth of more than +0.5%.

Without this Q4 quirk, his tenuous case would collapse.

For when we compare the US and UK over the last three quarters (including Q4 2010), we find that the US grew by 1%, whilst the UK grew not at all. A difference of one per cent in favour of the US economy.

And over the 12 months to the end of June, i.e. the lifespan of the coalition government, the US rate of growth is likewise 1.0% greater than in the UK (US 1.6%, UK 0.6%).

Taking the last 18 months, we get the following medium-term picture:

US:

2010                        +3.0%

2011 first half         +0.4%

18 months               +3.4%

UK:

2010                        +1.4%

2011 first half         +0.5%

18 months               +1.9%

In other words, the US economy has grown by 1.0% more than the UK over the last 12 months, and 1.5% more over the last 18 months, to end June 2011.

The US has many problems, but it has applied some meaningful, if now fading, stimulus.

So if George Osborne really does wish to speak truth, to power and wealth, and to the rest of us, let him own up – it is simply not true the UK’s austerity-based economy has grown faster than the USA’s. On the contrary, coalition government policies have led us deeper and deeper into the mire of unemployment, bankruptcies and economic stagnation.

Newsnight’s Jeremy Paxman posed a question to the panel, which included Lord Lamont, ex-Chancellor, and Irwin Steltzer. He asked: is George Osborne a radical Chancellor?”

Radical, according to the dictionary definition means: “desiring or advocating fundamental or drastic reforms”.

I argued that George Osborne is not a radical. Far from it.  His imposition of austerity, in my view, punishes the weak and rewards the strong. No change or reform in that. Instead the government’s central economic strategy is aimed at appeasing the financial markets, in particular the international bond markets and ratings agencies, irrespective of the implications for an already severe unemployment situation, or for the wishes of the British people. In doing so, George Osborne follows a long line of predecessors in putting the interests of finance before the interests of society as a whole. In this respect, he is no radical.

The true Conservative radical, I argued, was Anthony Barber, Edward Heath’s Chancellor of the Exchequer from 1971-74.

The relentless process of financial liberalisation that is finally unwinding in such a brutal manner across the globe, was really set in motion on Barber’s watch (although his Labour Party predecessor, Roy Jenkins, had actually done much of the preparatory legwork.) This happened as a result of a specific event: the introduction of  ‘Competition and Credit Control’ – a strategy devised in the Bank of England to remove direct controls and hence free up lending (and the price of lending) and instead use only the Bank rate to regulate the whole financial system.

Implemented at the same time as the Bretton Woods Agreement was unilaterally dismantled by President Nixon and the US Treasury, the result was one of the greatest explosions of credit in banking history. Yet despite the inevitable onset of inflation in the 1970s as a result of this revolutionary experiment, and despite the social and political upheavals caused by that inflation (repeatedly blamed by economists on workers and trades unionists), each stage of financial liberalisation was regarded as a cue for further liberalisation. Jeffrey Howe and Nigel Lawson in particular contrived to unravel particular restraints on the finance system in place since the aftermath of the Great Depression.

While George Osborne made a populist appeal in his 2011 Budget Statement, for the

“rest of the country to become advanced leaders in …advanced manufacturing, life sciences, creative industries, business services, green energy and so much more”

he continues to desire for Britain that

“the City of London (remains) the world’s leading centre for financial services. ”

The two are mutually exclusive. The rise of the financial sector has coincided exactly with the decline in manufacturing.

Turning back the clock a little we can seek out a genuine candidate for true radical: Winston Churchill. Writing in 1924 he understood that the interests of the finance sector and manufacturing/creative industries/business services were different and conflicting.

“I would rather see finance less proud and industry prouder”

he wrote then. But Churchill was persuaded by financial authorities in 1924 not to go with his instinct, and instead to return Britain to the gold standard -  at the behest of the finance sector. He was to gravely regret his decision, which proved disastrous for the British economy.

