Crying wolf is not good enough, Martin

When one of the most respected commentators on the world economy repeatedly expresses his profound pessimism about the prospects of an effective response to the “real and present dangers of climate change”, it is surely worth some serious consideration.

Martin Wolf is chief economics commentator at the Financial Times. He was awarded the CBE (Commander of the British Empire) in 2000 “for services to financial journalism”. He is an honorary fellow of Nuffield College, Oxford, honorary fellow of Corpus Christi College, Oxford University, an honorary fellow of the Oxford Institute for Economic Policy (Oxonia) and an honorary professor at the University of Nottingham.

Despite his pessimism Wolf has clearly not given up on a campaign to convince his readers that there is still something that can be done. In his second column in two weeks triggered by the atmospheric concentration of carbon dioxide passing beyond 400 parts per million, he says that “judged by the world’s inaction, climate sceptics have won”.   

In his first column, he alleged that “collectively, humanity has yawned and decided to let the dangers mount.” 

Wolf is convinced by the consensus of scientific evidence and rightly damning of the sceptics who are “corrupted by the money and fame”, but he says that there are “deep-seated” economic reasons for “our” failure “to shift our choices away from the ones now driving ever-rising emissions”.

He writes that data on the burning of fossil fuels since the mid-18th century show a consistent rise in annual emissions of carbon dioxide. There was, he adds, a slowdown in the rate of rise of annual emissions in the 1980s and 1990s. But this slowdown was reversed in the 2000s, as China’s coal-burning increased. Today, 30%  of CO2 in the atmosphere is “directly due to humanity”.

There’s a consistent theme in Wolf’s analysis that he shares with the official, “politically-correct” presentation of the science by the Intergovernmental Panel on Climate Change: We’re all to blame, and seemingly helpless to do anything much about it; apart, that is, from a faint, fading hope in an eight-point shopping list of increasingly more desperate and admittedly inadequate measures, aimed at the world’s governments.

But, fortunately, he is wrong. The objective source of his ideological error lies in his blinkered view of the social, economic and political conditions which, currently, govern –  and threaten – all of our lives.  As one of its chief advocates, it would be surprising indeed if Wolf issued any critique of the profit-driven economy that became the dominant force in the 18th century and ensured that “we” set out on the path of burning the fossilised remains of millions of years of vegetation. 

But it wasn’t “us”, as Wolf claims. Responsibility lies with the system of social relations that was ushered in and consolidated during the Industrial Revolution and beyond. “Us”, the majority, had no say, and still don’t in how things are done. Capitalism “freed” labourers from the land but at the same time deprived them of the tools by which they could generate an income for themselves and their families. Instead, we all became wage slaves.

This crisis-ridden capitalist system, dependent on the accelerating exploitation of what it necessarily regards as its God-given right to the planet’s resources is the clear and present danger, Mr Wolf. 

If “we” are to survive, the choice we have to make is to bring this period of history to its conclusion.  A month ago, on April 22, The United Nations marked International Mother Earth Day by acknowledging the leading role played by the Bolivian government. Secretary-general Ban Ki-moon said: “We need a paradigm shift – a transformation – in the way we produce, use and share energy.”

If we are able to bring about this change, it will be through the replacement of the current social relations. We’ll need a system in which we become stewards of the Earth, not exploiters.

Gerry Gold

Economics editor

The end of growth 'heresy' raises its head

Has the truth about the nature of the deepening global slump finally begun to make its mark in the brains of the system’s chief analysts and cheerleaders? We ask because some are beginning to question whether a “return to growth” is possible, let alone likely.

Yesterday, the Financial Times’ chief economics commentator, Martin Wolf, picked up the theme of a paper from the US National Bureau of Economic Research. The central argument in the paper by Robert Gordon challenges the conventional view of economists that “economic growth will continue indefinitely”.

Gordon says that there are demonstrable limits to increases in productivity derivable from technological innovation. These barriers include globalisation, rising resource costs, high fiscal deficits and private debts.

