Banksters' Paradise

Alastair Darling's Mansion House Speech last night was intended to be the last word on the financial crisis and that word is: complacency. Apparently there is nothing wrong with the system of banking regulation. The intervention by the Mervyn King indicates that, for once, there is a split between the economists and the politicians: Darling dare not challenge the power of the banks, but King recognises the danger of their supreme power in the economy.

There is an important sense in which the Darling of the city is right: regulation is not the point. The banking system was designed to enable a small number of people to profit hugely from the economy while the rest of us labour for a shrinking share of resources. The system of regulation did nothing to prevent that; but then it was not intended to. The boom and bust that has been so spectacularly played out over the past year is not a temporary aberration; it is symptomatic of the economic system we live under.

It can't be a coincidence that Obama ,made his announcement about changes to the regulation of the US banking system on the same day. And here we see that, contrary to our preconceptions, there is a stronger sense of resistance to corporations (or 'trusts' as they were historically called in the US) on that side of the Atlantic. The attempt to begin to control the derivatives market is a small gesture in the direction of actually retaking political control over this most wayward section of economic life.

The cause of the financial crisis was the absence of any sort of democratic control, any representation of the views of the citizen, in the banking sector and this has remained unchallenged. Neither the FSA in the UK nor the Fed. in the US has any accountability to citizens. This is internal regulation within the financial elite. It is leaving power in the hands of exactly the same bodies that failed to prevent the crisis this time around. It is a refusal to question the nature of financial organisation under capitalism.

In a sustainable and just economy banking would be a peripheral rather than parasitical activity. Money would be created to faciliate exchanges. It would be impossible to use money to make more money, which is the source of our current woes. Nothing teaches this better than trying to create your own local currency, as we are here in Stroud. A real money system cannot work without a successful productive economy. Making money is easy, but in an economy that has lived parasitically off the rest of the world for centuries the next step, recreating living productive economies, is a seriously long haul. Tweet

Would you buy a used economy . . .?

I am faintly tempted to make some sort of connection between the budget and the scrappage scheme, which might get as far as a joke if it weren't such a desperately serious business. The blogosphere is full of confident experts selling their opinions but I feel fairly comfortable letting on that I don't really know what it feels like when your economy goes bust. Perhaps we should be looking across the Irish Sea to get a few hints.

As usual the main budget stories have been apolitical and have avoided the most important issue, but tucked away inside the Guardian we find an article that tells us what the financial markets made of it. They weren't impressed. The result was an increase in the cost of insuring UK debt, which is now considered riskier than that of Spain and almost twice as risky as that of Unilever or France.

On the one hand you might be tempted to laugh this off, given that the risk is measured in terms of the very credit-default swaps that got the global economy into this mess and by the people who considered Lehman Brothers in good health the weekend before it went bust. On the other, as in all matters of economic confidence, it is a self-fulfilling prophecy, since as our IOUs become riskier they become more expensive to sell. So we have to work harder to pay off the debt that was taken on in our name, and a default is more likely.

Meanwhile, reading between the news, we find that the 'quantitative easing' programme, where the government invents money and uses it to buy the national debt, is expanding to twice the originally planned level. So it is only the sleight-of-hand process of removing some of the unwanted debt that is keeping the price as high as it is. The interesting question for puzzled economy-watchers is how long this bizarre stealing from Peter to pay Paul can carry on? And who will take the decision to call a halt to the game? Answers on a postcard, or in a comment. Tweet

Busted Budget

This has been an extraordinary budget season. Our economic destiny for the next 50 years is being changed and, because of the way the red, yellow and blue parties have adopted mix-and-match policies in recent years, there is no real political debate. I was sorely disappointed by the Green Party's response, which focused on the £5bn. of investment in the economy and ignored the £175bn. of borrowing (itself a significant underestimate) which will really determine the future of the economy and of our society and environment.

There are three reasons why we must reject this level of government borrowing, and in fact the whole system of money creation based on debt. The first is that it is socially unjust: it operates as a means of transferring wealth from working people who pay taxes to those who live from investment earnings. In order to buy government bonds you need to have spare money to invest, but the interest that they return will be paid by those who earn their money through work.

The role of public debt in enabling a transfer of wealth from poor to rich is sufficiently routine after 300 years to raise no qualms, but the less advantaged in our society will surely notice the pressure of the debt that Labour has taken on over the past year through increases in taxation and reductions in public services, which will combine with the rises in unemployment brought by the Recession. We already hear rumblings from union leaders. Dave Prentis’s ‘carats for the rich; the stick for the poor’ speech is only the beginning of a return to the conflictual politics that massive borrowing makes inevitable. Unless the policy is changed we face a period of social unrest and community breakdown that will make the 1970s look like Blue Peter, and perhaps an even more right-wing political backlash.