As we have repeatedly argued, the present fiscal crisis is a consequence of first the cost of rescuing and subsidising the financial sector; and second: the cost of the subsequent rise in unemployment.

To pretend this crisis is one of the public sector is not radical, it is deceitful.

To meet the crisis with austerity, is not radical: it is foolish and even reckless.

But unsurprisingly there is no shortage of foolish and reckless Chancellors. According to this yardstick, George Osborne is most like Phillip Snowden, the ill-fated Chancellor of the Exchequer in the Labour Government of 1929-31. Snowden attempted to recover from the Great Depression with a policy of austerity. As a result he not only intensified and prolonged the most severe unemployment crisis in the UK’s history, but also caused public debt to rise. Then he commissioned an actuary, Sir George May, to recommend even more severe cuts.

The Labour government imploded.

This week, the OBR’s increased estimates for public debt outcomes– despite spending cuts, or in our view, because of spending cuts – indicates that George Osborne is following the same policy path as Philip Snowden. It will be a matter of time before we discover whether his government goes so far as the 1929-31 Labour government.

Only when the policy of austerity was eventually revised by his successor Neville Chamberlain, did the economy – and the public debt – begin to recover.

The truth is most Chancellors are only radical in a counter-revolutionary sense. They erected and attempt to preserve a system based on financial authority.

The true radical Chancellors were those who first overthrew this brutal and unjust doctrine. History is replete with examples on both the Tory and Labour sides, of Chancellors who took a stand against finance. But those who did so most decisively were Hugh Dalton, Sir Stafford Cripps and Hugh Gaitskell, the Chancellors of the post-World War Two Attlee government. They nailed their colours to the mast in their paper: “Full Employment and Financial Policy” (not available on the web, sadly.) In that paper they argued that “finance should be the servant not the stupid master….” of the economy. That  “blame for unemployment lies much more with finance than with industry.”

Building on the system constructed under Keynes’s direction during World War Two (and Tory Chancellor Sir Kingsley Wood deserve an honourable mention here) the Labour Chancellors set a financial policy that underpinned a genuine economic and social miracle, the New Jerusalem as it became known.  (For more, read Douglas Coe’s piece here.) It is no coincidence that Clement Attlee is repeatedly regarded as the most successful Prime Minister in British history.

To return finally to the Newsnight studio, Norman Lamont, currently a director of the hedge fund RAB; ‘a director of a number of investment funds’ and an ex-employee of Rothschilds, challenged repeatedly the idea that the finance sector had received any special treatment. He sees finance’s pre-eminence as a natural outcome, and therefore not to be disrupted by external influence – i.e. non-market forces. Unfortunately the feature ended at that point, with only my gasps of astonishment audible.

I hope the above makes clear that nothing could be further from the truth. There is nothing natural about the rise of the finance sector. It is a sector that needed Anthony Barber’s help with ‘Competition and Credit Control’ – to be rid of the restraints and constraints that enable finance to gamble, speculate and ultimately destroy economies. They continue to demand that freedom to do as they please not just from Chancellors, but from society as a whole.

And we, as a society, have granted them that reckless freedom.

Since 1971 finance has constantly benefitted from extremely special treatment; including the most extraordinary government subsidies and guarantees. This special treatment, these subsidies and guarantees have not been granted to industry. And yet one Chancellor after another has persisted in giving preference to finance. As a result – and I write this with total conviction – the world economy and society has been degraded to an extent that most of our policy makers simply cannot recognise; in ways that are simply not visible to the many smug and complacent members of the British establishment.

As in the 1930s and 1940s, genuinely radical policies are the only possible solution to today’s crisis. Sadly, with the honourable exception of one or two politicians, including Caroline Lucas MP, there are no radicals in the House of Commons. That may just reflect the fact that society has been quiescent in a project that has made finance master to our economy.  But there are signs, including the promised numbers at the TUC’s 26^th March demonstration – that society is beginning to understand the harm done to individuals, households and firms, and to our ecosystem -  by Chancellors too timid to challenge the City of London.