Wolf describes the possibility of an end to growth as the “heretical question”. He was writing less than 24 hours after the BBC screened an assessment of the ideas of Karl Marx by its chief economics editor Stephanie Flanders in which she also allowed the “it can’t go on forever” cat out of the bag.

Though Flanders didn’t bring this out, Marx described as his most important contribution to political economy the discovery of the contradictory forces that give rise to the “law of the tendency of the rate of profit to fall”.

Put at its simplest, competition obliges capitalists to invest in productivity-enhancing technologies which, in the short-term give them cost and price advantages over their competitors. But in the long term, that same process reduces the rate of profit across the economy as a whole.

Attempts to overcome the operation of this inescapable law, among them the drive for growth, are what produce not only the struggle between the classes, but the very same barriers to growth identified but not explained in Wolf’s account.

The attempts to overcome the law and its effects just make everything worse. Capitalism has to grow, but each period of growth reaches its limit, followed by capital destruction and a new turn of the spiral. Each twist leads to greater instability, more explosive volatility, and ever more cataclysmic events.

Gordon’s consequential prediction is for the rise in the real disposable incomes of those outside the elite to slow to a crawl. Quite an understatement.

It’s doubtful that the people of Greece will need much convincing. Their disposable income dropped 16% between 2009 and 2011. The Irish people came off second worst with drop of 9%. The new draft 2013 budget for Greece is founded upon the expectation that its economy will shrink for a sixth year taking it down by 25% since the 2007/2008 crash.

More savage cuts are lined up.  Unemployment will rise close to 25%. No wonder that last week's General Strike saw calls for the government to be overthrown along with its agreement with the IMF. Spain is following the same path. As is every country caught up in the globalised economy.  

It is 50 years since Rachel Carson’s Silent Spring launched a conflict with the chemical industry corporations led by profit-chasing Monsanto, Velsicol and American Cyanamid. It is 40 years since the Club of Rome presented its shattering “Limits to Growth” using the then young science of complex systems to show that resource limits would ensure that growth could not continue. But, as we have seen, capital doesn’t respond to argument.

As Monty Don, gardening expert and president of the Soil Association, noted in response to a revisiting of Carson’s book, “profit-based food production [is] in the tight fist of huge corporations that have no respect or care at all for humanity”, adding: 

Things are worse than Rachel Carson might ever have dreaded and will certainly get worse yet before there is any hope of improvement. Will any of us have the quiet, dignified, deeply intelligent courage that lay behind her work? Capitalism cannot change track. It is condemned to measuring success and failure in terms of profit and loss. Governments have less and less power and chase after more and more control. 

The answer, surely, lies not in Labour’s reactionary “One Nation” jingoism and "responsible capitalism" but in a transfer of power from governments and corporations into the hands of ordinary people and the building of a sustainable, not-for-profit economy and democratic political system.

Gerry Gold

Economics editor

Facebook riches show how obscene the system is

As people wander the towns and cities of Greece and Spain today looking for work, food and simply the means of survival, in California a company that makes no profits at all will sell its shares for over $100 billion.

Mark Zuckerberg and the other people behind Facebook will be richer beyond their wildest dreams, billionaires many times over, by close of business as the corporation goes from a private enterprise to a public one by selling shares on the stock exchange.

While the Greek Olympic Committee humiliatingly had to find sponsorship from a German car firm to stage the torch handover yesterday because the country is bankrupt, Zuckerberg are his friends are laughing all the way to the bank.

The contrasts between Facebook and the rest of us don’t just border on the obscene – they are way beyond that. In the United States itself, the real unemployment rate is said by experts to be closer to 14% than the 8% cited by official figures. Hundreds of thousands are homeless and many millions below the poverty line.

The Facebook “flotation” is also another prime example of fantasy finance, the same stuff that drove the debt-laden boom of the first years of the century and eventually helped to bring the global economy down.

