So what was that all about? The wheels of government nearly seized last week; local authorities prepared for an emergency council tax hike and staff cuts; there was talk of an early election. Yet, what plunged the Scottish parliament into turmoil was an eleven million pound shortfall in a home insulation programme - a sum so vanishingly small as to be lost in the small change of the thirty billion Scottish budget. Not much more than the golden parachute Fred the Shred Goodwin awarded himself when he abandoned the Royal Bank of Scotland. Could the entire system collapse over such a tiny sum?
Well, the answer is no, of course it couldn’t. What happened last week in Holyrood was a kind of parliamentary theatre, a bit like one of those dramatic reconstructions they used to run on Channel 4 before it dumbed down. A kind of ‘what if’’. All the parties in the parliament looked into the abyss of a lost budget and came racing back from the brink. Everyone is chastened by the experience, and Holyrood is probably a better place for it.
What actually happened was this: the two Green MSPs, Patrick Harvie and Robin Harper, had been trying to get a £100m free home insulation project off the ground in Scotland. Scottish homes have all the thermal efficiency of patio heaters, and half of the output of Torness power-station goes on heating the sky. It’s a very good programme, as it happens, tried and tested south of the border, which largely pays for itself in reduced energy costs. Except, of course, government has to put money up front to get the home insulation into the houses first.
Now, it appears that the Greens and the SNP came to a deal over a £33m start up of the scheme, which would have been an honourable compromise. This was being negotiated, by Alex Salmond personally, even as MSPs gathered for the budget debate on Wednesday afternoon. But the compromise came unstuck shortly before the vote. The Greens co-convenor, Patrick Harvie claimed he had not been given a guarantee by the Finance Secretary, John Swinney, that £11 million of the cash would be new money and not drawn from other budgets.
The SNP claim they had given a guarantee, and are very,very angry. But the real reason for the breakdown was that Harvie - who is under pressure from his own party for accepting the M74 extension and other road extensions in the budget - wasn’t in a position to get an endorsement from his party in time. So in a state of frustration and fury he voted against it, risking losing the scheme altogether.
It was just one of those things, really. A combination of confusion, emotion and brinksmanship. Anyway, the budget bill went down and the roof went up. Suddenly, the illusion of government disintegrated; the ship of state was rudderless. Almost immediately, councils started ringing up the Scottish Executive to find out what had happened to the money they were expecting from the budget. Might they have to make emergency council tax increases to meet their financial commitments? Trades unions were in a panic about job losses in countless public sector schemes. Firms were ringing up the Scottish Executive to find out if their contracts were going to be honoured. Now, maybe a lot of this was just needless bureaucratic fuss - but it was not entirely without foundation. The truth is that no one knows what would happen if a budget actually did fall - except that the previous year’s budget is reapplied. In a searing soundbite at FMQs Alex Salmond claimed that it would mean cuts of £1.8bn and the loss of 34,000 jobs. Labour jeered that the budget failure was a result of incompetence by the SNP.
Then, a curious thing happened. The Liberal Democrats, who had voted against the budget all along because they wanted a 2 pence tax cut, suddenly turned round and made conciliatory noises. If Alex would talk with them about borrowing powers for the parliament, they might be able to vote with the government. Then Labour made clear that they would be willing to come to a deal about apprenticeships. Initially Labour had wanted the SNP to drop its plans for a Scottish Futures Trust and its local income tax. Now, all they were wanting a handful of sweeties and a hug.
It didn’t really make sense. Why would Labour and the Liberal Democrats suddenly decide to support the budget when they had already voted against it twice? Why not just leave the mess and blame it on Alex Salmond? Well, the short answer is that they didn’t want to be held responsible for causing council chaos. Minority government cuts both ways - it is for the opposition parties to explain, if they use their majority to overturn the government’s budget, why they are plunging the country into turmoil.
The Greens, who had started it all, were largely forgotten, which may be a good thing for them, since it prevented them becoming the full target of Alex Salmond’s wrath. We don’t know whether the insulation deal is still live - the money for it may be handed to one of the other parties in the renegotiations on the budget. But Salmond says he wants to get a unanimous vote for the budget, so the suggestion is that a deal is still on the table.
The only one smiling on Thursday was Margo Macdonald, the wily Lothians MSP who quietly used her vote to win further concessions on affordable housing for Edinburgh. Everyone else was looking a bit sheepish, as the press rounded on Holyrood for playing politics with peoples’ jobs. But playing politics is precisely the point. This was an exercise in calculated political risk taking - a process of discovery if you will, in which the parties in the Scottish parliament tested their respective strengths, and the strength of the constitution, in a kind of shadow election.
