The Financial Fuck-Up by Robin Ramsay
I haven’t blogged for a while because…..because the only item on the agenda is the financial fuck-up and I’ve been preoccupied trying to read about and make sense of it. (The Internet is wonderful and terrible at the same time: more than enough information rapidly becomes far too much information.) But here some more or less random thoughts on the present chaos.1. None of this is a surprise. The mountain of debt encouraged by central bankers in American and the UK was bound to topple over at some point. Bubbles always burst. Lots of people have been sounding loud warnings but to little effect.
2. The current mess resembles the Nick Leeson/Barings affair: senior management had no idea what the drones on the dealing floor were doing but didn’t care as long as the profits rolled in. When it went wrong they simply didn’t know what had been going on.
3. Most of this mess is a consequences of computers. Without computers much of this elaborate trading could not be done. I read one account which compared the present situation with The Invasion of the Body Snatchers: the pods have opened but they contained not aliens but computers…
4. So complex is the web of trades, futures, derivatives, no-one has any clear idea of which bank is in the shit and who is trustworthy. The result is that all banks now assume that all other banks are about to go bust and the result is the credit freeze.
5. In the country the one step the government could have taken but didn’t to loosen up the housing market was to pump money into the remaining mutual building societies.
6. I knew the world had changed when Gordon Brown talked of nationalising Bradford and Bingley. When Northern Rock was more or less nationalised, that N word was studiously avoided by Brown and Darling. I presume the change of vocabulary has been prompted by polling which tells them that the punters like nationalisation again (at least where the security of their deposits is concerned).
7. The mess is entirely the fault of the politicians: they set the rules by which the moneylenders operate.
8. No-one on the government side of the Commons seems to have any economic knowledge. Brown, Darling, Yvette Cooper and the other minor Treasury figures seem utterly at a loss. And well they might: the world they have built – or allowed to be built in the City – is crumbling before their eyes. Will they return to their old world-view? No they won’t. That’s the meaning of the return of Peter Mandelson: he was one of the pioneers among NuLab figures in advocating globalisation (which in UK terms means doing whatever the City wants) and his return means we are going to have the same old same old but with some tweaks and lots of stupid Brownian rhetoric about the need for global rules.
January 2nd, 2009 at 1:56 am
In light of Britain’s Banking Crisis and recalling your analysis of New Labour and the City in the Prawn Cocktail Party, I was prompted to look around for your more recent writing. I did stumble across an old piece for ‘Variant’ with some choice quotes from Alistair Darling.
Perhaps it’s worth revisiting now that the potential losses on the banks’ derivatives trading has led him to part-nationalise them and transfer their liabilities over to the public exchequer — to be extracted by taxation on workers and productive industry, whilst commerce based on consumption collapses.
Over the course of New Labour’s decade, high interest policy described in the article changed towards a cheap money policy which propelled rampant asset price inflation, and the collapse of that bubble has prompted bi-partisan support for state intervention to prop up market values (esp. housing). Externally, these market interventions have been balanced by a passive devaluation of sterling of around 30%.
This was part of the the Variant piece:
http://www.variant.randomstate.org/pdfs/issue6/unclesam.pdf
‘Uncle Sam’s New Labour’, Variant magazine, Autumn 1998:
…
A fatal inversion?