Millions of small investors, drawn by the prospect of easy money are, however, likely to get their fingers burnt as the major financiers move in.

With the global economy on a knife-edge the unreality persists. Still the bankers are paid in telephone numbers (on top of their bonuses) while 25% are out of work in Spain and the Greek standard of living has fallen off a cliff as a result of austerity demanded in exchanged for loans.

The eurozone crisis is intractable. It’s not a matter of if but when Greece either leaves or is ousted from the single currency. Fresh elections next month seem certain to propel the left-wing Syriza into government. Its leaders have pledged to renegotiate the bail-out terms with the EU and European Central Bank but stay in the euro. They can dream on.

As in Spain, where 16 banks were downgraded overnight, people in Greece are beginning to take their money out of the banks just in case they wake up one Monday and find their euros have been replaced by the New Drachma or the New Peseta at much lower values.

Judging by the near hysteria from prime minister Cameron in London, the impending break-up of the euro will precipitate an economic slump as well as a banking crash that according to the BBC’s Robert Peston was only narrowly avoided at the end of last year.

Martin Wolf, the Financial Times’ leading analyst, confirms this. He wrote last night: “These perils are not of concern to the eurozone alone. Taken as a whole, this is the world’s second-largest economy, with the largest banking system. The risk that a bigger eurozone upheaval would cause a global crisis is real. As frightening is the likelihood that eurozone crises would become permanent features of the world economy.”

There is no future for the majority along this road. The capitalist system is actually broken and beyond repair. There is no choice but to think along the lines of reconstructing the economy along lines of co-operation, mutuality and not-for-profit, democratically-owned enterprises.

That would involve cancelling all sovereign debt. Bond markets that are presently holding countries to ransom would be shut down, along with the stock markets. Investment bank speculation would become a thing of the past. All the expertise in the financial industry would be put towards creating new, equitable monetary arrangements between countries.

This scenario undoubtedly seems a long way to most people. But with the crisis reaching a tipping point, these are the sorts of considerations we will have to apply ourselves too in the near future.

Paul Feldman

Communications editor

UK heads for recession as '1930s moment' nears

Greek debt is but one black hole among many in the eurozone crisis which threatens to tip the world into a ‘1930’s moment’ according to IMF managing director Christine Lagarde. But the problems facing global capitalism are far deeper.

Even Lagarde had to acknowledge that there is “little margin for manoeuvre” and that the real problem is "America's debt and deficit - the lack of a medium-term plan to reduce it”. Even that doesn’t begin to get to the heart of the matter.

Only yesterday the worst-case expectation was that the UK’s Gross Domestic Product – the key measure of growth - fell by 0.1% between October and December. But today’s official figure from the Office for National Statistics reveals that the UK economy actually shrank by 0.2% in the last quarter of 2011, and is heading for recession.

Accumulated UK government debt broke through the £1 trillion mark as a dual consequence of falling tax revenues, continued support for the financial sector and higher welfare bills as a result of soaring unemployment.

Despite the ConDem’s stated intention to reduce the country’s dependence on debt, its combined corporate, public and household debt has increased to 507% of GDP and the country remains where it was in the league table of the richer nations when the crisis broke in 2007/8 – right at the top.

Despite all the evidence, there are some like governor of the Bank of England Mervyn King, who try to present even the darkest of messages in a glowing halo of hope for the future of the capitalist society.

He said: “All crises come to an end, and businesses will find ways to trade with each other and meet the needs of consumers whatever the transitional problems posed by deleveraging.” Of how and why this might happen he gave no sign, making his message rather mystical in content.

Oliver Blanchard, the International Monetary Fund’s chief economist also tried to package his warning that Europe's debt crisis could tip the world economy into recession with the faintest hint of a rosy future "With the right set of measures, the worst can definitively be avoided and the recovery can be put back on track," he said. "These measures can be taken, need to be taken, and need to be taken urgently."

Only the first indications of the impact of these ‘measures’ have been seen so far in the millions of dispossessed American families, and hundreds of millions thrown out of their jobs worldwide.