The third reason to oppose a debt-based economic policy is that it creates an in-built pressure on the planet and its resources. When the government creates money through issuing bonds it creates a parallel future demand for goods and services—goods and services which can only be produced using energy and resources. So the system of paying for future consumption by public debt, just like the system of creating money as private debt, is the central cause of exponential economic growth and the environmental destruction it brings with it. Building up an ecological debt that is far more serious than a mere balance-sheet.

So what is to be done about this fine mess that capitalist economics has gotten us into? If we begin from the understanding that the debt is unpayable, then our only alternative is to bring the debtor and creditor nations together for a negotiated round of debt forgiveness, a global jubilee. Without such a deal the decade ahead looks grim as we face internal unrest over the struggle for diminishing output and trade wars and possibly worse abroad. Rather than reliving the sad history of the 1930s Depression and the Second World War, we could just fast forward to Bretton Woods and negotiate a stable and balanced financial architecture based on the abandonment of the reserve currency system and a trade system that treats all the world’s nations fairly. Tweet

Ooh, give me some more pain, darling

I enjoy discussing a conspiracy theory over a pint as much as the next person and, given the shallow and irrelevant nature of most media chat on issues of importance, one can only gain a sense of what is really afoot from trying to read the clues. I would condemn this as undemocratic and unaccountable government in normal times, but just now I am seriously hoping that what we see is not going to be what we actually get.

Apart from the concern about paying the money back, it seems a strategy that is highly likely to fail in its own terms. How many of us feel inclined towards a pre-Christmas splurge this year? Isn't it much more likely that we'll save the money? Rather than encouraging consumption, investment in a low-carbon economy a la Green New Deal would be a strategy worth getting into debt for.

The only justification for racking up spending at the rate we are expecting this afternoon is to keep an unsalvageable system on track for long enough to put something better in its place. The media tidbits about higher income taxes in the future are window, meant to conceal and to impress those amongst the electorate who have longed to see new Labour give some indication that it still represents the have-nots more than the haves. The level of revenue it is likely to accrue for future spending is a pathetic £2bn. and can make no difference to the big picture.

As I blogged previously, what happened in Washington ten days ago was equally meaningless. In this case window-dressing to impress the punters that the big players were talking to each other, and were agreeing, and that they could really make a difference. Hence the Nuremberg-style backdrop: negotiation to impress rather than to make any serious plans.

But I really hope serious plans are being made somewhere. Given the dire situation we are in even a completely undemocratic and secretive policy-making process would be better than the economic freefall and possible social breakdown that is threatening. Gordon Brown might be the person to lead this debate - a politician with a good grasp of economics is valuable in such a crisis. If we see other governments following a similar finger-in-the-dyke strategy to our own Darling's after today then I think we can assume that this is the case. We can hope that a longer-term plan is being assembled and we can do our best to democratise that process by debating our own plans for a steady-state and sustainable economy in pubs, on buses and in any media to which we have access. Tweet

Gordon is Not a Moron

On Monday Alastair Darling will announce his plans for borrowing. He will be quite explicit in his hypocrisy. All the ideological ranting we have listened to for the past 40 years about how spending would destroy the economy has suddenly been abandoned. Was it wrong for all those years? Or is our economy so close to collapse that all the rules we have lived by can be gleefully abandoned?

The scale of borrowing is set to exceed $100bn., which is three times more than the government predicted. What are we to make of this? How can we possibly take any more of those projections - neat lines of exactly 45 degrees on x-y axes - seriously ever again? It is quite clear that the government economists are not in control and don't know what they are doing.

So what are the economic rules for? One begins to suspect they may be made up to find excuses for not doing what the people in the democracy demand. Want a new hospital funded from government spending? Sorry, we can't possibly borrow more than 40% of GDP. Could we have more investment in the railways so that people have a serious alternative to driving? Can't do that because we can only borrow to invest.

It all turned out to be nonsense. Because when it looks like a situation might arise where really radical economic change is called for, any amount of money can be borrowed to ensure this doesn't happen.

When this level of borrowing was first mooted I remember waxing biblical and wailing about the debt hanging around our descendants necks unto the tenth generation. I thought I was being rhetorical, but the size of debt we're talking about raises questions of intergenerational equity in financial, not just planetary, terms.