Labour could in theory have joined with the Liberal Democrats to move a confidence motion and try to replace the government. The Labour leadeer Iain Gray actually requested guidance on this from the Presiding Officer, Alex Fergusson. But the opposition parties clearly decided that they were not in a position to fight any elections right now. Since they weren't prepared to beat Alex Salmond, they had to join him, to ensure that they didn’t get the blame for losing thousands of jobs. In other words, reason prevailed. Which, when you think of it, is all you can expect from a parliament.
Saturday, January 31, 2009
Monday, January 19, 2009
Obama Messiah
Barack Obama used to joke about his being regarded as the Messiah by awed supporters. But he’s going to have to be a real miracle worker if the 44th Presidency of the United States is not to end in disappointment and disillusion. Never as an incoming world leader had such an in-tray of unmitigated doom: two unpopular wars, a climate out of control, a world economic system in an advanced state of collapse. And that’s before he gets round to race, poverty and the Middle East.
In private, many Republicans are content to let a new and inexperienced leader clean up the mess they’ve left after eight years: a crippling trillion dollar deficit, a dysfunctional financial system, half a million jobs being lost every month. Ten trillion dollars have evaporated in the greatest stock market crash since the 1930s. Twenty million Americans face negative equity, thirty million Americans are in poverty, forty million have no health insurance. The numbers just keep piling up.
And as if that wasn’t enough, the entire world is expecting Obama to solve their problems too by launching some miraculous public works programme to get the planet back to work- the economic equivalent of loaves and fishes. But it ain’t gonna happen. Barack Obama does not walk on water, and as President his ability to alter the disastrous trajectory of his country and he world is limited. The US bet the house on a system of speculation and derivative trading that has exploded in its face, leaving the country with massive debts. America and the world faces a deep and long recession while the bad loans are cleaned out of the system and all the folly and fraud is exposed. There really isn’t much a new President can do about that, except feel his nation’s pain.
And so, pretty soon, we will all probably start to complain that Obama is a man of straw, a media creation, a triumph of style over substance; more a celebrity than a politician - a “polebrity” to use the latest ugly neologism. The President-elect hasn’t exactly shunned the image-makers, and seems to be proud of his 15 appearances on the front page of Time magazine, those paparazzi pics of his pecks, the $2,000 suits. His wife, Michelle, is being groomed as a black Jackie Onassis. His daughters, we learn, will be making their own beds and getting by on a dollar a week pocket money while, er, attending schools costing $25,000 a year.
Obama has been trying to get his disillusion in first. He has antagonised the Left by surrounding himself with establishment figures like Secretary of State, Hillary Clinton, who supported the war in Iraq and wants to bomb Iran. His choice of Chief of Staff, Rahm Emanuel - a fiercely pro-Israeli son of a Zionist partisan - should disabuse those hoping Obama will hold Israel accountable for war crimes in Gaza. His economic advisers include the billionaire Warren Buffett and the ultra-conservative former head of the Federal Reserve, Paul Volcker. He’s even antagonised gays by inviting a homophobic pastor, Reverend Rick Warren, to deliver the invocation at tomorrow’s inaugural address.
Liberal America has got the message. Indeed, it is remarkable that there is still so much optimism about the Obama presidency from radicals like Senator Jesse Jackson who seem to believe that Obama is going to declare a war on poverty, save the planet and apologise to the world for America’s illegal war-making. But Obama’s tax increases are minimal, applying only to those earning over $200,000 a year - and he seems to have no stomach for the kind of redistribution of wealth that FDR promoted in the 1930s. He has dropped strong hints that he favours protectionism to halt the ‘export of American jobs’, which could be disastrous for world trade, not least in developing countries. The President-elect has also given notice that he intends to save the big three car manufacturers, Ford, General Motors and Chrysler, by spending billions of public money subsidising the sale of their abominable gas-guzzlers. Yes, Obama has promised to create four million new jobs and a greening of the American economy. But in a profound economic recession, the likelihood is that job creation will take priority over saving the planet.
Obama is now talking about “phased withdrawal” form Iraq leaving American soldiers there for an indefinite period. He is promising to send tens of thousands more young Americans into Afghanistan to fight another unwinnable war. And of course he famously said he would be prepared to invade Pakistan to root out al Qaeda. There is no indication that America is likely to abandon nuclear weapons or breathe life into the Nuclear Non-Proliferation Treaty.
So, where is the change we can believe in? Is Obama just a suit with a brown face, a latter day Uncle Tom, another careerist politician on the make? Well, no, I don’t think so. Call me naive, but I think Obama will make a difference. As the son of a Muslim he will alter the dynamics of international relations and will speak directly to pariah states like Iran. He won’t launch any more illegal wars. The President-elect is an intellectual who will raise the quality of debate in America ove rissues like climate change, and will bring America into the environmental consensus. Neoliberal economics will be abandoned along with free-market fetishism, as will neoconservative foreign policy and brain-dead “America First” rhetoric. America will become a marginally more equal society, under President Obama, and there will be some progress on health care - though don’t expect the new President to introduce a national health service in the depths of an economic depression.