With a backdrop of bankers looting the EU’s Treasuries (via a bailout that rivals George Bush’s TARP) let us consider one of the most significant Dem-Con appointments (and a non-appointment) to the British cabinet.

That of someone who until now was invisible: David Laws the new Chief Secretary to the Treasury.

His Wikipedia profile (updated on the day of his elevation, and before he had taken up his ministerial responsibilities) depicts him as the man that speaks for his party on matters relating to kiddie-winkies and families and, no doubt, motherhood and apple pie.  He is also commended for his conciliatory role in negotiating the Scottish Parliament coalition.

No mention here of his real background.

For, according to ePolitix, David Laws was once Vice President of JP Morgan and Co and based in the United States, before becoming Managing Director of Barclays de Zoete Wedd in 1992.

Now, in my book the most obvious candidate for the job of Chancellor, or Chief Secretary to the Treasury,  was surely Vince Cable, a man credited for his prescience in predicting the financial crisis, respected for his ongoing analysis of that crisis and regarded as a “scourge of City ‘fat cats’.”

Why was he shunted across to the toothless Department of Business, Innovation and Skills? And why was a man who until now has had absolutely no record of speaking out on the financial crisis, elevated to a powerful post at the Treasury?

Could it be that Vince Cable is unacceptable to the City? That he was likely to threaten the oligarchical role of the British banking community, and their grip on the UK Treasury?

Evidently so. What else can explain the Financial Times’s headline (under a picture of David Laws and the Old Etonian) “Coalition softens stance on banks” (FT 13 May 2010).  And the comment that “proposals for banking reform announced by the new coalition government appear to take a much more measured approach to the task of reshaping Britain’s bloated banking sector”.

So be afeared.

While most economists recognise (as does the FT’s Martin Wolf) that “the source of the government debt…. is the past profligacy of large segments of the private sector, and in particular the financial sector.” (FT 12 May 2010) yesterday’s Dem-Con coalition statement argued to the contrary. Government debt, according to our new political masters, is the result of “Labour’s financial crisis’ – with the City of London blanked out.

This framing of the debate is deliberate, and Labour was profoundly unwise, and irresponsible, for allowing it to pass unchallenged during the election campaign.

Because this devious framing of the causes of the financial crisis was at the heart of the Conservative election campaign strategy. And even while the Tories hid George Osborne away in a cupboard for the full duration of the election campaign, the framing of the issue remained central to their strategy. The role of the City of London was completely ignored, and the entire financial crisis laid at the door of the government, and the innocents dependent on, and working for, the public sector.

It was the most dishonourable and deceitful sleight of hand in modern British politics, I would contend.  And sadly, both Labour and too many of the British public bought into this framing of the debate.

So the ground is now laid. Bankers are preparing to move from looting Treasuries in the US and EU – to once again looting the British Treasury.  And as Michael Hudson argues, to shift the burden of taxation from property and finance – back on to Labour.

Less public money spent on welfare and jobs, means more money for bank bailouts.

Labour’s claims for jobs, for healthcare and pensions will be subordinated to claims by the banks “to get fully paid on hundreds of billions of dollars of recklessly bad loans… reduced to junk status.”

With a totally inexperienced and economically inept Old Etonian in charge: with David Laws playing the role of decoy in this proposed Great Bank Robbery, and aided and abetted  by subservient economists, the Treasury remains within the firm grip of Britain’s most powerful oligarchy.

What is at stake is not just ‘savage cuts’ inflicted on the innocent and the vulnerable, shocking though such an injustice will be.

What is at stake is nothing less than Britain’s democracy, and the peoples’ right to control over the nation’s finances.

