Worsening economy behind Coalition crisis

All the indications are that the British and European economies have now been drawn into the deepening contraction of global capitalism:

•   The Bank of England today slashed its forecast for UK economic growth in 2012 to zero from its May estimate of 0.8%.  Governor Sir Mervyn King said recovery hopes had consistently been dashed.
•   Last night, S&P cut Greece's outlook to from “stable” to “negative”. The ratings agency said the economy in the already crisis-hit nation was worsening.
•   The Banque de France, the country’s central bank, said that its preliminary figures show that gross domestic product will be down 0.1% in the third quarter, which ends on September 30. The bank had already predicted that GDP would fall the same amount in the second quarter.
•   German exports slowed by a more than expected 1.5% in June. Imports dropped 3%, against a 2% prediction.

The Cameron-Clegg Coalition’s current austerity programme of spending cuts and tax increases was based upon an unrealistic expectation of growth, which has now been replaced by the certainty of its opposite. This – and the crisis within the Coalition itself, spurred by the virulently anti-Cameron Old Tories - underlies the sharpening of tensions as the Tories abandon plans for reform of the House of Lords to focus attention on the economy.

As BBC economist Stephanie Flanders puts it, we are experiencing: “ by some measures “the worst four-year period for the UK, outside wartime, in at least 100 years - worse than what happened in the 1920s and 1930s, and worse than anything in the 1970s and 1980s”.

People in the UK face the same challenges as the rest of Europe in battling assaults on public services, jobs, pensions and benefits and the loss of their homes. Amongst the worst-hit countries is Spain, where unemployment amongst young people stands at around 50%. In Greece, the Orthodox Church has set up emergency feeding centres for hundreds of thousands of people who have lost everything. They include formerly well-paid professionals – architects, engineers, information technology specialists who hardly know what has hit them.

The contraction means demand is dropping fast, so exports, imports and production must follow. Government revenues from tax continue to drop, so “unaffordable” public services have to broken up and those parts that can be made profitable handed to the private sector. Then, as the spiral of recession deepens, comes the competitive elimination of surplus productive capacity – the mothballing of factories, boom-year housing estates left empty, infrastructure left to decline and rot, millions upon millions of people driven from their jobs and homes, left without food, abandoned to their fate.

In country after country people have protested, marched and even occupied workplaces.  The Trade Union Congress in Britain is calling for another demonstration in October. But the experience of its last national anti-austerity protest in the spring of 2011 showed that it changed not a whit of the Coalition’s policies. 

Thus resistance must be transformed into preparations to replace the broken system of capitalist social relations dominated by the giant global corporations. It is these which have undermined the legitimacy of the state and hollowed out the old forms of parliamentary democracy.

New forms of fully inclusive, participatory, direct and representative democracy are needed. They can learn from the experiences of those who’ve worked in not-for-profit institutions like the National Health Service, housing, education and social services as well as the workers’ co-operatives, credit unions, food coops and community shops that have spread around the world as people try to protect themselves against the worst effects of the crisis. These need to go further to develop policies and strategies to replace capitalist social relations.

A World to Win believes that a global network of People’s Assemblies can provide this framework. You’re invited to join the discussion at http://aworldtowin.ning.com/

Gerry Gold

Economics editor

Infinity and beyond is Bank's view of crisis

Who’d be an economics forecaster at a time of chaos and crisis? Only six weeks ago, Bank of England experts thought they had the situation covered. Now they’ve ripped up those forecasts and are starting again.

Admitting they have no idea about what is going on, and even less about what to do, the worsening crisis in the eurozone led Mervyn King, the BoE’s governor, to excuse their astonishing bewilderment when he appeared before the Commons treasury committee:

“It is impossible to imagine a situation in which you just do not know what the situation will be in a part of the world that is close to you and is half of your trade”, he said. “And that makes it impossible to engage in any sensible forecasting.”

So for King and his colleagues, the laws of economics appear to have broken down. And there’s nothing in the history books to provide any insight.

Ever since the crisis erupted in Greece, European leaders, together with the heavy hitters from the IMF have attempted Herculean feats to keep it isolated, with firewalls and barriers of all kinds.

