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Whenever a considered, rational, historical account comes to be
written about the current economic crisis – that is, if future conditions permit us the luxury of historical contemplation
– then surely one of its most dispiriting aspects will be the persistence of a belief that a return to the status
quo ante is not only possible, but is ‘just around the corner’. Looking for those
famous ‘green shoots of recovery’ might be the natural reaction for the optimist, but it is also symptomatic of
a mind-set which, like the victim of a disabling accident, refuses to accept the world as it is and would rather dwell in
the past. This affects not only the traders and investors who have led us into this crisis, but also the careerist-politicians
who have to an enormous extent facilitated the mess.
The world has turned upside down. The structure of the world economy can never be the same again.
But it will be a long time before the leading actors are able to acknowledge this in public, even if most of them must
now be having dark thoughts in private.
The onset of this financial disaster has been so sudden, its scale
so vast, that it must now be painfully embarrassing for all those British politicians who have staked their careers on the
continued success of the City of London. In his speech at the Mansion House in 2004, the then Chancellor Gordon Brown had
told an audience of bankers: “What you have achieved for the financial services sector, we as a country now aspire
to achieve for the whole of the British economy.” Er, quite so. Or as the British comedian Harry
Hill might say: “Yes……well….good luck with that!”
But given the widespread belief that financial services have been largely responsible for the success of the British
economy, it is perhaps not so surprising that most of our careerist-politicians are in denial and still believe that a return
to the status quo ante is possible, even desirable. As this much lamented state-of-affairs is likely to become a
distant memory, it might be worth reminding ourselves just what it is that we’re being told to regret.
Where to start? Well, how about the doomed investment bank Bear Stearns whose traders hoisted a sign
over their working space saying: “Let’s make nothing but money.” Or the credit-ratings agencies,
working to commission, with a vested interest in certifying sub-prime applicants with triple-A scores? Or the convoluted securitisation
system, so complicated that, notwithstanding the finest minds of our generation (to parody Allen Ginsburg) replete with thousands
of MBA degrees, was understood by so few?
And that’s just the beginning.
Let’s not forget the herd mentality which rendered anyone within the large financial houses who questioned the wisdom
of what was going on either afraid to speak out or, if finding the courage to do so, simply told to shut up or look for another
job. Let’s not forget, either, the shareholder boards stuffed full of compliant idiots – ‘useful idiots’
– whose enquiries extended no further than the bottom-line share-price and were totally oblivious of working relationships,
management practices or any of those now infamous ‘innovations’. For all of these people the only thing that mattered
was the share-price and a continuous profitability which was enough to make them trumpet the glory of anglo-saxon capitalism
from the metaphorical rooftops; while below them, in the literal streets, social problems multiplied, the gap between rich
and poor grew ever wider and Britain was judged to be the 24th(!!) ‘best’ nation in Europe for a young
person to grow up in.
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The social impact of this crisis has a very long way to run, but the economic dimensions
are truly staggering. By the spring of 2009 the UK government had put a grand total of £1.3 trillion, a figure almost
beyond comprehension, into the banking system in order to avoid its disintegration. And for that act of gargantuan generosity
what have UK taxpayers received in return? An injection of liquidity into the mortgage and loan market? Well, hardly. Just
a vague promise that at some future date the banks will be fully restored to private ownership (presumably in accordance with
the sound moral principle that while all losses must be socialised, all profits must be privatised); and, of course, the unforgettable
parade of former C.E.O.s, freshly penitent after tucking away obscene wads of money and ‘compensatory pensions’.
So incompetent has been the handling of these ‘compensation packages’ that,
if one didn’t know better, there would be a suspicion of successful extortion by blackmail, almost as though members
of cabinet had been caught pants down watching a porno movie!
In
some ways blackmail would be a lot easier to deal with than the possibility of a corrupt old boys’ network in operation,
or, indeed, the widespread arrogance and contempt which has characterised so many of the leading players within the financial
services sector.
Yet is it really so very surprising? These people have the economy
over a barrel and they know it. Even now, if the government doesn’t accommodate their preferences they could easily
let the barrel slip and run downhill, totally beyond control. This has been the public reward for the misplaced trust which
a succession of governments have placed in the City of London; for, in the same way that this crisis will have a long tail,
it has surely had an even longer gestation period. Some might say that this stretches back to 1981 when
the 10% liquidity requirement was abandoned; others might point to the ‘big bang’ reforms of 1986 which ushered
in the era of ‘light touch regulation’ – so vigorously defended by the City even in the face of this colossal
failure of the free market that one is bound to suspect ulterior motives. However, the real genesis of this problem goes back
even further and is so outrageous that it is almost unbelievable.