But there are some who are, however reluctantly, coming to the conclusion that the game is up. In a wide-ranging article inspired by the Financial Times ‘capitalism in crisis’ series, its senior commentator Martin Wolf reviews the defining characteristics of civilisation.

Taking in the insolubility of the crisis of extreme financial instability, the prospect of a global economic collapse, the impact of humanity on the planet, and the role of leadership, he observes that states alone are now unable to supply the ‘public goods’ of education, health, control of crime and pollution.

“Ours is an ever more global civilisation that demands the provision of a wide range of public goods. The states on which humanity depends to provide these goods, from security to management of climate, are unpopular, overstretched and at odds. We need to think about how to manage such a world. It is going to take extraordinary creativity.”

Wolf doesn’t offer a solution, because the only ones available within the framework of capitalist civilisation are too brutal and unacceptable to liberal thinkers like him.

It is time to open a new era, based upon co-operation in a democratically-controlled, ecologically restorative system of production and distribution designed to satisfy the needs of the 99%.

Gerry Gold
Economics editor
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Making a killing at our expense

As the European Union struggles to hold together, riven with differences over impending bail-outs to save the euro (while ejecting Greece), others are moving in for the kill.

The fact is that there are profits to be made in periods of economic turmoil. Buying at the bottom of the market and selling on at a later date is classic capitalist behaviour.

Not that the BBC News team grasped this when financial market trader Alessio Rastani was interviewed about the so-called rescue plan for the eurozone.

The candour of his “bring it on’” message at the prospect of economic collapse astonished his interviewers.

The interview is full of choice phrases and suggestions: “The market is toast”, “The market is going to crash”, “Hedge funds are moving their money to safer assets” and “most traders we don’t care about the rescue plan”.

While others hope for pleasant night-time experiences, Rastani said: “I’ve been dreaming of a depression for three years…Just like in the thirties, when the market crashes we can make a lot of money out of hedging strategies.”

After telling viewers that “this economic crisis is like a cancer. By the time you discover it, it’s too late”, he told them: “Governments don’t rule the world, Goldman Sachs rules the world."

Some, trying to undermine his message, are suggesting that he’s a phony, a member of the famous Yes Men hoaxers.

They’d like to think his message is the lie that encircled the world before the truth got its boots on. But the frenzy of withdrawal of funds from the junk bond markets confirms Rastani’s message.

The Yes Men issued a statement commending Rastani for his "masterful performance", adding:

"Who in big banking doesn't bet against the interests of the poor and find themselves massively recompensed – if not by the market, then by humongous taxpayer bailouts? Rastani's approach has been completely mainstream for several years now; we must thank him for putting a human face on it yesterday."

By observing the behaviour of traders like Rastani, Felix Salmon of Reuters news agency has arrived at an interesting hypothesis – capitalism has produced its own opposite from within itself. Salmon characterises some traders as anti-capitalists, writing:

“It’s a common misconception that all traders are die-hard capitalists. But in fact many of them are quite the opposite. They still want to make money, of course. But that doesn’t mean they want the stock market to go up.”

Make no mistake, hedge traders are not the new proletariat, but they do represent the contradictory nature of a capitalist economy that has become hopelessly, irretrievably over-run by the cancer of credit and debt which has metastasized throughout the entire system.

Under extreme pressure from the deepening world crisis, the world’s policy makers have adopted a plan which they hope will stop the cancer in its tracks, isolating it in Greece. But the medicine depends on vast sums of new credit to recapitalise the banks and to build up the as yet non-existent stability fund against further impending crises in Portugal, Ireland, Italy, Spain and France

Oh, and there is the small matter of getting the banks which are exposed to Greek debt to take a 50% loss. The IMF would also have to act as a backstop for the eurozone, standing by with another even bigger source of credit. The mind boggles at the numbers being talked about.