Perhaps the best guarantee of change is the extent to which Obama has emphasised continuity. He is making a point of including Republicans in his administration, of celebrating his defeated rival, John McCain, the man who accused him of being soft on terrorism. Obama has been hard at work ramping down expectations, qualifying his own radical image and disowning black fundamentalists like his former Pastor, Jeremiah Wright. I see this as ideological capital being placed in the bank, for when Obama does make a radical move, which I believe he will.
Just read his book, Dreams of my Father - the best political autobiography I have ever read - and you will see that this is a very different politician from any we have seen before at this level. He is a humane radical whose experience as a community activist in the Chicago ghetto framed his politics. His destiny is to make a difference for tomorrow a black man will enter the White House and that will be change enough for now.
In private, many Republicans are content to let a new and inexperienced leader clean up the mess they’ve left after eight years: a crippling trillion dollar deficit, a dysfunctional financial system, half a million jobs being lost every month. Ten trillion dollars have evaporated in the greatest stock market crash since the 1930s. Twenty million Americans face negative equity, thirty million Americans are in poverty, forty million have no health insurance. The numbers just keep piling up.
And as if that wasn’t enough, the entire world is expecting Obama to solve their problems too by launching some miraculous public works programme to get the planet back to work- the economic equivalent of loaves and fishes. But it ain’t gonna happen. Barack Obama does not walk on water, and as President his ability to alter the disastrous trajectory of his country and he world is limited. The US bet the house on a system of speculation and derivative trading that has exploded in its face, leaving the country with massive debts. America and the world faces a deep and long recession while the bad loans are cleaned out of the system and all the folly and fraud is exposed. There really isn’t much a new President can do about that, except feel his nation’s pain.
And so, pretty soon, we will all probably start to complain that Obama is a man of straw, a media creation, a triumph of style over substance; more a celebrity than a politician - a “polebrity” to use the latest ugly neologism. The President-elect hasn’t exactly shunned the image-makers, and seems to be proud of his 15 appearances on the front page of Time magazine, those paparazzi pics of his pecks, the $2,000 suits. His wife, Michelle, is being groomed as a black Jackie Onassis. His daughters, we learn, will be making their own beds and getting by on a dollar a week pocket money while, er, attending schools costing $25,000 a year.
Obama has been trying to get his disillusion in first. He has antagonised the Left by surrounding himself with establishment figures like Secretary of State, Hillary Clinton, who supported the war in Iraq and wants to bomb Iran. His choice of Chief of Staff, Rahm Emanuel - a fiercely pro-Israeli son of a Zionist partisan - should disabuse those hoping Obama will hold Israel accountable for war crimes in Gaza. His economic advisers include the billionaire Warren Buffett and the ultra-conservative former head of the Federal Reserve, Paul Volcker. He’s even antagonised gays by inviting a homophobic pastor, Reverend Rick Warren, to deliver the invocation at tomorrow’s inaugural address.
Liberal America has got the message. Indeed, it is remarkable that there is still so much optimism about the Obama presidency from radicals like Senator Jesse Jackson who seem to believe that Obama is going to declare a war on poverty, save the planet and apologise to the world for America’s illegal war-making. But Obama’s tax increases are minimal, applying only to those earning over $200,000 a year - and he seems to have no stomach for the kind of redistribution of wealth that FDR promoted in the 1930s. He has dropped strong hints that he favours protectionism to halt the ‘export of American jobs’, which could be disastrous for world trade, not least in developing countries. The President-elect has also given notice that he intends to save the big three car manufacturers, Ford, General Motors and Chrysler, by spending billions of public money subsidising the sale of their abominable gas-guzzlers. Yes, Obama has promised to create four million new jobs and a greening of the American economy. But in a profound economic recession, the likelihood is that job creation will take priority over saving the planet.
Obama is now talking about “phased withdrawal” form Iraq leaving American soldiers there for an indefinite period. He is promising to send tens of thousands more young Americans into Afghanistan to fight another unwinnable war. And of course he famously said he would be prepared to invade Pakistan to root out al Qaeda. There is no indication that America is likely to abandon nuclear weapons or breathe life into the Nuclear Non-Proliferation Treaty.
So, where is the change we can believe in? Is Obama just a suit with a brown face, a latter day Uncle Tom, another careerist politician on the make? Well, no, I don’t think so. Call me naive, but I think Obama will make a difference. As the son of a Muslim he will alter the dynamics of international relations and will speak directly to pariah states like Iran. He won’t launch any more illegal wars. The President-elect is an intellectual who will raise the quality of debate in America ove rissues like climate change, and will bring America into the environmental consensus. Neoliberal economics will be abandoned along with free-market fetishism, as will neoconservative foreign policy and brain-dead “America First” rhetoric. America will become a marginally more equal society, under President Obama, and there will be some progress on health care - though don’t expect the new President to introduce a national health service in the depths of an economic depression.