At the end of last month I delivered the prestigious EBOR lecture at York. My address was entitled:

“Credit, usury and political power: chasing the moneylenders from the temple that is our democracy”

Click on the link below to read a PDF version of the full lecture:

EBOR Lecture November 25th (PDF)

It has been an extraordinary day this day, and something to witness: this frenzy of pre-election fisticuffs.

Extraordinary because Conservatives, like mindless bullies, are fighting a phoney war against the victims of this crisis.

The fact is the Tories are spineless scaredy cats, too timid to take on the perpetrators, who have successfully bribed them with various inducements, including the playground’s shiniest marbles.

As a result they have turned away from the perpetrators, and   are picking on nurses, policemen, teachers, civil servants, Alzheimer-carers, school cooks, hospital cleaners and psychiatrists – to categorise but a few.

All these victims of the financial crisis now stand accused – by the Tories and their friends -  of pillaging Treasury coffers of £250 billion  – the rise in government debt since this crisis started in 2007.

In the schoolground-type frenzy that has ensued, the Tories have been joined by most mainstream commentators including the BBC’s Stephanie Flanders and Robert Peston whose analyses are happily amplified by the smug and largely economically illiterate guests invited on to Newsnight.

Vainly they call for reinforcements – from the Ratings Agencies who have steadfastly refused to join in the bunfight, but whom the bullies claim to have on side.

Then as the dust flies and the victims scream for help, Labour and the Liberal Democrats pile in – like the nervy boys in a class hovering around the school bully as he beats up on innocent, if puny weaklings.

The Tory tactics are clear and were best expressed by Gerry Robinson on Newsnight on Tuesday 8th December.  Government spending on the public sector must be slashed. (They never attack government spending on the private sector – i.e. £400 million on the ‘cash for clunkers’ scheme that went straight to the private car companies.)

The civil service and public sector must be decimated, and at least another million workers forced onto the dustheap of unemployment.

The City of London – the big bad bully that has wrecked the playground – must be defended against all those puny weaklings – and from what Mr. Robinson petulantly called ‘spiteful populist attacks’.

Let’s remind these bullies and their minders of the facts.

Britain’s annual income is about £1,450,000,000 – £1.45 trillion.

According to the governor of the Bank of England, the taxpayer has provided about £1 trillion of that annual income to a tiny elite in the finance sector – in bailout resources.  These are not just taxpayer funds – they include the BoE’s generous liquidity injections and the Treasury’s guarantees to the finance sector.

By contrast the government’s deficit for this year is 17% of that: about £175 billion – due to rise to £178 billion.

When this crisis started government debt (i.e. the stock of debt, accumulated over time, not the annual flow of income and payments – the deficit) stood at a very reasonable 37% of GDP – and amounted to £650 billion.

Today, two years into this financial crisis, government debt has risen by 20% – that is by £250 billion.

£150 billion of that rise in debt is directly attributable to the bailout of the finance sector, including the financial rescue of banks like RBS, Northern Rock and Lloyds – according to official statistics. The rest can be attributed to the costs the government is incurring in cleaning up the mess – paying unemployment benefit, providing fiscal boosts etc.

So the rise in the government debt and the rise in the annual deficit – is directly attributable to the profound economic failure brought about by the financial recklessness and greed of a small elite in the financial sector – and their cheerleaders in governments and regulatory institutions.

As a result of that economic failure the Chancellor announced today that Britain’s GDP had contracted by 4.75%.

In the playground that would be called by its real worth -  £69 billion.

In addition investment has collapsed by 13.6% – roughly £30 billion – over this last year.

And consumers – who make up the bulk of Britain’s GDP (60%) – have cut back by 2.5%.

That sounds like a small number, but because the share of our national cake taken up by consumption is so big – 2.5% equals £20 billion.

Those numbers explain the massive ‘crater’ that has been bombed out of our economy by the finance sector.

A ‘crater’ of collapsed private sector output, investment, consumption, and rising unemployment.