But the crisis has morphed. Strongman Hercules has given way (temporarily) to Sisyphus – the king punished by being compelled to roll an immense boulder up a hill, only to watch it roll back down, and to repeat this action forever.

Forever? Well, it certainly seems this way in the other illuminating comment from King - a weird, contradictory warning to the public against seeing any end to the crisis.

“When this crisis began in 2007-2008, most people including ourselves did not believe that we would still be right in the thick of it” [he really, really said it], “in the middle of it, quite this late,” King told MPs. “All the way through, I’ve said to this committee that I don’t think we are yet half-way through – I’ve always said that and I’m still saying it.”

So, if we’re to understand this correctly, the longer the crisis has gone on, the end disappears into infinity as “half-way” fades into the distance. He’s not wrong. On the same day, figures for the UK’s state borrowing showed that the deficit is still growing. Tax revenues are falling and unemployment has driven up welfare spending. Chancellor Osborne had to postpone a 3p petrol duty rise for fear of sending the economy over the edge. That’s how precipitate things are.

After taking a quick look at the books, Vassilis Rapanos, 64,  the finance minister of the newly elected Greek coalition government, resigned on Monday due to ill health.  

Also on Monday, Spain and Cyprus became the fourth and fifth casualties in the 17 country eurozone forced to admit bankruptcy and beg for help. Eurozone finance ministers are meeting today to consider the appeals. Spain is asking for €100 billion. Estimates put the cost of a bailout for Cyprus as high as half of its €17.3 billion economy.

The reaction from credit ratings agency Moody’s was predictable, whatever Mervyn might say. They downgraded the ratings of 28 of 33 rated banks, by one to four notches, following a cut to Spain's sovereign rating to just above junk status earlier this month.

With Germany’s Chancellor Angela Merkel refusing to share the total eurozone debt burden “as along as I live”, the struggle playing out in Europe, as in the rest of the world, is the endgame between national sovereignty and the transnational cabal of giant corporations and the investment funds that largely own them. They also have the World Trade Organisation and International Monetary Fund on their side.

A conspiracy? Yes, indeed, but one that results from the objective logic of the system of debt-fuelled profit-seeking growth known as capitalism. With its markets for commodities and credit super-saturated, its logic now demands contraction by up to 90% of pre-crisis levels and the destruction of public spending.

The interconnectedness that resulted from three decades of global expansion provides the path of transmission for the debt contagion. But in the right social hands, the technology, the infrastructure, the corporations themselves, are the source of the solution.  

Gerry Gold

Economics editor

Rating agencies tighten the screw

Moody’s has joined other credit rating agencies in downgrading its assessments for France and Spain when it comes to repaying loans. What logic is unfolding here?

The full name of the credit rating agency – Moody’s Investors Service – says it all. The analysis these agencies make and the actions they take are intended to assist those with money to magnify the value of their investments.

Over the last few months, as the crisis has deepened, the significance of Moody’s and the small number of other similar agencies has grown and grown.

In many ways they provide the information needed to allow the operation of the free market, advising investors on the credit-worthiness of borrowers, and helping borrowers to improve their attractiveness to lenders.

Informed investors profit from crisis, as they speculate against future market prices for shares and bonds.

Moody’s cut in Spain’s rating and its warning to France measures the deterioration in conditions in those countries as the recession exposes the weakness of the banks.

The downgraded ratings don’t just measure, however. They have a dual role. They are intended as a direct intimidation to those countries’ governments (and to all the others who are next in firing line).

Unless you take action to ensure that you overcome your difficulties in making these payments, the increased cost of borrowing more will make life impossibly difficult. It’s the classic money lenders’ threat.

The objective conditions that provide evidence for the downgrade are slowing growth, and accelerating recession leading to falling tax revenues which, in turn, make it more and more difficult for governments to make the interest payments due on the money they’ve borrowed.

So the rating cut also translates into a more severe assault on the lives of the people who live in the countries affected. The news about Spain and France came just as trades unions in Greece prepared for a 48 hour strike supported by the burgeoning network of new organisations that have formed to fight the impact of the mounting attacks on living standards.

