Economy

Tom Griffin (London, OK):Perhaps it's something to do with his Freudian slip during the week, but Gordon Brown's bailout plan for the British economy has come in for some sceptical scrutiny in the Sundays today, and not just from his opponents on the right.

In The Herald, Iain MacWhirter agrees with German Finance Minister Peer Steinbrueck's critique of Brown's approach:

The government seems to think it can turn the clock back to 2007 - but the clock is broken. There must be a return to a savings culture. There must be reform of the housing market to prevent another boom, new rules for the Bank of England to curb asset bubbles. We need regulation of derivatives markets and closure of the tax havens which allowed banks to set up shadow entities. The hedge fund industry, which was based on abuse of tax havens, needs to be dismantled as a matter of urgency. As is becoming clear from scandals like that of Bernie Madoff, who ran a £50 billion scam, the hedge funds were essentially Ponzi pyramid schemes built on leveraged debt.

In the Observer, Andrew Rawnsley also picks up on Steinbrueck's comments, in arguing for a greater focus on investment rather than reflating consumption:

Tom Griffin (London, OK): The ongoing saga over the fate of HBOS continues to highlight the new faultlines in Scottish politics. The recently appointed Scottish Secretary Jim Murphy is facing criticism after leaking details of talks with Jim Spowart about an alternative to the Downing Street-backed Lloyds-TSB takeover.

The Sunday Herald reports:

Alex Neil, the SNP MSP who has been campaigning for HBOS jobs to be saved, accused Murphy of trying to spike the second bid.

He said: "This is a resigning matter. Jim Murphy has shown that he can't really be trusted to keep confidential matters to himself. This is market-sensitive information. This is really underhand and mischievous behaviour to try and spike any chance of another bid."

David Mundell, the shadow Scottish secretary, said: "If there is any suggestion that any politician has got embroiled or broken any confidences then that is a very serious situation and must be investigated."

Tavish Scott, the leader of the Scottish Liberal Democrats, said: "This is really dirty tricks to save Labour's neck. This is purely because Gordon Brown cannot be seen to change his mind after waving the Lloyds TSB and HBOS deal to go through."

Tom Griffin (London, OK): An openDemocracy piece from Mary Kaldor puts the credit crisis into a longer term perspective, highlighting the work of Carlota Perez on long waves of economic change:

Perez's contribution is two fold. First she demonstrates the importance of the institutional framework. She explains crises and depressions in terms of a mismatch between social and political institutions and the techno-economic paradigm. She accounts for `golden ages' in terms of contrasting periods of harmony.

The depression of the 1930s is explained in terms of the mismatch between financial and regulatory arrangements, which were an expression of the social and political institutions, largely established by Britain in the late nineteenth century and the huge potential for economic expansion resulting from the marriage of oil and mass production pioneered in the United States known as Fordism. 

Over at oD Today, Tony Curzon Price picks up on some of the political implications of the theory:

Brian Davey (Nottingham, Strategy for Losers): Green New Deals are clearly the new big idea. Governments need to spend to avert the worse kind of slump and it makes sense for their expenditure to focus on  renewables and energy efficiency. At the same time the finance system needs greater regulation.

This is instantaneously the new conventional wisdom. The beginnings of an alliance created by the New Economics Foundation (NEF) for a Green New Deal appears to be pushing at an open door. The United Nations Environment Programme are calling, apparently, for something similar.

But are these ideas radical enough for the problems that we face? The NEF alliance has created a draft programme about the banking crisis, peak oil and climate change that is effectively relating the finance and money system to the limits to growth. However it leaves out that key idea and  its implications for the banking and finance system.

Tony Curzon Price (London, openDemocracy): George Osborne gave the Today program an opportunity to demonstrate the great emptiness of the media-political conversation this morning.

Paraphrasing, here was the interview:

SM (interviewer): "What is wrong with Darling's plan?"

GO: "You can't spend your way out of a recession with a Keynesian splurge on big projects"

SM: "What would you do differently?"

GO: "Freeze council tax, give small businesses help and let the bank of England cut interest rates, putting money in people's pockets."