Put
quite simply, the whole problem originates with the way in which the banks are allowed to create money.
Anyone who believes that money mainly consists of coins and notes should rapidly disabuse
themselves of the idea. This narrow definition of physical (debt-free) money (M0) accounts for only around 3% of the total
money stock. The remaining 97% or so exists only in cyberspace. It is an entry on a bank computer, made whenever loans are
allowed on a customer’s account, and then spent over and over again in what is known as the ‘multiplier effect’.
Of course, most people assume that whenever a bank makes a loan it must be making it out of deposits that it already holds.
But this is not the case. When a bank makes a loan it is not lending existing money, it is creating new money. The
role of the banks in creating money and expanding the money supply is therefore crucial to the understanding of the current
economic crisis.
One of the former directors of the Bank of England, said: “If
you want to be the slaves of the bankers and pay the costs of your own slavery, then let the banks create money.” (1)
And no less than Thomas Jefferson once commented: “If the American
people ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks
and the corporations that will grow up around them will deprive the people of all property until their children will wake
up homeless on the continent their fathers occupied. The issuing power of money should be taken from the banks and restored
to Congress and the people to whom it belongs. I sincerely believe the banking institutions having the issuing power of money
are more dangerous to liberty than standing armies.” (2)
I believe that what we’re witnessing today is the total unravelling of this debt-money
system, and it’s going to be very, very painful……or perhaps I should say painful for most people. It won’t
be painful for those members of the financial elite who’ve already bailed out with their bonuses and transferred most
of it into real assets such as property, cars, gold, jewellery or art, or perhaps into what they calculate will be safer currencies.
For them, such action has been as graceful and as smooth as poetry; though perhaps not the work of Shelley, Yeats, Byron or
Wordsworth, but rather the more contemporary words of John Cooper-Clarke: “Take some bugger for a lump sum and bugger
off to Spain.”
Unfortunately, however, not even our Spanish friends are likely
to be the beneficiaries of this particular largesse. That ‘money’ now represents a black hole, sucking everything
else in the western economy down with it. It is all the worse because the ‘money’ never truly existed in the first
place.
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What is money? Money itself is worthless. The various paper notes representing money which have circulated in various
quarters of the world in different time-periods might have some intrinsic value for a collector, but they remain simple pieces
of paper, however elaborately designed. The same goes for the various metals which have represented coinage. The true value
of money is much nearer to those vast numbers trapped by computers and masquerading inside cyberspace; in other words, a mountain
of digital zeros.
What gives money its value, what makes it a currency,
is because it represents something. That something is the price the free market attaches to an almost limitless range
of goods and services. In turn, all those goods and services are the end product of human labour. Apart from scarcity value
of certain precious metals and minerals, such as gold, emeralds, rubies, diamonds etc, nothing else can enter the equation.
Human societies started to grow by trade. The more goods and services that were available, the faster
those goods and services were produced, meant that societies became more sophisticated. Money, as currency,
was absolutely essential to this process because it enabled people to buy and sell without the messy and slow hindrance of
a barter-system.
The first banks were set up to facilitate this growth in trade,
to take deposits for safe-keeping, and to make loans to craftsmen and merchants. Unfortunately there was an obvious flaw in
these arrangements; the whole system depended upon that hard-earned human quality of trust. When banks are given the power
to create money an enormous amount of trust is placed in them. As recent events have proved, that trust has not always been
justified.
The expansion of the money supply, the growth of credit and the
printing of money beyond the productive capacity of the economy is one definition of inflation. For two of the great reserve
currencies of the western world – the US dollar and the British pound sterling – this has been an endemic feature
of economic life. These currencies have – until now – been the bedrock of world trade because they have been derived
from two of the most powerful economies the world has ever seen. The status of a reserve currency bestows an enormous advantage
upon the bankers of the issuing country because it provides them with crucial leeway in matters of trade, especially financial
services. But, as we have seen, the strength of these western reserve currencies is now being questioned.
The problem is that the nations of the west, especially the USA and the UK are now debt economies.
They are pervaded by debt, whether it be at personal, corporate or governmental levels; a state of affairs which can only
be sustained by the willingness of others to hold on to dollar and sterling. Unfortunately, this willingness now shows signs
of wilting, as evidenced by rising bond yields, recent failure of bond auctions and the downwards revision of sterling’s
credit-rating. This is an unprecedented situation. The massive UK budget deficits, stretching far into the future, are shaping
into a fathomless chasm, over which the prospect of revised and sustainable growth is beginning to look about as reliable
as a rope bridge in a hurricane.