For governments subservient to the capitalist economy, like the ‘socialist’ Pasok in Greece, cuts are not optional.

For the millions of people whose wages and pensions are melting away, whose jobs are being destroyed, health, education and social support systems being swept from under their feet, fighting the cuts is not optional either.

What resolution can there be to these opposite interests?

Strikes, protests, demonstrations, occupations are all now everyday events. Last Saturday’s occupation of towns and cities throughout the world is an important part of the answer to Moody’s symbolic measure of the power of capital.

But only a part. The regulation of finance demanded by many protestors is not an option for capital either.

This is an epochal moment providing both the necessity and opportunity to replace the rule of capital.

Those who claim to the know, like Mervyn King, governor of the Bank of England, are warning that “time is running out” for the global capitalist economy and that even dealing with Greece and the eurozone crisis will not provide the “solution”.

He is right there. The capitalist system has plunged into an irreversible crisis in which the only answer for the ruling classes is to punish the overwhelming majority through an unprecedented assault on living standards, services, job and right.

In all the temporary and permanent occupations of towns and cities, the question to be raised is not how to better manage capitalist society but how to achieve the democratic ownership and control of the banks, the factories, the mines and the supermarkets.

Gerry Gold

Economics editor

The great contraction

Signs of a great contraction of the global conomy are appearing throughout the world, pushing aside any lingering notions of the return to growth that capitalism requires.

Following six months of stagnation, the Bank of England said today that the near-term outlook for growth had worsened since February, while prices would rise, and that first-quarter growth had been slower than it had predicted. Governor Mervyn King also blamed the extra public holiday for the royal wedding, and disruption to supply chains from the Japanese earthquake, for the slowdown.

Since the recession started, the financial sector has shrunk by 9% - twice the 4.7% decline in the economy as a whole to the end of 2010. As big banks continue to offload loans and reduce balance sheets, the process is likely to constrain the economy’s growth rate for years to come.

In the United States, the independent Consumer Metrics Institute (CMI) presents a stark truth emerging through the clouds of delusional confidence. Last week it report that “after a week-long pause our Daily Growth Index resumed its movement into record territory, setting a new all-time low representing a 6.39% year-over-year contraction on May 3, 2011”.

Revised official figures from the US Census Bureau more than confirm the CMI’s more accurate grip on the reality of deepening decline. It reported that 2010 "furniture and home furnishings stores" sales were 3.6% weaker than previously reported, turning an 0.8% gain into a -2.4% contraction while "miscellaneous store retailers" dropped some 6.7%, nearly wiping out the earlier 7.6% alleged gain.

Japan, the world’s third largest national economy, is struggling to recover from the effects of the earthquake and tsunami which overwhelmed the inadequate and badly maintained defences of Tokyo Electric Power’s Fukushima reactors, forcing the closure of swathes of production across the world. Latest estimates from Goldman Sachs economists indicate a contraction of 0.2% in 2011 revised down from an 0.7% gain.

In the eurozone, Greece’s economy contracted by 4.5% in 2010 and is expected to shrink by another 3% this year. German consumers have been hit hard with a 2.1% monthly contraction in spending. The overall drop is 1.7% for the year, and it is now at the lowest level since November 2009. The German thrift is even more remarkable given that unemployment is lower there than anywhere else in Europe. In Spain the March 1.4% fall in retail sales extended the string of losses to twelve consecutive months. In bankrupt Ireland, house prices are down by at least 33% from their peak - the largest contraction in Western Europe since the global economic crisis began.

In Serbia, the International Monetary Fund, which provided a loan of €3 billion in 2008 are busy strong-arming the country’s government into revising its shrinking GDP figure for 2009 sharply downward from a contraction of 3.1% to over 6%As a result, Serbia’s debt – and the payments to be made by its increasingly unwilling population – will be sharply higher than previously thought. Tens of thousands have attended anti-government rallies.

Meanwhile, bonuses for chief executives at 50 major US companies bounced back by an average of 30.5% in 2010, the Wall Street Journal has reported. This was the biggest gain in at least three years. Goldman Sachs chief executive Lloyd Blankfein's total compensation, including a cash bonus, had been raised to $19 million in 2010. His pay package includes a salary of $600,000, a cash bonus of $5.4 million and stock awards of $7.65 million for 2010.