SM did not then ask why this wasn't itself Keynesian splurging. There are three points here:

1. what should be the level of fiscal largesse?

2. is it better to spend this mainly on public investment or to delegate that spending to households and small businesses?

3. who eventually pays for fiscal largesse?

Tony Curzon Price (London, openDemocracy): Darling is going to announce that the budgetary prudence rules of his predecessor---to balance the budget over the cycle, unless the spending is on long term public good investment---don't apply. And he is right. But why does a rule that sounds so sensible have to be thrown out so soon after it was proposed?

Tony Curzon Price (London, openDemocracy): The Bank of England's report on the state of finance has about 3 worrying graphs per page.

Here's just one example - the amount that UK banks will need tofind next year to pay back loans that are coming due.

 

Any wonder the banks are hoarding all that taxpayer investment they
are getting and not lending on? And if you were asked to invest in a
business that you knew had to stump up these sorts of sums next year,
would you worry that your investment was just going to stright into the
pocket of a creditor whose lending terms are tougher than your
ownership terms?

I'm all for the State being the bank of last resort, but I don't have any taste for the taxpayer being the dupe of last resort. Why don't we let these banks go under while putting in place an emergency financial system. I am glad to see that Walter Munchau has started to suggest this option.

Tom Griffin (London, OK): "Occasional slowdowns are natural and necessary features of a market economy." That's the message from a group of leading economists who wrote to the Sunday Telegraph yesterday in protest at Alistair Darling's attempts at Keynesian reflation.

Over at our sister blog oD Today, Tony Curzon Price gives the arguments of the 'rump monetarists' a thorough fisking.

The weekend reports of Dominique Strauss-Kahn's dangerous liaison have set tongues wagging worldwide, at a time when the IMF's Managing Director was positioning the organisation to implement a new global, financial regulation system. Neither favourable nor disfavourable behaviour in Mrs Piroska Nagy's regard has been established, and the investigation had been discretely ongoing since August, but in light of the fate of Paul Wolfowitz, his very future is clearly at stake.

It would be interesting, then, to examine who may stand to benefit from Mr Strauss-Kahn's aventure d'un soir. The investigation was launched in response to governing board member A Shakour Salaan's request. The Wall St Journal, who broke the story, claiming this was done with "advice from the representatives of Russia and the U.S." And this does seem probable. The Times speaks of a "dismayed President Sarkozy." This rather less so.

Clearly, if the IMF was to return to a role exceeding even it's former strength, as proposed in the Financial Times, there would be difficulties for those countries whose growth most depended on their financial sector and speculation. There may be effects on oil and gas prices. There would certainly be voices opposing restoring the oversight that has been carefully dismantled in the U.S., given their muzzling of government as crisis approached. Russia nominated its own candidate when Nicolas Sarkozy convinced enough leaders to make DSK Europe's, and may well seek to nominate his eventual successor.

Radhika Balakrishnan and Diane Elson: The U.S. financial crisis,  and the $700 billion rescue plan, even as amended by the Senate and the Treasury Department, do not simply involve huge monetary costs. Both the crisis and the proposed bailout involve violations of the human rights of millions of Americans. Any short- and long-term solutions to the problems must take human rights into account and ensure that the banks are fully accountable to the American people

The Universal Declaration of Human Rights, crafted under the leadership of Eleanor Roosevelt in the aftermath of the great depression and the Second World War and signed by the U.S., declares that everyone has inalienable political and civil and economic and social rights. Governments have obligations to respect, protect and fulfill those human rights, which include the right to an adequate standard of living, the right to housing, and the right to education, as well as the right to freedom of peaceful assembly and association.

Rupert Read (Norwich, The Green Party): Here is a good place to start. Check out the sub-head to this piece in today’s ‘Telegraph’: "October 13, 2008 will go down in history as the day the capitalist system in the UK finally admitted defeat." These are extraordinary days. In fact, the crisis is so fast-moving now, that it would be more accurate to say: 'These are extraordinary hours'. This blogger's and then the Green Party's call for the banks to be nationalised - for no taxation without representation - have been dramatically vindicated. At last, we the taxpayers are going to get seats on the Boards of banks. At last, banks will be forced to lend to each other, and to their customers, especially small businesses, who are at the moment being either gouged or stonewalled by commercial banks. At last, the obscene profiteering of the banks will be reined in, including dividends and executive bonuses.