Perhaps the best guarantee of change is the extent to which Obama has emphasised continuity. He is making a point of including Republicans in his administration, of celebrating his defeated rival, John McCain, the man who accused him of being soft on terrorism. Obama has been hard at work ramping down expectations, qualifying his own radical image and disowning black fundamentalists like his former Pastor, Jeremiah Wright. I see this as ideological capital being placed in the bank, for when Obama does make a radical move, which I believe he will.
Just read his book, Dreams of my Father - the best political autobiography I have ever read - and you will see that this is a very different politician from any we have seen before at this level. He is a humane radical whose experience as a community activist in the Chicago ghetto framed his politics. His destiny is to make a difference for tomorrow a black man will enter the White House and that will be change enough for now.
Friday, January 16, 2009
Shritti Vadera - and other pests
Winter is a time of hibernation, when plants lie low below the ground hiding from the cold. But it is also a time of great expectation, as the garden prepares to come alive again and burst greenly onto the vibrant stage of spring. Tenacious bedding plants like the Vadera Shriti can be found even in the darkest days pushing their little green shoots through the permafrost, bringing hope of horticultural recovery.
But gardeners beware! Vadera can be a vicious colonisier of the flower bed and will be all over the place before you know it. It is best to treat premature Vadera immediately with a powerful brushwood herbicide or even a flamethrower if you don’t want it to crowd out all the other hardy annuals. The Vadera Shriti thrives on harsh treatment and you can be sure that, unlike the Norman Lamontissis, it can be relied upon to come back for more.
The Lamontissis was a great favourite of gardners back in the 1990s when Blue plants were all the rage. But it has fallen out of favour largely because the green shoots of recovery that Lamontissis promised rarely materialised. Instead the stunted tubors of recessionary growth were the bitter reward for putting your faith in the species Conservatonisus. Ugly, brown, barren and with a fragrance of mothballs, the Lamontissis is now relegated to the compost heap along with Thatcheralus and Majorens.
But what of the other bright young things in the flower bed? Will Yvette Cooperallis deliver more than a few random buds? This light seeking plant is always poking its nose into the air but lacks the proper root system necessary to thrive. Then there is the great opportunist of the modern garden, the Mandelsonus Peterii You hardly know it’s there, until suddenly it is all over the garden, bright and brash, grabbing all the light and putting more delicate blooms in the shade. But you know that Mandelsonus is not going to deliver anything but heartache as it poisons the ground around itself to kill off rivals.
True gardners are always on the lookout for the green shoots of recovery, but there is nothing worse than premature celebration of spring. Especially when the recent harsh winter frost has knocked the stuffing out of the garden and destroyed much prospect of any kind of growth for the medium term. Perhaps the best advice for those looking to a fertile future in the political garden would be to cover the entire flower bed in a deep layer of pungent horse manure the better to prepare the ground for more worthwhile species. The answer lies, as always, in the soil.
But gardeners beware! Vadera can be a vicious colonisier of the flower bed and will be all over the place before you know it. It is best to treat premature Vadera immediately with a powerful brushwood herbicide or even a flamethrower if you don’t want it to crowd out all the other hardy annuals. The Vadera Shriti thrives on harsh treatment and you can be sure that, unlike the Norman Lamontissis, it can be relied upon to come back for more.
The Lamontissis was a great favourite of gardners back in the 1990s when Blue plants were all the rage. But it has fallen out of favour largely because the green shoots of recovery that Lamontissis promised rarely materialised. Instead the stunted tubors of recessionary growth were the bitter reward for putting your faith in the species Conservatonisus. Ugly, brown, barren and with a fragrance of mothballs, the Lamontissis is now relegated to the compost heap along with Thatcheralus and Majorens.
But what of the other bright young things in the flower bed? Will Yvette Cooperallis deliver more than a few random buds? This light seeking plant is always poking its nose into the air but lacks the proper root system necessary to thrive. Then there is the great opportunist of the modern garden, the Mandelsonus Peterii You hardly know it’s there, until suddenly it is all over the garden, bright and brash, grabbing all the light and putting more delicate blooms in the shade. But you know that Mandelsonus is not going to deliver anything but heartache as it poisons the ground around itself to kill off rivals.
True gardners are always on the lookout for the green shoots of recovery, but there is nothing worse than premature celebration of spring. Especially when the recent harsh winter frost has knocked the stuffing out of the garden and destroyed much prospect of any kind of growth for the medium term. Perhaps the best advice for those looking to a fertile future in the political garden would be to cover the entire flower bed in a deep layer of pungent horse manure the better to prepare the ground for more worthwhile species. The answer lies, as always, in the soil.