But while investment banks like Goldman Sachs prosper – having moved into commodity futures in a big way – the productive economy is going to hell in a handcart. The banks left over from the crash may be too big too fail – but the global economy itself isn’t.

Gerry Gold

Economics editor

King's speech wins Oscar for half-truths

As everyone who buys their own food and fuel knows, price rises are accelerating. Even in the unlikely event that the revolutionary uprisings in the Middle East and North Africa don’t push oil prices even higher, inflation in the UK is shooting past 4% and heading towards double that by the middle of the year.

The supermarkets which control 75% of groceries, have already doubled the inflation coming through the commodity markets. They’ve pushed the price of processed food up by as much as 6.5% as they try to protect their profits from falling demand.

As the world has seen, when rising prices push food beyond reach even the most autocratic governments feel the anger of the people.

Inflation is just one side of the global crisis. It is the direct and inevitable result of desperate attempts by governments and central banks to reverse the implosion of the global financial system in 2007-8. They poured in trillions of dollars, pounds, yen, and yuan, hoping to restart lending through commercial banks that they had rescued with money borrowed in advance – without asking - from billions of ordinary people, their children and grandchildren.

It was clear from the outset – at least to some – that the growth needed to repay the debt will never materialise. But they had to try. So another solution to the worsening debt crisis is now in play – higher taxes and cuts in government spending which have already provoked social upheaval throughout Europe.

Now the reality is hitting home. Mervyn King, governor of the Bank of England, told MPs yesterday: "The research makes it clear that the impact of these crises lasts for many years. It is not like an ordinary recession, where you lose output and get it back quickly. We may not get the lost output back for very many years, if ever."

And, he added something that should strike fear into the parliamentarians: "The price of this financial crisis is being borne by people who absolutely did not cause it. Now is the period when the cost is being paid, I'm surprised that the degree of public anger has not been greater than it has."

Maybe King is thinking of joining the national demonstration called by the TUC for March 26, which looks like turning into the Britain’s very own Day of Rage. King told the Treasury select committee that the billions spent bailing out the banks and the need for public spending cuts were the fault of the financial services sector. And so he’s now proposing that rather than rescuing ailing banks, ways should be found to allow them to fail, albeit gracefully.

But the bankers’ banker is only telling half the story, or at best one side of it, to shield the real villain in all this – the capitalist system of production for profit. This is the elephant in the room that few people want to speak of. Certainly not the TUC nor Ed Milband and his let's-build-a “prosperous capitalism”-party which we wrote about yesterday.

For decades, global growth of the capitalist economy was only made possible by an expansion of credit many times greater than the new value generated. It couldn’t last. When the limit was reached, meltdown took over. Then everything that was done to try and solve the crisis by treating its symptoms only made it worse.

Growth has been replaced by recession, and everything and anything that is done to try and deal with it just inflames the people affected most. King wonders why people are not angrier and out on the streets like the workers of North Africa. Don’t worry Mervyn. The rage is building and when it blows it needs to be directed not just against a few bankers but at the crazy capitalist system as a whole. At that point, you will be out of a job!

Gerry Gold

Economics editor

Workers must sacrifice so capitalists can profit

The Governor of the Bank of England, Mervyn King has assured us that unemployment will rise and the value of wages will fall as inflation lets rip, leading to the most dramatic assault on living standards since the 1920s.

What’s more, you’ll be pleased to know, it’s absolutely necessary. This is the price we are obliged to pay, says King, to smooth the path to growth and economic recovery.

In actuality, it’s the consequence of failed to attempts to stave off the deepening recession and confirms that they don’t have a clue what to do, apart from the usual capitalist remedy of increasing exploitation and the share of national wealth that goes to the ruling classes.

It’s a similar story across the Atlantic as the rate of repossessions accelerates, driving millions of families from their homes and unemployment touches 10%. President Obama used his annual State of the Union address to warn that the US must mobilise to meet the “mortal threat of foreign competition from China and India”.