British politics has been stood on its head. The Conservative Party, traditionally the party of financial and overseas interests, has been replaced in that role by Labour. Instructed by its new friends in the City, Labour has become the party of financial, pre-Keynesian, orthodoxy. Gordon Brown looks determined to re-enact the role of Philip Snowden in 1931–the perfect Labour Party front man for the interests of the overseas lobby. The last three years of the Major regime saw Chancellor Kenneth Clarke running the kind of orthodox demand management policy — increasing government deficits in response to the recession — which Labour, under Wilson or Callaghan, would have run, but which is anathema to ‘Iron Chancellor’ Brown. On becoming Chancellor, virtually his first action was to make the Bank of England independent; and the Bank of England said, ‘Thanks very much’ and began putting interest rates up, despite the pound being too high for the domestic manufacturing economy. The first year of New Labour’s term of office produced a stream of newspaper stories complaining of the damage being done to British manufacturing by the strength of sterling identical to those which appeared in the first years of Mrs Thatcher’s Government — and for the same reason: interest rates were being put up.36 Once again, just as in the first years of the Thatcher regime, the exchange rate for sterling was not a consideration. …
We are powerless
‘New Labour’ believes — but is unwilling to state in so many words — that governments can do nothing against the power of trans-national finance. This belief has become the acid test for ‘New Labour’. In the Commons debate on the Nick Leeson-Barings debacle on 27 February 1996, it was Sir Peter Tapsell, a High Tory stockbroker, not Shadow Chancellor Gordon Brown or Labour’s City spokesman Alastair Darling, who declared that the derivatives market was ’so speculative in nature as to deserve the term gambling and perhaps should be banned in international law.’ Gordon Brown meekly echoed Chancellor of the Exchequer Kenneth Clarke and called for an inquiry. In a letter to me on the subject of Tapsell’s remarks on derivatives, Alastair Darling, now Chief Secretary to the Treasury, made the following assertions:
‘It is not possible to ban derivatives. They have been about for 200 or 300 years. Properly controlled and supervised there nothing per se wrong with them. The fault lies in the control systems. In any event, I trust that you will accept that it would be impossible for one country to ban the trade even if it was desirable. The trade would need to be banned throughout the world.’
To the implicit question, ‘Why not do something about this?’ Darling replied:
It cannot be done. (So do nothing.)
In any case, there is nothing wrong with them. (So do nothing.)
Even if there was, and you wanted to ban them, it would have to be done world-wide. (So do nothing.)
The financial sector’s interest in not being controlled by government has been universalised into the beliefs that not only is it impossible to impose such control, it is positively a bad thing to try. (The market is magic.) …
In the Independent on Sunday of 15 January 1996, Alastair Darling, now Treasury Minister, was quoted as saying, ‘It is not up to the government to say that the banks can only make so much profit.’ It certainly used to be ‘up to the government’: even Geoffrey Howe imposed a windfall tax on the banks in 1981; but that was back in those far-off days before the Government handed power to set interest rates, perhaps the most powerful single economic tool and the surest means of regulating how much banks earn, to the people who stand to gain by putting them up! Just before the 1997 General Election Roy Hattersley wrote in his Guardian column of meeting one of the then Labour shadow economics team, who told him that in the new global economy it was not possible for a government to increase taxes.40
On his visit to the beleaguered Bill Clinton in February 1998, Tony Blair told Guardian journalist and long-time Blair ally, Martin Kettle, of the ‘five clear principles of the centre-left’. The first of these was:
‘…stable management and economic prudence because of the global economy.’ 41 (Emphasis added.)
The acid test for Labour ‘modernisers’ has become how completely you accept the powerlessness thesis. The line sounds immediately plausible to those, like New Labour economics spokespersons, with little economic knowledge: it is what they keep reading in the newspapers and being told by their advisers from the City. The powerlessness thesis also has the advantage of being a popular line with Labour supporters of the European Union who can argue, as the Labour Party has done since it became Euro-enthusiasts, that we need Europe to control capital (‘the speculators’). A decade ago Gordon Brown et al. believed that British membership of the ERM would do it; when that failed they concluded that only a single currency would do it. But the propositions that nation states are powerless against capital movements, or that the free market model is the only one possible (or successful) are immediately falsified by the experience of Norway, and the Asian variants on corporatist, producer alliance, restrictive, trade barrier and exchange control-laden, nationalist economies of the Far East. These so-called ‘tiger’ economies had developed and grown in defiance of Anglo-American free market theories. 42
Why have New Labour adopted the powerlessness thesis? In part, it is simply that they are in the grip of theories; and like most people in the grip of theories they exclude information which might challenge them. The theories are reinforced by the fact that they are those currently approved of by their mentors in the United States and the British overseas lobby. In so far as alternative views are perceived, they are offered by people who for one reason or another, are regarded by New Labour as either discredited, such as the Labour Left, or beyond the pale, such as the Tory Europhobes. Thirdly, and most importantly, New Labour politicians like the belief that they are powerless against the world’s financial markets. Powerless as they are, a range of things that Labour leaders used to have try to deliver — growth, economic justice, redistribution — have ceased to be rational expectations of them. Nothing can be done short of the European-wide level; and maybe not even then. 43 Life is infinitely easier for Labour economic ministers when all they have to do is follow the City’s line.