Meltdown hits New Labour

The turmoil in global financial markets is now reflecting itself as paralysis and confusion in the minds and actions of politicians, amid opposition from bankers to their plans for more regulation. Most significantly, the crisis is also finding a strong echo in the opinions of voters, especially in Britain where confidence in the Brown government has plunged to a record low.

Over the weekend, the Group of Seven industrialised nations and the International Monetary Fund governing council made up of global finance ministers and central bank governors, endorsed nothing less than 65-point plan to reform global financial markets. The plan involves raising the amount of capital banks have to hold if they want to invest in complex credit securities, new disclosure requirements and the creation of a “college of supervisors” from different countries to monitor banks.

This plan was dead in the water almost as soon as it was announced. Wall Street bankers rejected the G7 call to raise more capital, saying they were opposed to selling shares at the current depressed prices while others advocated self regulation. In any case, there was no particular timetable for implementing the changes, which would be left up to national governments to carry through.

As to the present crisis, there was nothing in the way of either a plan or a strategy. Ministers actually rejected the IMF’s call for globally co-ordinated public intervention to tackle the problems in the financial system directly. With the dollar and the pound continuing their free fall on currency markets, the G7 also ruled out any intervention in this area despite their fears that the slide could spiral out of control and intensify the economic recession.

Grandiose plans combined with lack of actual activity are a graphic illustration of the impotence of the G7, IMF and other global institutions in the face of the credit crunch. Last week, for example, the Bank of England cut interest rates only to see lenders not only fail to pass this on to homeowners but in some cases increase rates to borrowers. Now Alistair Darling, the chancellor, has called a meeting to urge them to respond to interest rate cuts while the bankers say the credit crunch prevents them from doing so. The problems of banks was shown today when Bradford & Bingley led a fall in shares after reports that it was going to have raise new capital to fill a large hole in its balance sheet.


There was more bad news for the government today when a poll revealed that Gordon Brown is less trusted to steer his country through the global financial crisis than any other major western European leader. A Financial Times/Harris poll suggests Britons no longer trust his government on the economy – 68% said they were “not confident at all” in its ability to deal with the economic crisis. The figure was 52% in Germany, 51% in the US, 50% in France, 43% in Italy and 36% in Spain. This came the day after a Sunday Times poll which gave the Tories a 16 point lead over New Labour.

Even previously pro-government newspapers like the Financial Times are beginning to have doubts. Its editorial said: “If British voters are worried about the global credit squeeze – more than a third expect their finances to worsen – then they are right to be. They have no more reason to trust politicians’ assurances that the UK can weather a US recession than believe their next-door neighbour’s.”

The paper added: “Like the US, the UK has relied on a debt-fuelled boom in consumer spending to drive growth. As the credit squeeze begins to bite and households cut back borrowing, overall demand is likely to weaken. A long-predicted correction now under way in the UK’s inflated property market will be painful too.” New Labour is unravelling almost as fast as the financial system itself and the need to create alternative political movements to challenge corporate and financial power is more urgent than ever.


Paul Feldman
AWTW communications editor

Staring at 'economic calamity'

The world’s financial ministers are all in a dither, and it is not surprising. At the weekend meeting of the G7 – the world’s richest economies – ministers took a few steps towards acknowledging the scale of the economic unravelling that is both cause and consequence of the global credit crunch. Then most did a sharp about turn, rejecting America’s call for a global reflationary package and claiming things could be contained.

New Labour’s chancellor, Alistair Darling admitted: “It is undoubtedly the case following the problems that arose in the US housing market last summer that the world is facing a turbulent time.” Hank Paulson, the US treasury secretary acknowledged that “the current financial turmoil is serious, and persisting”. They were responding to an understated report from the Financial Stability Forum (FSF), a study group drawn from the world’s central bankers and financial regulators which warned: "It is likely that we face a prolonged adjustment, which could be difficult".

Financial Times columnist Wolfgang Munchau is even more downbeat – at least for the US and the UK - in what tries to be an assessment of the risk of global deflation, a repeat of the Great Depression – “the ultimate economic calamity” as he puts it. Munchau says there is one scenario that could produce a 1930s-style deflationary depression in the US: a large-scale financial meltdown, adding; “By that I mean a situation in which the financial sector would cease to fulfil one of its basic functions: to provide liquidity to the real economy.”

But those who’ve been paying attention know that the problem with Northern Rock was exactly that. The wholesale credit markets seized up – liquidity disappeared – following revelations about the repackaging and reselling of unrepayable debts. So Munchau’s assessment becomes particularly chilling when you read what another G7 Minister had to say. According to Peer Steinbrück, German finance minister, the G7 now feared that write-offs of losses on securities linked to US sub prime mortgages could reach $400 billion. This is sharply higher than the $120 billion credit losses that Wall Street banks and other institutions have revealed in recent weeks – and also far bigger than the US Federal Reserve’s estimates.

Which all helps us to put Munchau’s assessment of the UK’s prospects in perspective. He says “The UK is perhaps more vulnerable, because of the relatively large size of the financial sector in the economy, an over-reliance on a property market that is about to deflate, and chronically low productivity growth in non-financial sectors. There is now clearly the possibility of a severe and prolonged recession, followed by a long period of low growth.”

The FSF puts forward a raft of regulatory measures aimed at strengthening the resilience of key elements of the financial system. These however, are targeted at some of the many consequences rather than the underlying cause: 30 years of credit-induced transformation of the world economy has failed to reverse the underlying trend of a continuous decline in the rate of global growth per head.

None of this is really in line with Darling’s insistence that the UK has “good reasons to be confident” about its ability to withstand a slowdown in the global economy, is it? Just before the G7 met, figures released in Britain showed that home repossessions soared by 21% in 2007 as the credit crisis began to bite into people’s ability to repay their mortgages, let alone second mortgages used to buy expensive consumer goods. Meanwhile, business confidence in Britain is at an all-time low, according to a survey by the Institute of Chartered Accountants in England Wales. The banking, finance and insurance sector showed the lowest confidence. But there will be no recession, the institute says. So that’s alright then.

Gerry Gold, economics editor