He is proposing to reduce government spending to the lowest share of the US economy since the1950s. Despite renewed attempts to rehabilitate the policies of Keynes – who favoured higher spending in a recession – the crash of 2007-8 means that, for capitalism, the era of high levels of government spending is over.

Are these programmes of slashing cuts “ideological”? Yes indeed, they manifest the ideology of those whose job it is to sustain a society devoted to profit at the expense of the majority of people on the planet, and the planet itself.

Throughout the relatively short period in which capitalist production spread across the world, its inner dynamic forced its human agents to find ways to counteract the relentless tendency for the rate of profit to fall.

Investing in technology to increase productivity is one. Forcing wages down another. Together they lead to increases in productive capacity and the volume of goods and services. They call it “growth”.

Pretty soon production expands beyond the available marketplace of consumers. And then credit comes into play, stretching things beyond their “natural” limits - for a while. Then comes the crash. Surplus productive capacity is eliminated, and the process starts up, once again.

This time there’s a difference.

The period of growth called “globalisation” consumed the world’s natural resources at an exponential rate. Corporations spread production throughout the world by recklessly burning fossil fuels, unlocking energy and releasing it into the atmosphere and so intensifying weather patterns.

Early snow in Britain helped to reduce national output by an estimated 0.5% in the last three months of 2010. Floods in Pakistan and Queensland, Australia wiped out crops. Nature mocked capital as the floodwaters wrecked the extraction of coal.

But capital’s human agents are blind to these effects. They are tied into the historic logic of profit from which they cannot escape. Sir Richard Lambert, outgoing chief of the Confederation of British Industry accused the Coalition of having no strategy for growth.

But the Cameron-Clegg branch better reflects the needs of capital at this point in history. They are hell-bent on cutting the deficit, reducing capacity, shrinking incomes, eliminating jobs and services – every action aimed at facilitating the contraction without which “recovery” is impossible.

Rather than allow the destruction of the valuable results of a couple of centuries of human endeavour, it falls to the rest of us to bring the destructive system to an end before it threatens to end the conditions for life on the planet.

In the process of building a global network of people’s assemblies we can establish democratic stewardship of the world’s resources, utilising and advancing the science and technology for sustainable production, and setting ourselves the task of converting it to satisfy the needs of the majority.

Gerry Gold
Economics editor

All bark and no bite

There was dismay and anger amongst the several thousand trade union members who crowded Westminster Central Hall; some including a large number from the prison officers union, couldn’t get in to the TUC’s anti-cuts rally. People had travelled from Lancashire, Devon, Cornwall, Northamptonshire and around London to take part in the protest meeting and lobby of MPs.

As well as the Prison Officers Association, there were big delegations from Unison, actors’ union Equity, rail and transport workers, public services unions UNITE and GMB, the National Union of Teachers and the Right to Work Campaign. Screen actors Benedict Cumberbatch and Roger Lloyd Pack said they opposed cuts in the arts which will privilege the rich. They all shared a deep anxiety as it emerged that around half a million jobs are to go by 2015.

Tony Woodley, joint secretary of the UNITE trade union, pointed out that for every four public sector jobs scrapped by the cuts, three more would follow in the private sector. He pointed out that the Lib-Con coalition has no mandate for the cuts, and that people “did not vote for the dismantling of their schools, hospitals and communities.”

“Cuts on this scale make no sense,” he said – but they make sense to the coalition, the bankers and the IMF. It’s the survival of the capitalist system that is at stake for them.

TUC general secretary Brendan Barber continued the myth that the cuts are just a political choice, not an economic necessity for the ruling class: "They want us to believe....this is economic necessity. Yet economic experts across the spectrum warn us that the cuts are too deep and too rapid.”

Dave Prentis of Unison warned that if the government doesn’t listen, “we will be back. For every one of us in this room today, we will bring a hundred more. We’ll march in our thousands and we’ll vote in our millions,” he said in a fit of demagogy. But vote for what? For New Labour Mark 2?

None of the trade union leaders have any answers. In fact they are determined to hold back any serious movement by workers in the face of the re-shaping of the entire British state. Asked why the British workers were not angry as those in France, Woodley cited the anti-trade union laws making striking difficult. But if they were serious about halting the cuts, trade union leaders would bring every member out and let the law go hang. By directing all their fire towards parliament and the next election nearly four years hence, they hope to act as a lightning rod to defuse and disarm any movement.