The costs of another meltdown are, according to Martin Wolf of the Financial Times, “too grave to contemplate”. The panic written all over the faces of political leaders across the globe tells us that, with the world economy contracting, such an event is indeed on the cards.

Gerry Gold

Economics editor

Second wave of the crisis reaches land

In pursuing what the prevailing law defines as their perfectly legitimate individual interests, investors are collectively destroying the universe within which they – and we – all live. As agents of the capitalist way of doing things they have no alternative.

The latest assault on Italy, where investors are bailing out of banking and the market rate of borrowing has soared underlines, what is surely obvious to all – the second wave of the crisis which erupted in 2007-8 is now underway.

The punitive rates of interest charged for the loans needed by Greece, Portugal, Spain, Ireland, Italy and Iceland to avoid default only ensure that such defaults are inevitable.

Rating agencies have now declared Ireland’s debts to be worthless. Greece is virtually certain to default in the immediate future. The recession – decline in production – in each of these debt ridden countries is deepening. A collapse of the euro as a currency, leading to an immediate slump in trade, is a distinct possibility.

The formerly mighty US is locked into a political impasse over proposals to reduce its staggering $14 trillion debt mountain. If it is not sorted out soon, the US government will come to a default and the unthinkable – a dollar default – comes closer.

Occasionally, in struggling to find solutions to the impossible contradictions which dog their attempts to explain the deepening crisis and find solutions, a rare commentator will be found shedding light on the inevitable consequences of following the current path.

The Financial Times’ Martin Wolf is one member of this rare breed. In a recent column reviewing the crisis in the eurozone he revealed another two of the impossible contradictions that are skewering the global economy -

- the more successful a country is in reducing its debt burden in order to be able to return to growth, the deeper its recession gets. Latvia’s GDP, for example has dropped 23% since the crisis erupted.

- the more successful a country turns out to be in cutting its costs, the worse the debt burden becomes.

The solution? Wolf says “debt restructuring [a polite term for state bankruptcy, default, and debt cancellation] is merely a necessary condition for an exit. It is unlikely, in all cases, to be enough.”

His chilling prediction sets the scene for the coming months. “Some economies may just wither away.”

Putting it simply, mounting and ongoing resistance to the measures – “austerity” hardly begins to encompass it – being used to attempt to reduce unsustainable global levels of debt, means that debt must now be “restructured”, wiped out.

But the debt grew throughout the last 40 years to fund growth. So growth must now give way to contraction. Latest estimates suggest that the value of Greece’s debt must be reduced by 75%. And so must its production. And not just in Greece.

Grasping how markets, governments and corporations are driven by forces more powerful than the sums of their parts is vital. We have to get to grips with the contradictory forces at work in the capitalist economy and show that the system itself is broken and unsustainable.

Cuts in services, £9000 fees for university courses, soaring unemployment, inflation, mounting house repossessions, privatisation and attacks on pensions are the consequences of the crisis that broke in 2007-8.

What is coming up the line as the second wave of the global tsunami advances will shake society to its foundations. At the same time, it will create opportunities for transcending capitalism and creating a rational, sustainable economy. It’s a chance we can’t afford to squander.

Gerry Gold

Economics editor

Crisis is alll pain and no gain for workers

The crisis in Greece, which comes to a head today with the vote in parliament to impose further massive cuts, also marks four years since the mother of all financial bubbles burst.

The post-war expansion of credit that funded globalisation showed itself to be unsustainable when the effects of the credit crunch emerged into the open in 2007. Attempts to limit the effects of a global collapse of production with colossal amounts of credit invented by governments and central banks simply spread responsibility for the problem.

Toxic debt was in effect transferred from a failing system of global financial and manufacturing corporations to sovereign states which are, in turn, forcing it on to their increasingly resistant populations. In Greece, an estimated 80% are against “austerity” measures being forced through.