What is our chuckling ex-chancellor thinking about all of this? I have a sneaking suspicion that he may have been expecting it just like I was. Is it just possible that he is deliberately provoking this massive indebtedness to force us towards the grand jubilee, the wiping out of all national debts, and the road to the New Jerusalem? Tweet

Credit crunch for breakfast?

This is obviously a cereal that will run and run. Robert Peston reports that he expected the banks to be too proud to ask for government money. I’m rather bemused about how he might have formed this opinion given their recent behaviour. Fawning over the hand that feeds has been more the style amongst financiers of late. Darling is quite rightly resisting giving any more public money than is absolutely necessary, hence his piecemeal rather than global rescue strategy. The pundits who are calling for total guarantees and US-style largesse should be reminded that it will be their grandchildren who will be paying off these debts, just as we, the grandchildren of the 1930s, only finished repaying the wartime debts to the USA last year. I wonder if there is a connection there?

The real policy question is why any Chancellor should shovel money into the gaping maw of the banks where it will serve no purpose but paying off their debts. They have provided an effective distraction by arguing that without their finance the real economy would seize up. But our primary attention should be focused on that economy, the one where people actually make stuff and do useful things. There is no reason to use the banks as middlemen.

The banks’ lack of concern for the real economy is shown in their profiteering from the difference between the bank rate and the rates of interest they charge to businesses. This is now the only way banks still have to leverage money out of the economy and their use of it will rapidly increase the number of businesses going bankrupt. They are using the same tactics on mortgage-payers, which will cause an increase in foreclosures and damage the housing market yet again. Far from being the saviours, the banks are shown again to be the destroyers of the economy.

Darling’s plan should focus on the small businesses that provide 99% of the employment in this country. He should establish an ‘Economy Saving Bank’ (literally!) and use taxpayers money through that route to be channelled into business lending. Does this begin to seem like political management of the economy? Might I be the first to mention that unspoken phrase ‘credit controls’? If money is in short supply it seems only sensible to ration it. Those who need to borrow can justify their right to the shrinking pot on the basis of their usefulness to society. My guess would be that in any democratic system the banks would come rather low on this list at present.

Thanks to the Green Bean Counter for the joke and to Lew Rockwell for the cartoon. Tweet

Credit Crunch or Debt Swamp?

The much-discussed interview with the Chancellor published in this morning's Guardian is intriguing. It is so unusual for a politician to be this honest, or for anybody involved in the neurotic world of finance to say anything even slightly negative, that his assertion that this may be the worst economic crisis for 60 years is very unusual indeed.

The first question is, why on earth did he say that? Rapidly followed by the second: why choose the post-war period to compare with, when the economy was on its knees because of over-exploitation and exhaustion rather than a long debt-fuelled binge. A devastated economy is not a problem, so long as you have able and active people and sufficient resources to rebuild what has been destroyed. An over-indulged, greedy, wasted economy, still leeching off a munificent but abused planet is another matter entirely.

Honing our skills for reading between the news might help to explain what the Chancellor is up to here. Is this the first step towards a 'we're all in this together' approach to economic management, which will involve us all tightening belts, accepting a reduced standard of living, and co-operating rather than competing for once?

This is just the sort of approach a Green chancellor might have to adopt. However, it will never work unless the Chancellor has the courage to reclaim the power of economic management, and especially the finance sector. This power was ceded by the Thatcherites, with New Labour joining in to prove to the City that they were no threat. In the austerity scenario Darling may have in mind, the reduced standard of living would also have to take us to a future of equality--so no good the ordinary employee living on less while the elite can still sup champagne and enjoy foreign holidays.

Most interesting of all, perhaps, is the Chancellor's admission that he did not expect the bubble to burst, or, in his words, 'No, no one did. No one had any idea'. Well that isn't strictly true. In the circles I move in the crash had long been predicted. Could it be that what the Chancellor had not understood is how money is made as debt and how insecure this makes us all? Has he learned that lesson now? Is there any prospect, then, of not only banking reform but even monetary reform?

For those who have been wondering where I have been for the past month, I can let you know that I have been enjoying an enforced absence from cyberspace, thanks to the utter inadequacy of BT, the telecommunications monopolist. While I don't use them for either phone or internet services, they can still manage to make it impossible for my ISP to restore my Broadband. This post has been made via a dial-up connection--hence no pictures. Normal service will be resumed whenever BT can be persuaded to wander to the local exchange with a screwdriver. Tweet