Tom Griffin (London, OK): The Independent Commission set up to examine the funding of the Welsh Assembly Government began its work this week.

The Commission's call for evidence from interested parties comes as rising inflation is forcing the Government to dip into its reserves to cover its spending plans.

It will take over £200m from reserves, cutting them to 1% of the total budget, as spending rises to £15.2bn.

The money released will fund priorities including £60m over two years for the Foundation Phase education for three-to-seven-year-olds.

But opposition parties said local government was being "clobbered".

Over at the Institute of Welsh Affairs blog, James Foreman-Peck of Cardiff Business School argues that the Commission should consider the option of greater borrowing powers:

Devolving borrowing powers will be resisted by the Treasury on the grounds that there is an implicit Treasury guarantee to such borrowing although they cannot control the amount. The UK central government would be obliged to pick up the tab if the Welsh Assembly Government defaulted. But are we not seeing something like this for our big commercial banks at the moment? Anyway the Treasury’s point will need addressing in any recommendation for greater powers.

Tom Griffin (London, OK): Today's Scotsman reports on the dramatic impact which the credit crunch is having in Edinburgh:

Morale is said to have fallen to an "all-time low" among the city's 31,000 finance workers as they wait to find out whether their jobs will survive the upheaval.

And as house prices fall, and the dole queue lengthens, there were fresh warnings today that the city council will have to deal with a rise in homelessness in the near future.

One reason for the gloomy outlook is the expected merger of HBOS with London-based Lloyds.That move is now being questioned by the Liberal Democrats in the light of today's huge bailout of the entire banking sector.

Commenting on the rescue package, Scottish Lib Dem leader Tavish Scott urged the government to help keep HBOS as an independent bank.

He added: "This is a massive package of money for banks. Market and banking circumstances have changed enormously since the proposed Lloyds/HBOS merger was announced.

"The government are now in direct negotiations with banks so they could make this happen.

"Keeping HBOS as an independent bank while strengthening RBS through this package would be positive economic news for Scotland. I urge the government to make this happen."

Tony Curzon Price (openDemocracy, London):Paul Krugman has a simple model of the crisis that is a pretty useful tool to think about what is happening and what should be done immediately. It is not a model of why we got here, but a diagnostic tool for short term action.

First, Krugman's conclusions from the model are a) that taxpayers becoming shareholders in banks is a good next move and b) that international coordination of rescue plans is particularly important. Quoting him directly: 

First, it suggests that the core problem is capital, not liquidity - or at least that you can explain much of what's going on without appealing to a breakdown of buying and selling per se. To the extent that this is true, rescue plans centered on making troubled assets liquid, like the Paulson plan passed last week, won't do the trick. Instead, what's needed is an injection of capital, which can't reverse the original shock, but can undo the financial multiplier effect of that shock.

Second, the international implications: to the extent that we regard falling asset prices and their consequences as a bad thing, which we obviously do right now, this analysis suggests that there are large cross-border externalities in financial rescues. Macroeconomic policy coordination never got much traction, largely because economists never could make the case that it was terribly important. Financial policy coordination, however, looks on the face of it much more important. Capital injections by U.S. fiscal authorities would help alleviate the European financial crisis, capital injections by European fiscal authorities help alleviate the U.S. financial crisis. Multilateral Man, come home - we need you! 

Tom Griffin (London, OK): The credit crunch has shaken the political kaleidoscope at Holyrood as well as at Westminster. In both cases, somewhat counter-intuitively perhaps, Labour has been the initial beneficiary.

The shotgun merger between HBOS and Lloyds may have seemed like an open goal for Alex Salmond, but many feel he overplayed his hand, not least with his suggestion that an independent Scotland could have bailed out HBOS.