On a global scale, contradictory pressures are at work. Growth is giving way to contraction. The hard line views of the Bank for International Settlements (BIS) are in the ascendant, causing consternation amongst softer, liberal Keynesians, like Martin Wolf of the Financial Times, and Adam Posen, a member of the Bank of England’s influential Monetary Policy Committee

The real message from the BIS in its annual report published this week is precisely the opposite of a confident recovery. Challenges left in the aftermath of the 2007/8 crisis require further actions that will most certainly produce a severe contraction. That is what they are intended to achieve.

Challenges are grouped under several headings. At the top of the list is public sector debt. The BIS believes that governments have hardly begun bringing debt down to “sustainable levels”. In addition to short-term measures, pension schemes and social benefits will have to go. “Governments that put off addressing their fiscal problems run a risk of being punished both suddenly and harshly,” the report warns.

Next comes private sector debt. In the United States and Europe, households, financial and non-financial firms are still drowning in debt, despite millions of repossessions, massive write-offs, the disappearance of many financial and retail institutions, and mass unemployment across the world. Once again they’ve only made a start.

“Growth during the pre-crisis years was heavily weighted towards finance and construction. In a number of countries, these sectors grew disproportionately to the rest of the economy and now have to shrink. [emphasis added]. Like most adjustments, it will be painful in the short run. Not only will this reallocation impose suffering on the people who worked and invested in those sectors, it will weigh on aggregate growth and public revenues as well.”

The BIS sees the need for globally co-ordinated action to deal with “global imbalances in financial flows”. As the report states: “The financial crisis showed us that the build-up of gross investment positions can lead to substantial currency, liquidity and other mismatches that can propagate and magnify shocks, creating damaging volatility in the international financial system.”

But they are whistling in the wind if they think that governments have any more hope of controlling the movement of capital corporate interests after the crisis than before.

And then there’s the problem of monetary policy. “Unconventional actions” including negative real interest rates and quantitative easing – central banks inventing credit to lend money to governments - have led directly to soaring inflation, especially in food and fuel. The BIS “solution”? Monetary easing must be reined in and interest rates must rise – especially in the UK. As soon as they do house-buyers in Britain will be facing a tsunami of house repossessions.

Fixing the aftermath of the global capitalist crisis is too painful for countless millions to bear. The workers of Greece are saying they’ve had enough and are not prepared to sacrifice living standards further on the altar of creditors and their profits. Up to 750,000 workers in Britain go on strike tomorrow, defying both the ConDems and Labour, in defence of hard-won pensions which are being cut to reduce the budget deficit. The message is clear: We can’t be doing with this unsustainable, ruthless system any more.

Gerry Gold
Economics editor

Debt contagion spreads

In the aftermath of Davos, the annual skiing trip for the bankers, businessmen and tame governments of the global economy, one key theme runs through the post-mortems in the wake of the economic and financial crash: the free market requirements of corporations are in open conflict with the political constraints of a world of capitalist nation-states.

The Financial Times’ Martin Wolf, who moderated the “economic outlook” session sums it up like this: “We have a globalised economy, but politics remains local. In times of crisis, the pressure to look after the former dominates the latter.” What Wolf is indicating is that local “politics” either gets in the way and/or is not up to the job. He is right but Wolf fails to grasp that the contradiction between globalising corporations and nation-state politics is insoluble.

So struggling to take much if any comfort from the less-than-impressive signs of a return to growth after renewed and unprecedented overdoses of “stimulus”, the talk in darkened corners is now turning to “rebalancing the global economy” with all the unspecified pain for millions that brings in its wake.

The crash exposed massive over-capacity in production around the world, after decades of the increasingly credit-led investment needed to maintain the expansion on which capital feeds. In the last 12 months, many countries have relied on individual attempts at rescuing domestic economies, creating export-led growth as a result.

But it isn’t happening.

Whilst the stimulus enabled banks to refill their capital balances, and, particularly in China allowed production to continue and even grow, it has failed to get people buying. Consumers aren’t consuming.

