Tuesday, January 01, 2008

It's socialism for the banks

Gordon Brown is getting his excuses in early. In his new year address he warned Britain to prepare for "global financial turbulence" in 2008, declaring that: "the global credit problem that started in America is now the most immediate challenge for every economy". Funny how, when things are going well it is all down to the government, but when things aren't going well it is the fault of 'world market conditions'.

I think we can see how the PM is planning to handle the economic downturn that now seems inevitable. 'Nothing to do with us, mate, we just work here'. Well, the impact of the credit crisis has certainly been most marked in the US where millions face the loss of their homes. But this is as much a British-made problem as an American one. Remember Northern Rock? The first run on a British bank in over a century? The debt explosion, which is the root of the problem, is very much our own work.

As the former head of the US Fed., Alan Greenspan, reminded Brown last year, the inflation in house prices, fuelled by reckless lending, has been far greater in Britain than in America, and prices here have a longer way to fall before they become sensible again. Gordon's economic miracle was built on this shaky foundation, so he can hardly blame America for blowing it away.

He's right about the turbulence though. The world is becoming more unstable, as power and wealth shifts from West to East. America's loss of military prestige following the debacle in Iraq is being
paralleled by a decline of the dollar, which is no longer unchallenged as the
world’s reserve currency. Countries like China, now the world's second largest economy, are beginning to feel their strength and looking for a better deal. Their overflowing sovereign funds are now buying into western banks desperate for capital to meet their immense debts.

Why did the mighty Wall St banks suddenly discover they had no money to cover their loans? Well, as everyone now knows, dodgy US mortgage debts had
been “securitised” - packaged up and sold on to other
financial institutions as “collateralised debt obligations". This
was supposed to spread the risk, but it also spread the contagion,
and when the American housing market caught a cold, the rest of the
world caught pneumonia.

But British bankers were in the forefront of the "securitisation revolution". The City of London made a fortune out of trading CDOs. The Bank of England helped by slashing interest rates whenever the house of cards looked unsteady, or when British mortgage payers got into difficulties. Moral hazard begins at home.

It’s easy to blame nasty foreign bankers for these problems,
and they are certainly guilty of creating complex financial
which they didn’t really understand. However, the root problem
was very simple: too much borrowing.
And we, the people, have to take at least some responsibility for this - for taking out the loans in the first place. The British housing market became infected by a gold-rush mentality, where everyone hoped to get rich by borrowing to buy. We all wanted something for nothing. Families used their houses as
if they were cash machines. The government played its part by allowing tax breaks to buy-to-let speculators.

So we are all implicated in this insidious self-delusion, and we clearly haven't learned. British consumers spent and spent over Christmas, adding more billions ta debt mountain that already stands at a record £1.4 trillion. Britain is the most debt-ridden country in the world and we have more on our credit cards than the rest of Europe combined.

The government has been as profligate as the rest of
us, despite Gordon's "golden rules" , and is currently spending around 9 billion a month more than it is
receiving in taxes. Britain’s balance of payments went
into the red by record £20bn in the last quarter,
equivalent to 5.7% of national income.
Britain is worryingly dependent on the financial services sector - largely as a result of the government's neglect of manufacturing - and now that the goose is cooked, government tax revenue is sinking as the City prepares to axe literally thousands of jobs. Expect tax rises in the coming months as the treasury tries to make up the taxation gap.

Economics is always a dismal science, but it’s hard not to be
alarmed by this situation. The world really did change in August
when the banks stopped lending to each other, suddenly realising that they'd created a financial Frankenstein.
The reaction of the Anglo-Saxon
countries - essentially Britain and America - has been to fight debt
With debt. Central banks have tried to resolve the credit crisis by
pouring public money into the cash-strapped banks and by cutting interest rates. The consequence of this last desperate financial fix of cheap money will almost certainly be the return of inflation as a major political issue in 2008.

Inflation - the RPI which includes housing and energy costs - is
already over 4%, and the central banks should arguably be increasing interest
rates rather than cutting them. Inflationary pressures are hard to ignore, with oil over $90 dollars and world food prices
rocketing. But inflation is seen now as the lesser evil, and everything
is being thrown at a rescue of the corrupt financial system which got us into
this mess in the first place.

It's socialism for the banks. A cash rescue not just for Northern Rock, which has absorbed some 25bn of our money, but for the likes of Morgan Stanley, Citibank, Merrill Lynch. Central banks are handing out loans of such magnitude now as to beggar belief. Before Christmas the European Central Bankers handed out a credit line of 500 billion - half a trillion dollars!

In any other era, this might have been seen as an
irresponsible use of public funds, but we live in an era in which there is precious little questioning of the financial system. The political influence of the financial institutions
is so great in America and Britain that they can
largely dictate economic policy. It is
as if democracy has ceased to function, and the interests of the
banks have come to be seen as synonymous with the interests of the nation.

But we know they aren't synonymous. The banks have an imperative to lend, because their trade is in debt. The nation needs to save - now more than ever. Before we throw yet more money at the banks we need a thorough review of the economic policies that brought about the "global economic turbulence that the PM says is about to hit us. That should be Gordon Brown's New Year resolution, not passing the devalued buck.