A crater that cannot be filled by an over-indebted and comatose private sector. (See yesterday’s (8th December, 2009)  CBI and NIESR data).

The private sector is so worn down by the burden of its debt – piled on by banks and private equity companies – that businesses are not even asking for loans for new investment – they are relentlessly focussed on liquidating their debts.

Some – many – may not succeed, and may instead go bust.

So, because of its massive debts, and because of the slump in demand,  the private sector cannot compensate for the ‘black hole’ or ‘crater’ in the economy – only the government can.

Hence the really urgent need for government spending. And hence the disappointment in Alastair Darling’s timid budget – which includes plenty of cuts in government spending, and which bullied the innocents with the threat of another rise in national insurance taxes.

All of these political kids, fooling around in the political playground – have failed to understand the nature of this crisis.

It is a debt-deflationary crisis..as Irving Fisher so acutely explained……in which debts must be liquidated, which leads to distress selling (of property/assets/stock) – which in turn leads to a fall in prices. That then leads to a fall in profits, followed by a reduction in output, in trade and in employment of labour.

A fall in output, trade and employment leads to a loss of confidence, which leads to hoarding ‘and slowing down still more the velocity of circulation’.

A fall in output in a welfare state economy, leads to a fall in taxable income (income tax, VAT, national insurance) no longer paid by the unemployed, and to a rise in welfare benefits paid.

And it is this fall in tax revenues, exacerbated by rises in unemployment benefit spending – added to the massive costs of bailing out the finance sector (£150 billion) that explains why the government’s debt and deficit has risen.

This collapse in prices and liquidation of debt then causes ‘complicated disturbances in the rates of interest….in particular, a fall in the nominal, or money rates and a rise in the real, or commodity, rates of interest.

That, and not the ratings agencies, is what we must fear most of all.. The impact of a debt-deflationary crisis on interest rates….

Compared to that threat, dealing with the bullies in our political playground will be a pushover.

Dan Roberts has a great column in the Guardian today. He asks the right questions. First, why is the Treasury spending £8 billion of taxpayers money reinflating the housing market? Second, why is the Treasury encouraging this now nationalised bank to increase mortgage lending, when the productive sector of the economy – companies, small businesses et al – are being starved of loans from taxpayer-bailed-out-banks, or else having to borrow at usurious rates?

A superb report from the Centre for Research on Socio Cultural Change at Manchester  (“An alternative report on UK banking reform”) suggests the answer: The nationalisation of Northern Rock is being treated as an “equity style turn around”, with the overarching objective of protecting and creating value for the taxpayer as shareholder.

“It is not clear whether the banks have been nationalised or the Treasury has been privatised as a new kind of investment fund.”

It makes perfect sense doesn’t it, given that the Treasury is advised on these matters (some would say it has been captured) almost exclusively by bankers? Get reading the CRESC report -its excellent -  the first piece of independent, academic thinking on reform of the banking sector to have crossed my path.

Watching our British politicians squabble and spin this last week over the Pre Budget Report – while Rome burns –  was depressing. Why are our politicians so off-beam? Why does their response to this crisis seem so petty and botched?

The answer may lie in their ties to the finance sector. The fact is we are experiencing what will be a prolonged Bankers’ Depression – born in the City of London, not in the US sub-prime market. Neither of our major political parties is willing to admit that; to analyse the crisis in those terms and therefore to lay the blame on the finance sector and to rein it in. They are too compromised.

If Britain were facing the threat of a foreign invasion, would the Conservatives hesitate to spend on defence? Have any balanced budget Tories suggested dropping Trident to bring down public spending?  No of course not.

And if this crisis is likely to be prolonged and grave, why is Labour’s Alastair Darling so optimistic, airily assuring us that the economy will be so improved in thirteen months time, that he will raise taxes? Does he not appreciate the scale of this crisis, which thanks to globalisation is now borderless?