Thursday, January 15, 2009
Lords a-lobbying
It’s good to see that, in these difficult times, one industry in Britain is still thriving: political sleaze. Firms may be cutting back on hospitality and executive jets, but there’s no shortage of funds to buy members of the House of Lords. We’ve had cash for honours, now it is cash for laws.
The going rate for an amendment to a bill is around £120,000 according to a Sunday Times investigation. Lord Taylor of Blackburn says that £100,000 is “cheap” for his services in promoting business interests in the Upper House. No recession mentality there.
And isn’t it inspiring to learn that 13 Scottish Labour Peers are in the vanguard of this thriving industry. Like Lord Moonie of Bennochy, the former defence minister, who sells advice and expertise to the arms industry. Lord Moonie has also launched his own fiscal stimulus by claiming £170,839 in expenses since he became a Lord in 2005 - £500 a day, when he's there. Forget the Obama plan - stand by for a consumer boom in Scotland as Lord Moonie and his chums spend their way out of recession.
Lord Foulkes of Cumnock, the veteran former minister, is being paid £36,000 for opening parliamentary doors for Eversheds, a legal firm which specialises in securing big construction deals. This on top of some £64,000 in Lords expenses. The former Development Secretary gets a £1,000 a day from Eversheds for making “introductions” in parliament And who could possibly object to that? Well, the Scottish Parliament perhaps which does not allow consultancy and where Lord Foulkes is an MSP. But in the House of Lords anything goes - just as long as it called ‘advice’. Rent-a-Peers have been giving out passes to lobbyists from energy companies, banks, advertising firms and basically anyone who can put up the money.
It’s time for the moaning minnies and the doom mongers to pipe down and stand up for the great British institution of parliamentary payola. No one does it better than us. We have an entire parliamentary institution dedicated to peddling influence: the House of Lords. A fine body of unelected men and women whose sole function appears to be to auction their services to the highest bidder. No parliament in the world has anything like it. A legislature with rules so light of touch that when Lords are found with their fingers in the till, there is nothing whatever that anyone can do about it. They can’t be expelled or suspended. They can’t even be voted out by the electorate. Perfect. Britain has built post-modern irony into its very system of government.
We should celebrate this noble institution of “Lords for Hire” by setting up a metering system - an ermined cab-rank outside the Houses of Parliament where commercial interests can hire noble Lords by the hour. Then no one would be in any doubt about what the real business of the Upper House is.
The going rate for an amendment to a bill is around £120,000 according to a Sunday Times investigation. Lord Taylor of Blackburn says that £100,000 is “cheap” for his services in promoting business interests in the Upper House. No recession mentality there.
And isn’t it inspiring to learn that 13 Scottish Labour Peers are in the vanguard of this thriving industry. Like Lord Moonie of Bennochy, the former defence minister, who sells advice and expertise to the arms industry. Lord Moonie has also launched his own fiscal stimulus by claiming £170,839 in expenses since he became a Lord in 2005 - £500 a day, when he's there. Forget the Obama plan - stand by for a consumer boom in Scotland as Lord Moonie and his chums spend their way out of recession.
Lord Foulkes of Cumnock, the veteran former minister, is being paid £36,000 for opening parliamentary doors for Eversheds, a legal firm which specialises in securing big construction deals. This on top of some £64,000 in Lords expenses. The former Development Secretary gets a £1,000 a day from Eversheds for making “introductions” in parliament And who could possibly object to that? Well, the Scottish Parliament perhaps which does not allow consultancy and where Lord Foulkes is an MSP. But in the House of Lords anything goes - just as long as it called ‘advice’. Rent-a-Peers have been giving out passes to lobbyists from energy companies, banks, advertising firms and basically anyone who can put up the money.
It’s time for the moaning minnies and the doom mongers to pipe down and stand up for the great British institution of parliamentary payola. No one does it better than us. We have an entire parliamentary institution dedicated to peddling influence: the House of Lords. A fine body of unelected men and women whose sole function appears to be to auction their services to the highest bidder. No parliament in the world has anything like it. A legislature with rules so light of touch that when Lords are found with their fingers in the till, there is nothing whatever that anyone can do about it. They can’t be expelled or suspended. They can’t even be voted out by the electorate. Perfect. Britain has built post-modern irony into its very system of government.
We should celebrate this noble institution of “Lords for Hire” by setting up a metering system - an ermined cab-rank outside the Houses of Parliament where commercial interests can hire noble Lords by the hour. Then no one would be in any doubt about what the real business of the Upper House is.
Monday, January 12, 2009
True lies in the Scottish parliament
And so to Holyrood where that the Presiding Officer, Alex Fergusson, has ordered an inquiry into whether or not politicians tell the truth in parliament. I presume he will follow this with an investigation into the toilet habits of bears in afforested areas and a commission to determine the attitude of the Pope to the Catholic religion. The reason for this investigation of the bleedin’ obvious was what we hacks call a “porkie pie” uttered by the First Minister.