Former Scottish Lib Dem leader Jim Wallace argues that the episode has highlighted unanswered questions about monetary policy and financial regulation in an independent Scotland.

Tom Griffin (London, OK): David Cameron has been quick to react to the nationalisation of Bradford & Bingley today, but the progress of the credit crunch leaves him with a more complicated task than he might have anticipated a few weeks ago.

Today's poll for the Sunday Telegraph provides more evidence that Gordon Brown's 'no time for novices' argument' has gained some traction. Andrew Rawnsley argues in his Observer column that the Tories have been caught flat-footed by recent events and need to raise their game:

Just a few weeks ago, Mr Cameron was planning to leave Labour to stew in its unpopularity and keep the substance to a minimum at his own conference. He won't get away with that now. The country looks for seriousness from the man who wants to be its Prime Minister. If he doesn't have any answers, then David Cameron really will find himself on the conference stage without any clothes on.

 

Mike Small (Fife, Bella Caledonia):The collapse of the financial markets, industries and associated ‘businesses’ presents us with a great opportunity as a world society. As the veil is lifted revealing the reality behind the fictional economy on which our lives are dependent, a number of compelling options emerge.

The first, and most appealing is to continue as if nothing has happened, perhaps offering some minor regulatory tweaks, some admonitions to a few naughty individuals and ‘move on’. This is the systemic response. This is business as usual, and is the most likely, though the least credible outcome. Almost everyone at a UK level, Tory-Labour, Liberal, minus a few squawks here and there is coalescing around this brutally inadequate consensus.

Tony Curzon Price (London, oD): Gamekeeper Hank Paulson has asked taxpayers to put up $700bn of risk capital to spend on his erstwhile and future colleagues on Wall Street. He has given permission to his previous employer, Goldman Sachs, to become a deposit-taking institution. (I am no financial adviser, but I would caution anyone to think twice before transferring their balances to Goldman Sachs today). Are the Democrats right to be resisting the blank cheque, or are they playing loose with the world economy?

The dilemma is clear: crises require flexibility, rapid action and leadership; but the power of flexibility can be abused. Paulson, who rose to the top in the macho culture of "take no prisoners'' Wall Street is not the man the taxpayer should trust. Worse, the Bush administration's systematic capture by energy, military and religious interests does not suggest a culture that can be trusted with huge power.

Tom Griffin (London, OK): It's been a remarkable couple of days. The weekend's attacks on Gordon Brown have left the Government looking weakened at the very moment when the credit crunch has taken a dramatic new turn with the demise of Lehman Brothers. Robert Peston has called it Wall Street's 'most extraordinary 24 hours since the late 1920s.'

The party politics may not be the most important angle in all of this, but for what it's worth, Labour looks ever more vulnerable to critiques like this one from Janet Daley in the Telegraph:

Tony Curzon Price (London, oD): Tim Duy has a great analysis of what the week-end teaches us about where we are with Lehman, Merrill, AIG etc. I think he is right that this is a signal from the US authorities that the socialisation of losses is over; that any taking-over of dud assets by the public will now go through Congress, and not through a technocratic nod-and-wink. The danger, as it has been for a year, is contagion to the real economy---when do firms providing real value find that either a) demand has fallen such that they have to cut back operations or b) that their own credit lines for working capital and investment programs are closed, and so have to cut back?

That danger still exists. Certainly, as banks find it harder and harder to satisfy regulators that they have enough capital to guarantee the loans they have made, they will cut back their lending. So far, the Fed has become banker-of-last-resort by allowing bonds and now even shares to be put up as guarantees for cash loans.

In any case, the week-end moves by the Fed mean that the music of time is picking up again. After 1 year of waiting, time-haltingly hoping, that the crisis would resolve itself, the regulator has called time-up. There may yet need to be large-scale public cash injections into the corporate sector to avoid deep depression. But this week-end shows the regulator has, at last, given up on hopes of self-repair. So adopt the pose of the surfer caught between breaking waves: take a deep breath and hope the turbulence of the breaking behemoth does not keep our economies trapped under for too long.