In countries like Spain, the United States and the United Kingdom and its nearest neighbour Ireland, as well as some of the countries of the former Soviet Union consumption was funded by borrowing against absurd inflation in property prices. Property prices have collapsed, so consumption collapsed. It can’t be restored to previous levels. The patient has suffered a near fatal illness.

Growth certainly hasn’t returned to countries like the Ukraine where GDP fell 14% last year. All across the world unemployment is high and soaring, hours and wages are being cut. Pensions wiped out. In the US, where some of the production numbers look positive, Lawrence Summers, Barack Obama’s principal economic adviser, admits “what we are seeing in the US and perhaps in other places, is a statistical recovery and a human recession”.

The obscure language of the financial commentators can be difficult to untangle at times, but the threatening messages are getting clearer day by day. They speak on behalf of the global investors, speculators who move vast funds to the source of highest return. And the message to governments is this – those with an excess of debt had better give up on stimulus pretty soon to avoid the growing threat of state bankruptcy that is spreading like a global contagion.

Italy, Portugal, Spain, the UK, Iceland are joining Greece - which has its hand out for help to the International Monetary Fund and the European Union – in the emergency ward. Those with excess savings like China had better get their people increasing their consumption pronto, or face the consequences.

No wonder the political crisis is growing in all the major economies. Cut spending and the economy will dive (or die); don’t cut spending and the state faces bankruptcy. In short, there are no answers within the present framework. That doesn’t mean the forces of extreme reaction will give up and go home. If conventional nation-state politics won’t work, there is always the danger of unconventional “solutions”.

In our draft Manifesto of Revolutionary Solutions we set out our proposals to bring this obscene and increasingly dangerous system to its end. Join the discussion.

Gerry Gold
Economics editor

More shocks on the way

The disarray – and fear – in ruling class circles over the future prospects for the financial system is growing apace. Far from rescuing the banks, unprecedented levels of state intervention have, according to Mervyn King, Governor of the Bank of England, and others, reinforced existing weaknesses.

King has put himself at odds with the New Labour government, which has poured billions of pounds of taxpayers’ cash down the throats of the banks to no avail. Not only have they failed to resume previous levels of lending, bankers are paying themselves huge sums in bonuses, which for 2009 are up 50% on last year.

So King told Scottish business organisations last night: “The sheer scale of support to the banking sector is breathtaking. In the UK… it is not far short of a trillion (that is, one thousand billion) pounds, close to two-thirds of the annual output of the entire economy. To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”

He went on: “It is hard to see how the existence of institutions that are ‘too important to fail’ is consistent with their being in the private sector.” King has a point, of course. In effect he is saying that the private sector can only function through the capitalist state and that this is not a genuine kind of private enterprise capitalism. He is right there!

Just over two years ago the financial system went critical, highlighted by the panic withdrawal of funds by Northern Rock’s depositors. The combination of the worst financial crisis since the Great Depression and now the longest recession since the Second World War was triggered by a rising rate of defaults on sub-prime mortgages in the US, the weakest point in a worldwide explosion of credit secured against overpriced property.

The world’s governments and central banks were forced into drastic action. They’ve taken some bankrupt institutions into public ownership, provided guarantees against loss for others, and cast trillions into the credit markets. They’ve reduced interest rates to historic lows, effectively entering negative territory. And they’ve created new money to inflate their own balance sheets.

In a wide-ranging comment on King’s speech, Martin Wolf, the Financial Times’ senior columnist accurately assessed the effect of this intervention, and all the half-hearted attempts at regulation. He concludes: “Trying to make financial systems safer has made them more perilous. Today, as a result, neither market discipline nor regulation is effective. There is a danger, therefore, that this rescue will lead to still greater risk-taking and an even worse crisis at some point in the not too distant future.”

King is proposing something different to regulation however. It puts him at odds with the rest of the establishment. His proposal for a separation of traditional banking from investment, high-risk activities is an echo of the American Glass-Steagall Act of 1933. This was a rapid reaction to the banking crisis that swept America after the 1929 stock market crash, in which investment banks played a key role. Glass-Steagall’s restrictions were steadily eroded in the 1980s to allow globalisation to proceed and the law was finally abandoned by the US in 1999.