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There
have inevitably been comparisons with previous downturns, most notably the slump of the late 1970s / early 1980s. But the
social and economic structure of the UK in the 1970s was vastly different from anything we see today. At that time the manufacturing
sector of the economy was far more important, far more labour-intensive, and helped to sustain the kind of society in which
the working-class male and the family-unit formed the nucleus. In those days the reward to labour (in the form of wages) was
still fairly substantial, and even though the gulf between rich and poor existed, as it always has, at least its dimensions
were not beyond human imagination. Economic change since then – or, rather, the management of it – has rendered
the old working class all but obsolete, along with the traditional family-unit. In their place we now have a slightly expanded,
though somewhat devalued middle-class; and, more crucially, a large entrenched underclass, reinforced by single parenthood
and welfare policies, to many of whose members the ethos and concept of work is something totally alien. The parallel growth
in criminality is only too apparent.
Neither were the causes of the 1970s
slump – or its eventual ‘antidote’ in the shape of Thatcherism and globalisation – remotely comparable
or applicable to the current banking debacle. In 1971, faced by the massive bill for the war in Vietnam, President Richard
Nixon embarked on his own version of quantitative easing when he removed the US dollar from the gold exchange system. The
international impact was mainly felt in the rising cost of oil, priced in dollars, and compounded by supply difficulties after
the Arab-Israeli war in 1973. It was around this time that the oil-producers’ cartel OPEC beefed up its act and consigned
cheap oil to the history books. All those who believe that Keynesianism is the required response during a slump would be well
advised to study what happened next.
In the UK Edward Heath’s government
of the early 1970s had already tried to boost the economy through public spending (the ‘Barber boom’) and the
resulting inflationary froth, exacerbated by the oil crisis, had led to a vicious wage-price spiral in a Britain which was
still heavily unionised and nationalised. Strikes, power-cuts and three day weeks set the trend for the
rest of the decade, while consumers struggled with double-digit inflation. In a keynote speech in 1976 Prime Minister James
Callaghan admitted (‘in all candour’) that Keynesian policies had failed, and had only ever succeeded in so far
as growth had been bought through successive bouts of inflation.
The crucial point to note is that the ‘transformation’ of Britain in the 1980s by Margaret Thatcher’s
monetarist policy was a one-off, and is a wholly inappropriate remedy to today’s economic troubles.
Capitalist growth was revived by Thatcher through a transfusion of power from unionised
labour to free-market capital; her methods involved a repudiation of Keynes and the installation of a brutal monetarist policy
which choked off the supply of public funds and cheap credit, driving inefficient (and quite a few efficient) companies to
the wall. When Thatcher came to power union membership in the UK was at its peak; by the time she was removed
from office the unions had been pushed down to the foothills, where they have remained ever since. Another factor unique to
the 1980s ‘revival’ was the boost to the ‘flexibility’ of wages supplied by the burgeoning power of
globalisation. When economists talk about the flexibility of wages they invariably mean that wages can be driven down to the
lowest feasible level. Any remedy to current ills, therefore, cannot possibly involve the weakening of labour
and the lowering of wages because both are already weak and low. Those cards have already been played.
At this point it is worth remembering that the current crisis originated with a mass
default of sub-prime borrowers in the USA where wages, like those in the UK, have already been rendered ‘flexible’
i.e. driven down to rock bottom. It is those mortgages which have been parcelled up in their thousands, turned into ‘structured
investment vehicles’, sanctified by the hocus-pocus of quantitative mathematicians (or ‘quants’, as they
are better known – though some readers may prefer a slightly shorter, similar-sounding word) and sold like bad beef
on to the world markets. But you cannot get blood out of a stone. Mortgages in the USA (and the UK) are unaffordable to large
sectors of the population precisely because wages are too low or the cost of houses too high; and since most commentators
seem to equate economic health with the rising price of houses, it is quite clear which variable would need to be adjusted.
Yet higher wages would require an increase in productivity or an increase in working hours. This is clearly impractical. Indeed,
some workers have recently been asked to work for nothing in a bid to save jobs.
Some
left-wing analysts might be tempted by these events to apply a Marxist narrative – a crisis in capitalism brought about
by a declining rate of profit – but I’ll steer clear of that controversy. What seems clear, though, is that without
any fundamental redistribution of wealth (and yes, that means an end to those obscene banking salaries and bonuses) the current
attempts to stimulate the western economies by government spending are unlikely to succeed.