One need only think back to events on an oligarch’s yacht in Corfu in which both political parties were implicated. Or to JP Morgan’s recruitment at just £2 million a year of a man until recently Labour’s Prime Minister. Or to Gordon Brown’s decision to bestow a knighthood on the man that carries a great responsibility for this crisis – Alan Greenspan. On 4th August this year Greenspan, writing in the Financial Times, celebrated the role that “Adam Smith’s invisible hand” has played in “quietly displacing government control of economic affairs. Since early this decade” he wrote “central banks have had to cede control of long-term interest rates to global market forces”.

In this last week, just three months after this was written, governments on both sides of the Atlantic used taxpayer resources to take government control of two of the biggest banks in the world – Citigroup and the Royal Bank of Scotland (RBS) – to protect them from the savage discipline of global market forces.

Politicians (and we Green New Dealers) will not be able to deal with this, or the climate change crisis effectively until the finance sector and its ideology is subordinated to society’s interests – and we regain control over movements of capital, the regulation of credit and interest rates.

Politicians have in turn, to abandon the certainties of orthodox monetary theory. Namely that money is a commodity, and that its “price” – the rate of interest – must be set by the private sector alone – through supply and demand for money in private markets for capital – just as the price of oil is set by supply and demand for oil.

This is a nonsense. We do not dig capital out of the ground, nor does it grow on trees. Money is man-made. Interest rates are a social construct. And as such, unlike oil or soya beans “there are no intrinsic reasons for the scarcity of capital” as Keynes argued in the General Theory. Because there is no reason for the scarcity of capital, there is no reason for the price of capital to be high.

If we are to emerge from this grave financial  crisis; if we are to finance a Green New Deal, we need to get a grip on the finance sector, on the creation of credit, on the movement of capital, and on the setting of interest rates. Until we, as a society acknowledge that, and begin to disarm the financiers, there will be little hope of the recovery Alastair Darling boasted of this week – or indeed of a Green New Deal.

Yesterday’s dramatic Bank of England 1.5% rate cut was an extraordinary admission of analytical failure. The Monetary Policy Committee of orthodox economists (with Danny Blanchflower the honourable exception) is well behind the curve. While it is tiresome to beat one’s own drum, I am obliged to point out that on the 12th July I wrote a short piece for the Guardian beseeching the Bank of England not to “sacrifice the economy on the cross of inflation targeting”. Today’s numbers from the Insolvency Service reveal that more than 4,000 companies have been sacrificed.  Company insolvencies have risen by 26.3% over a year ago, and by 10% over the last quarter. This represents the loss of a great deal of productive activity, and of thousands of jobs.

I do not have an army of economists undertaking research for me. Nor do I have the ample resources enjoyed by the Bank of England and the Treasury. And yet common sense, a cursory review of the direction of commodity prices, as well as a refusal to play the game of baiting workers demanding pay rises with threats of non-existent inflation – made the progress of prices perfectly clear.  Inflation rises in the Spring were not caused by wage demands, but instead by a spike in internationally-fixed commodity prices. The coming financial meltdown was soon going to dampen demand for oil and other commodities, and force those prices down again. In the meantime high oil and commodity prices were exacerbated by high real rates of interest. The combination was threatening the solvency of companies, households and individuals.That much was obvious to me. Why was it not obvious to the Bank of England and the Treasury?

But perhaps the most disturbing aspect of yesterday’s rate cut was the fact that it may not have any real impact on other rates within the economy. Private and nationalised banks are cocking a snoop at both the Bank of England and the Treasury, and both appear impotent. This is worrying. When governments appear to lose control over the economy, people look elsewhere for leaders that will exercise some control over the economic forces that impact so detrimentally on their lives and livelihoods.

The Bank of England and the Treasury’s ideological fixations and fetishes continue to worsen this crisis. Is yesterday’s dramatic rate cut a sign that Old Lady of Threadneedle St. might be catching up?  For the sake of us all, I sincerely hope so. But I fear it may be too late.