Alex Salmond told MSPs at question time that the issue of future funding for the Inter Faith Council had been “resolved”, when it had not been - though the IFC had been “assured” that its funding was to continue. Not exactly the Schleswig Holstein Question, and not exactly a lie, but a matter of such vital moment to Holyrood that not one but two inquiries have been set up to investigate it. The First Minister himself has set up a parallel inquiry into his own truthfulness, involving the past Presiding Officers, Lord Steel and George Reid, who for some inexplicable reason has not been ennobled yet.
No. Sorry. This is getting silly. A parliament that sets up inquiries into whether or not politicians tell the truth is a parliament that has lost the plot. I’d hoped to return to my day job as a political commentator this week, leaving the latest banking crisis to its own devices - I’m having increasing difficulty finding original ways of saying that we’re doomed. However, it’s impossible to take politics seriously when it’s conducted at this level. Politicians are experts in half truths and manipulation, but they very rarely tell outright lies - except over issues of national interest - because no decent politician ever needs to. Our rich English language, with all its ambiguities and nuances, allows them enough wriggle room to say anything they want, more or less. Alex Salmond mostly solves the veracity problem by simply not answering the question at all.
In the midst of the greatest economic crisis since the 1930s, the real inquiry should be into why the Scottish political classes are fiddling while the economy burns. It’s hard not to see these farcical inquisitions as a form of denial, a retreat from reality, infantilism. Why aren’t former Presiding Officers being invited to convene a cross party convention on economic recovery to press r for a proper public works programme? Of course, I realise that the devolved Scottish Parliament lacks the formal powers to deal with an economic depression. The Scottish Government can’t mount a banking rescue, or cut interest rates, or engage in quantitative easing. But it needs to make its voice heard in the recovery strategy. Otherwise it looks as if Scotland is utterly dependent on Westminster for its economic salvation.
Look across the Irish Sea, and things are very different. There, politics is deadly serious right now, focussed on matters of economic life and death as the Celtic Tiger drowns in its own debt. The Irish banks, like our own, are bankrupt and have effectively and actually been nationalised by the government. This has placed their huge liabilities on the public accounts, causing a fiscal crisis. To avert a default, the Taoiseach, Brian Cowen, has announced a £16 bn austerity programme with swingeing spending cuts and a proposal to cut public sector wages by up to 10%. He is warning the unions that if they don’t accept a reduction in living standards, the International Monetary Fund may be called in to force matters.
The Irish finance minister, Brian Lenihan, has accused the British government of “beggar-thy-neighbour protectionism”, by allowing the pound to fall in value against the euro. Irish exports are now priced out of its biggest market, while cheap UK goods are flooding across the border. House prices are forecast to fall by up to 80% as migrant workers, and many native Irish, prepare to leave the country altogether. Teh crisis hasn’t made the Irish question their membership of the euro zone, or their independent nationhood, but it has been a catastrophic assault on the confidence and morale of a small nation which had become carried away with its own apparent financial success. It is a sober warning to Scotland not to put its faith in house prices and innovative banks.
It's understandable why politicians in Holyrood would rather leave the recovery to London - then they can blame Westminster when things go wrong. This is a very difficult time for the SNP to make the case for independence and they must be relieved that they are not holding an independence referendum this year. But in hiding from the magnitude of the crisis they are making a mistake. Holyrood as a whole is in danger of delivering a unilateral declaration of irrelevance. There are some very bright people in there, and I know from speaking to them that they are not short of ideas. But the parliament seems to have been struck dumb. The debate on the Scottish budget last week - the most important since the parliament was created - was a non-event.
Holyrood needs to fulfil its mission statement by finding a way of expressing the collective will of the Scottish people as the nation faces its greatest challenge in half a century. The row over the third runway at Heathrow was an opportunity to raise the urgent question of building a fast rail network to Scotland. But it has been left to David Cameron’s Conservatives to make the case for an environmentally-sustainable recovery based on rail investment. Nor has there been any concerted action to ensure that the UK government recognises that developing Scotland’s reserves of renewable energy could be the foundation of a great new industry. As far as I can see, all the Scottish parties now agree that a council house building programme is long overdue, to save the construction industry and address the housing crisis. But that case is not being made with any vigour.