And where was Milliband? He was in hiding from the trade union leaders who got him the Labour leadership. The reality is a New Labour government would be doing the same – and it may not be too long before they too are co-opted into this government of desperate decline.

Today’s spending review is not the result of a nasty bunch of old-style Thatcherite Tories. It is a response to the most serious economic and financial crisis of the capitalist profit-based system. As Bank of England governor, Mervyn King, speaking in the Midlands, made plain. Deep tensions underlay discussions at the International Monetary Fund meeting last week, he said.

Global currency conflicts, particularly between the US and China, are evidence of profound disagreements about the way to deal with the crisis. A 1930s-style collapse of business activity and international trade is possible. So much for the cuts being an “ideological exercise”! They are the ruling class’ response to an uncontrollable crisis of the system.

Fighting against the cuts agenda means challenging the ruling class by working for a transfer of power, property and control to a democratically elected and accountable network of peoples’ assemblies http://aworldtowin.net/frontline/BuildPeoplesAssemblies.html. Come to the Beyond Resistance conference on December 11 to make this come alive.

Corinna Lotz and Peter Arkell
A World to Win

An 'offer' we can and should refuse

When Mervyn King, the governor of the Bank of England, let slip that whoever wins the election would subsequently be out of power for 30 years, he was speaking with inside knowledge. King knows better than anyone the real state of the country’s finances – and it doesn’t make bedtime reading.

It’s the stuff of nightmares, with a budget deficit that is so huge that it threatens to overwhelm the state’s finances. What’s happening to Greece (with Portugal, Spain and Italy next in line) is a warning of the events that follow when a sovereign debt gets too big to pay off.

What King is indicating is that the scale of the cuts in public spending that will be implemented after the election – if Britain is to avoid the fate of Greece – are so vast that the anger of those on the receiving end will destroy whatever government emerges after May 6.

Of course, if the leaders of the major parties acknowledged what King was talking about, you might have to pay people to vote next Thursday. Instead, the political class are bound by an omertà. The Sicilian oath of silence, which became associated with the Mafia, is the only way to describe what’s happening with less than a week to go to a general election that is at best fraudulent and at worst a major deception at the expense of the British electorate. It only confirms what a joke the Parliamentary system has become with its claims to democracy and to represent the “will of the people”.

For example, today Lord Mandelson, asked if there was a hole in last night’s TV debate on the issue , the business secretary told BBC Radio 4's Today programme: "I refute that."

He then wittered on about New Labour’s “deficit reduction plan”, and claimed: “I don't think it's fair to say we have left the public in any doubt about the size and scale of the turnaround and what's involved." Pull the other one. Everyone from the Financial Times to the Institute of Fiscal Studies is saying the exact opposite and I know who I’d rather believe.

Extending the Mafia analogy a little further, you could say that messrs Brown, Cameron and Clegg are making us an offer they think we cannot refuse. But why lend any of them our votes when they will use them to claim a mandate for destroying living standards? In a sense, the opinion polls point towards a general desire not to hand any single party a clear mandate. Such is the uncertainty and fear in many voters’ minds about what’s likely to happen when the dust has settled.

The crisis that is unfolding in Greece is now being compared to the sovereign equivalent of the collapse of Lehman Brothers in 2008 which precipitated global financial turmoil. The Greek people are resisting dramatic cuts in living standards that are a consequence of the collapse of a global capitalist economic model driven by debt. Naturally, the measures imposed by the International Monetary Fund will intensify Greece’s economic catastrophe as people have less money in their pockets.

Similarly in Britain, capitalism can only “return to growth” on the basis of a scorched earth policy founded on an unheard of reduction in living standards and jobs. May 6 will settle nothing. All the election will do is draw up the battle lines between government, the state and ordinary working people.

The struggles that are soon to unfold will quickly assume a social character that raises the question of questions: how do ordinary people achieve the power to call a halt to capitalism’s meltdown. These are the kind of issues we will take up at our conference on May 22.

Paul Feldman

Communications 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