Indeed, in these circumstances, those who wish to see a return to sustained growth had better be careful what they
wish for. Underneath the anticipation of a return to the status quo ante there seems to be a complacent assumption
that the previous international order will be undisturbed; yet any recovery will see the ‘emerging’ economies,
led by China and India, push the price of oil back up to panic levels. If that occurs any return to growth in the UK will
also require a wheelbarrow – to carry around the extra currency as inflation renders us Zimbabwe-Lite.
By then, it will be worth recalling the burden that this forced inflationary growth
– if it ever arrives – has dumped on the UK taxpayers, not the least of which will be massive unemployment and
the social evils which always accompany it. A burden which, it should be noted, will fall hardest on those who are entirely
innocent of its causes. As for the guilty, it is a fairly safe prediction that they will escape with the lightest rap over
the knuckles. You can see how things are shaping up already. Despite all the tut-tutting from the politicians, I’ll
be amazed if there is any meaningful curtailment of the bonus culture, even more amazed if there is a reinstallation of the
Glass-Steagall firewall between regular/investment banking, which is the very minimum that should occur if the career-politicians
are remotely serious about the necessary reform.
Except this time I don’t
think growth will return so quickly or so easily. I believe western capitalism has been holed below the waterline, though
like all those dancers on the Titanic it will take quite some time before the horrendous truth begins to dawn. The
career-politicians will huff and puff, but essentially achieve nothing. I certainly do not expect them to embark upon any
major redistribution of wealth, certainly nothing so sensible as a boost to consumption by targeting aid to those individuals
who need to consume in order to survive (eg spending on food, housing, fuel, footwear etc). Anybody with political nous who
had the long-term interests of this country at heart (rather than their own short-term careers) would recognise that this
could be achieved on very positive terms – by making the recipients of such aid pledge their commitment to peaceful,
law-abiding behaviour. This is essentially what the Social Continence system proposes. Common sense, in other words.
But, alas, that seems in short supply.
There would, of course, be no guarantee
that Social Continence - or targeted Keynesianism with a few strings attached - would be an economic success. But
it would at least stimulate the economy at the base of our society, which is exactly the spot that needs to be reached; it
would provide its own multiplier effect – frothing up rather than trickling down – and, most crucially of all,
it would provide a huge incentive to keeping social order at a time when it will come under severe pressure.
Four hundred years ago those found guilty of inducing a catastrophe on this scale would have been
hung, drawn and quartered, their body-parts displayed for public delectation at various points around the city of London;
forty years ago, the culprits would have been sacked – compensation would have sounded like a sick joke – and
required to serve out their time as bartenders. Only the modern age, it seems, can breed those who seek redemption in bloated
pensions or a quick return to the action as if nothing untoward has happened; not only that, but the brass neck to display
indignity at the slightest suggestion that their working methods might benefit from a little revision.
But then, when a confidence trick goes on for so long without any public examination it is perhaps
not so surprising that the perpetrators become arrogant and contemptuous of those they claim to be serving. The role
of banking in anglo-saxon capitalism could even be summarised as: ‘encourage everyone to go into debt – individuals,
companies and governments – and charge enormous commissions, bonuses and salaries for the privilege of doing so.’
If this were not so, how else could it be that well over half of the UK’s total money
stock is due to the creation of mortgages – money which the banks have created out of nothing. Is this how the wealth
of the UK economy is to be defined? By the amount of money owed to its banks?
The
social fallout from this crisis has barely begun. But don’t expect riots or even much in the way of strikes or civil
unrest. This is the UK we’re talking about where the art of ‘dumbing down’ has been perfected and more interest
is shown in Simon Cowell’s waistband than the institutions of democracy. The careerist politicians will be grateful for that. What won’t please them so much will be the boiling cauldron
of crime, violence and all sorts of domestic abuse, though they will do their best to downplay its significance.
It is ironic that a generation ago Margaret Thatcher’s government was elected on a mandate of
thrift and parsimony, with an emphasis on hard work, productivity and enterprise. Yet the deregulation of the financial sector,
which her government supervised, has undermined each of these factors. Thatcher went into battle with the unions and identified
‘the enemy within’. That seems like small beer now. Thirty years later ‘the enemy within’ exists for
real and this one will not be beaten back quite so easily.
(1) Lord Josiah Stamp. Public Address inCentral Hall, Westminster 1937.
(2) Quoted in Charles Beard : The Rise Of American Civilisation; London, Cape.
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