I know it’s not easy getting a fair hearing in a London-dominated media. I know that Alex Salmond is a genuine enthusiast for renewable energy and has been promoting it for all it is worth. I noted that Iain Gray, the Scottish Labour leader, made a sincere attempt to avoid futile oppositionism over the budget last week. But so far, Holyrood has not found a way of leading opinion and and providing a sense of moral leadership for the country. I still cannot understand why the bosses of the delinquent Scottish banks, which did so much to bring the British economy to its knees - the Royal Bank of Scotland and Halifax Bank of Scotland - have not been summoned to parliament to answer for their economic crimes. The bankers have successfully avoided public scrutiny simply by refusing to give media interviews. The Scottish Parliament could have stepped in here and held them accountable. Yet, apart from a futile attempt to rescue the Bank of Scotland from the clutches of Lloyds, our politicians have failed - so far as I can see - to make any significant moral interventions in the crisis.
There are still some in the parliament who believe that Scotland will “escape the worst” - that unemployment will not be so bad here, that house prices will not fall much, and that the public sector will insulate us from harsh economic winds. These are dangerous illusions. Look at Ireland - we are not all that different. Scotland is likely to be hit even harder by this recession than it was in the 1980’s - at least then we had heavy industry. The Scottish economy is held aloft largely by the spin of property developers and the complacency of politicians. And that is the only truth that matters.
Alex Salmond told MSPs at question time that the issue of future funding for the Inter Faith Council had been “resolved”, when it had not been - though the IFC had been “assured” that its funding was to continue. Not exactly the Schleswig Holstein Question, and not exactly a lie, but a matter of such vital moment to Holyrood that not one but two inquiries have been set up to investigate it. The First Minister himself has set up a parallel inquiry into his own truthfulness, involving the past Presiding Officers, Lord Steel and George Reid, who for some inexplicable reason has not been ennobled yet.
No. Sorry. This is getting silly. A parliament that sets up inquiries into whether or not politicians tell the truth is a parliament that has lost the plot. I’d hoped to return to my day job as a political commentator this week, leaving the latest banking crisis to its own devices - I’m having increasing difficulty finding original ways of saying that we’re doomed. However, it’s impossible to take politics seriously when it’s conducted at this level. Politicians are experts in half truths and manipulation, but they very rarely tell outright lies - except over issues of national interest - because no decent politician ever needs to. Our rich English language, with all its ambiguities and nuances, allows them enough wriggle room to say anything they want, more or less. Alex Salmond mostly solves the veracity problem by simply not answering the question at all.
In the midst of the greatest economic crisis since the 1930s, the real inquiry should be into why the Scottish political classes are fiddling while the economy burns. It’s hard not to see these farcical inquisitions as a form of denial, a retreat from reality, infantilism. Why aren’t former Presiding Officers being invited to convene a cross party convention on economic recovery to press r for a proper public works programme? Of course, I realise that the devolved Scottish Parliament lacks the formal powers to deal with an economic depression. The Scottish Government can’t mount a banking rescue, or cut interest rates, or engage in quantitative easing. But it needs to make its voice heard in the recovery strategy. Otherwise it looks as if Scotland is utterly dependent on Westminster for its economic salvation.
Look across the Irish Sea, and things are very different. There, politics is deadly serious right now, focussed on matters of economic life and death as the Celtic Tiger drowns in its own debt. The Irish banks, like our own, are bankrupt and have effectively and actually been nationalised by the government. This has placed their huge liabilities on the public accounts, causing a fiscal crisis. To avert a default, the Taoiseach, Brian Cowen, has announced a £16 bn austerity programme with swingeing spending cuts and a proposal to cut public sector wages by up to 10%. He is warning the unions that if they don’t accept a reduction in living standards, the International Monetary Fund may be called in to force matters.
The Irish finance minister, Brian Lenihan, has accused the British government of “beggar-thy-neighbour protectionism”, by allowing the pound to fall in value against the euro. Irish exports are now priced out of its biggest market, while cheap UK goods are flooding across the border. House prices are forecast to fall by up to 80% as migrant workers, and many native Irish, prepare to leave the country altogether. Teh crisis hasn’t made the Irish question their membership of the euro zone, or their independent nationhood, but it has been a catastrophic assault on the confidence and morale of a small nation which had become carried away with its own apparent financial success. It is a sober warning to Scotland not to put its faith in house prices and innovative banks.
It's understandable why politicians in Holyrood would rather leave the recovery to London - then they can blame Westminster when things go wrong. This is a very difficult time for the SNP to make the case for independence and they must be relieved that they are not holding an independence referendum this year. But in hiding from the magnitude of the crisis they are making a mistake. Holyrood as a whole is in danger of delivering a unilateral declaration of irrelevance. There are some very bright people in there, and I know from speaking to them that they are not short of ideas. But the parliament seems to have been struck dumb. The debate on the Scottish budget last week - the most important since the parliament was created - was a non-event.
Holyrood needs to fulfil its mission statement by finding a way of expressing the collective will of the Scottish people as the nation faces its greatest challenge in half a century. The row over the third runway at Heathrow was an opportunity to raise the urgent question of building a fast rail network to Scotland. But it has been left to David Cameron’s Conservatives to make the case for an environmentally-sustainable recovery based on rail investment. Nor has there been any concerted action to ensure that the UK government recognises that developing Scotland’s reserves of renewable energy could be the foundation of a great new industry. As far as I can see, all the Scottish parties now agree that a council house building programme is long overdue, to save the construction industry and address the housing crisis. But that case is not being made with any vigour.
