The truth behind Brown's boom

A committee of MPs today blames the “reckless behaviour” of the banks for the financial crisis, which is as neat a way of any of letting the New Labour government off the hook as any yet devised.

The Treasury committee’s view of the collapse of the financial system is partial and one-sided and a bit short on history. If the banks were reckless – and they were – it was because they were encouraged to be so. And no one in government complained as the tax receipts rolled in, especially not Gordon Brown who was chancellor for the decade when the credit-fuelled boom took off.

Why were the banks “reckless” and take extraordinary risks with their lending? That is the question. Why, as the committee asks, did bankers make “an astonishing mess of the financial system”? The answer usually given is that they were “greedy” and simply loved piling up the bonuses and forgot to look out for tomorrow.

That doesn’t really get below the surface, however, and puts the collapse of the global financial system down to a few badly-behaved individuals. The real truth is that the so-called boom Britain has experienced was only made possible by a massive extension of credit (and its opposite, debt) under the direction of the government.

It is not that Brown did not know what was going on. His government actively encouraged London to become one of the centres of fantasy finance, which inevitably contributed to the series of bubbles that have now burst and broken the back of the global economy in the process.

Verification of this comes from the Institute of Fiscal Studies, whose director Robert Chote, shows how the Treasury actually knew that the boom was not what it appeared to be. Between 1998 and 2008, output in the economy was 3-4 per cent above its sustainable level, he estimates, in what he calls “an alternative view of history”.

This view, he said, would “cast a much less flattering light” on Brown’s record as chancellor. “It would certainly suggest that he should have been running a much stronger fiscal position.” In plain English, Brown’s officials suspected it would end in tears, and should have reined in spending, but decided to keep the illusion going in the hope that the days of boom and bust were a thing of the past.

Chote explains how much of the so-called boom actually amounted to an increase in share and house prices, which people cashed in on to fuel consumer spending on imports. Yet this activity was treated as if it were a sustainable growth in the real economy. Apparently, the Treasury is now rewriting history to try and disguise what happened.

Of course, the banks contributed. Why shouldn’t they have? They are in business to make money and if that could be done by recycling dodgy loans as securities, creating more and more complex ways of moving funds around the globe, increasing profits as they went, they knew that the government was behind them all the way, to the point where Brown told them in June 2007 that they had created a new “golden age” in the City.

Ultimately, the banks and the government responded to the fact that the only way that the expansion of the goods-producing side of the global economy could be maintained was through greater and greater amounts of fictitious or fantasy finance. The collapse of one has revealed the massive over-capacity and over-production in the other, which is why trade has collapsed around the globe. Global capitalism as a whole is unsustainable any way you look at it and the best way to mark May Day is to renew our efforts to put it out of its misery.

Paul Feldman
AWTW communications editor

A system beyond repair

The global economy is in bad shape, nowhere more so than in the UK and each panic measure only makes matters worse. Following a total of 2% cut in the previous two months, the Bank of England has reduced its rate by a further 1% to 2% – equal to the lowest rate since the Bank of England was founded in 1694, when capitalism began to make its mark. That’s how serious the crisis is.

The sudden and brutal deterioration in the economic outlook across Europe also prompted the European Central Bank to cut its main policy rate by three-quarters of a percentage point to 2.5% – its largest reduction ever – just hours after Sweden’s central bank cut the country’s official borrowing costs by a record 1.75%.

This is the first time that UK interest rates have plumbed these depths since rates took on their current, central role in attempts to minimise the effects of recurrent crises. This was following the 1944 Bretton Woods arrangements to restart the normal business of making profits following the Second World War’s destruction of productive capacity and people.

The Bank of England’s decision is a futile bid to stimulate the economy by getting people spending again and cutting the cost of loans. But the banks are not rushing to play ball as they are mainly interested in rebuilding their shattered balance sheets. Suddenly the banks have become “risk averse” after decades of encouraging debt. Output in the UK fell by 0.5 per cent in the third quarter of this year. Unemployment is rising sharply. Consumer and business spending are stagnant while investment in housing is falling. Yet sharper declines in output and bigger rises in unemployment are expected.

Analysts are warning of the threat of deflation. The Financial Times
warns today: “This is not a normal slowdown. Falling commodity prices, collapsing demand and a damaged financial system may well turn some inflation indices negative: spells of falling prices are quite possible. If consumers start expecting prices to fall, this could uncork the poison of deflation.”

The voice of global capitalism is also concerned that panic measure following panic measure “risks spooking investors, causing long-term interest rate spikes and prompting flights from currencies”. Judging by the plummeting pound against the dollar and euro, this is already beginning. With reports that the government is about to start printing money – regarded as the “nuclear option” – in a yet another attempt to reflate the economy, the position with the pound can only deteriorate.

The financial crisis in the US is taking its toll on other countries. The huge volumes of Treasury bonds issued as part of an effort to reverse the economic slump threaten to stop access to credit by – and therefore bankrupt - Latin American governments facing financing needs of an estimated $250bn next year, The risk is that Latin American and other emerging market borrowers may be “crowded out” from credit markets by a US fiscal deficit that could exceed $1,000bn next year

And China? The source of cheap labour which was the motor of globalization is receiving criticism for its recently announced Keynesian “New Deal” programme pouring money into roads, docks and other export infrastructure. Critics say China should encourage spending to turn savers into big spenders.

The inevitable failure of all of these attempts to stave off the effects of the global financial and economic hurricane lead to just one conclusion: the capitalist system is out of control and beyond repair. And New Labour is undoubtedly preparing other, sinister and repressive measures to deal with the massive social unrest that is heading to a community near you in 2009.


Gerry Gold
Economics editor