Both King’s proposals for a return to the pre-globalisation era and Wolf’s assessment show that the crisis is far from over. More shocks are on the way. For example, soaring stock market prices contain little of substance and are essentially a new bubble just waiting to burst while house prices remain artificially high.

The IMF is warning that the global recession is having an adverse effect on commercial property prices and defaults are soaring. Increasing unemployment is also accelerating the rate of repossessions in America and Britain. The conditions for a second wave of the global financial crisis are already present. It wouldn’t take much to touch it off.

Watch this space.

Gerry Gold
Economics editor

For a future without the FT!

The Financial Times major series of articles grandly entitled “The Future of Capitalism” should at least have a question mark after it, especially as the main contributors are, to say the least, struggling to come to terms with what’s actually happened, let alone what lies ahead.

Whilst the contributors admit that the post-1980s period of neo-liberal, unregulated financial markets is at an end, none can tell us anything about the reciprocal, causal relations between credit and the production of real value, or even between the bursting of the financial balloons and the freefall in global production. 

Gillian Tett seems to be uncertain whether the financial system has collapsed or not. First she tells us hopefully, that “the pillars of faith on which this new financial capitalism were built have all but [emphasis added] collapsed”. But later in the piece, things get a lot worse: “Last September,” she says, “the final pillar of faith collapsed.” 

According to Tett, two revolutions occurred in the 1970s.  Banks abandoned centuries of safe lending practices. They started to sell their credit risk –  the risk that the people they’d lent money to wouldn’t repay the loans –  to third-party investors in the new capital markets. And they adopted complex computer-based systems for measuring credit risk. As a result everything got too complicated. Nobody could understand what was going on any more. 

Why this happened, what started it, what the motive force was that drove the demand for increased credit she can’t and doesn’t say. It doesn’t even arise as a question. But there are plenty of places, human failings, to apportion blame: “Naked greed, lax regulation, excessively loose monetary policy, fraudulent borrowing and managerial failure.” 

There’s no hint of a connection between the inner logic of capitalist production for profit that drives growth, pushes regulation aside, creates new forms of credit to finance consumption and production –  and breeds the conditions for the crash, its inseparable opposite. 

Martin Wolf at least acknowledges the existence of the real economy where goods and services are made by human labour. He even goes so far as to establish a connection between it and the world of finance. 

“Today, with a huge global financial crisis and a synchronised slump in economic activity, the world is changing again,” he writes. “Synchronised”? That just means that things are occurring at the same time. “The combination of a financial collapse with a huge recession…will surely change the world.” A “combination”? Yes Martin, but what connects them? How do they affect each other? 

Wolf is worried. He doesn’t know what will happen next. “It is impossible at such a turning point to know where we are going.” In support of his campaign for co-ordinated government action to stimulate demand, he asks us to remember what happened in the Great Depression of the 1930s: 

“Unemployment rose to one-quarter of the labour force in important countries, including the US. This transformed capitalism and the role of government for half a century, even in the liberal democracies. It led to the collapse of liberal trade, fortified the credibility of socialism and communism …xenophobia and authoritarianism. Frightened people become tribal: dividing lines open within and between societies. In 1930, the Nazis won 18 per cent of the German vote; in 1932, at the height of the Depression, their share had risen to 37 per cent.” 

But what about the Second World War, Martin, the destruction of property and lives?  For capitalist recovery, the destruction of surplus productive capacity was essential to restarting the business of making profit. For Wolf, the FT’s most prestigious commentator, it never happened. 

If we are to prevent a new, unimaginably greater orgy of destruction, unsustainable, broken capitalist society has to be consigned to history. We have to start planning for a world beyond the immediate crisis, one in which there is no “future of capitalism”, where there’s not even a copy of the Financial Times to be had! 

Gerry Gold
Economics editor