I know it’s not easy getting a fair hearing in a London-dominated media. I know that Alex Salmond is a genuine enthusiast for renewable energy and has been promoting it for all it is worth. I noted that Iain Gray, the Scottish Labour leader, made a sincere attempt to avoid futile oppositionism over the budget last week. But so far, Holyrood has not found a way of leading opinion and and providing a sense of moral leadership for the country. I still cannot understand why the bosses of the delinquent Scottish banks, which did so much to bring the British economy to its knees - the Royal Bank of Scotland and Halifax Bank of Scotland - have not been summoned to parliament to answer for their economic crimes. The bankers have successfully avoided public scrutiny simply by refusing to give media interviews. The Scottish Parliament could have stepped in here and held them accountable. Yet, apart from a futile attempt to rescue the Bank of Scotland from the clutches of Lloyds, our politicians have failed - so far as I can see - to make any significant moral interventions in the crisis.
There are still some in the parliament who believe that Scotland will “escape the worst” - that unemployment will not be so bad here, that house prices will not fall much, and that the public sector will insulate us from harsh economic winds. These are dangerous illusions. Look at Ireland - we are not all that different. Scotland is likely to be hit even harder by this recession than it was in the 1980’s - at least then we had heavy industry. The Scottish economy is held aloft largely by the spin of property developers and the complacency of politicians. And that is the only truth that matters.
Crunch time for students as the debt crisis hits
Gordon Brown is doing his bit for the long term unemployed by creating jobs for redundant cabinet ministers and their aides. Recycling Peter Mandelson as Business Secretary has been such a success that the PM is returning another Blairite job seeker, Alan Milburn, to the fold. And reportedly trying to persuade Alistair Campbell to become a Lord - though I’m not sure if becoming Baron Campbell of B*llocks counts as a proper job.
Alan Milburn’s new task, announced as part of the Prime Minister’s jobs summit, will be to help more working class students get into professional jobs. The former Health Secretary is to conduct a review of the obstacles faced by children from poorer families seeking careers in law, medicine and the media. Well, I think I can help him out here. There is one very obvious reason why so many medical students and lawyers come from well-off families: they can afford to take on the £20,000 debts that many have to shoulder to become qualified. Working class school leavers are twice as likely to be discouraged from going to University because of debt than middle class students.
Gordon has shown a nice sense of irony in handing this task to one of the most market-oriented politicians around. Alan Milburn was an advocate of university top up fees, which made success at university even more dependent on family background and wealth. But at least Brown can’t be accused of promoting class war. Milburn and the Labour minister, Liam Byrne, apparently believe that the preponderance of privately-educated graduates in law is not about money but something to do with “character”, acquired at private schools. Character education is the new buzz phrase in New Labour circles. Comprehensive head teachers better start clearing their staff rooms now to make way for the legion of ‘character workers’ sent in to sort out slummy kids.
This is patronising nonsense. State-educated students don’t lack character, they lack opportunity. Working class graduates get discouraged when they find that their expensive degrees still don’t get them into professional jobs because they didn’t go to the right schools. Private education isn’t better than the state, it just gives you better contacts - a calling card for a world of connections and privileges. In many well-heeled Edinburgh dinner parties the first subject of conversation remains: ‘and where did you go’.Which may be one reason why the law in this country is so antiquated.
Forget class, a little meritocracy would work wonders. Take the media, of which I have some experience. Especially in London, where the jobs are, areas like broadcasting are increasingly staffed by people who can afford to work for nothing for the years it takes until producers can remember their names - which tend something like Tamsin or Phoebe. Class envy? Absolutely. Who wouldn’t envy trustafarians who can subsidise themselves, not just through four years of college, but another four years of internships until they get a proper contract. There are people in their thirties in the media who have worked all their adult lives and never had a job.
This situation is only going to get worse as graduate employment evaporates and competition increases. This is a very post-modern economic recession in which students are increasingly find themselves in the front line. Youth unemployment is growing faster than among any other age group and of the 3 million likely to be unemployed by the end of the year, 1,25 million will be under 25 and many will be holding degrees. They are being called "Generation Crunch". Even many middle class students are questioning the value of higher education when they slog away for four years, taking on massive debt, only to find themselves in a temporary job in M&S.
I have to declare an interest here since I have been asked to stand for Rector of Edinburgh University and have been speaking to a lot of students recently some of whom are working 22 hours a week in a bar to help pay for their education. Student accommodation costs up to £750 a month in Edinburgh. The popular image of student life - forged I admit by my own dissolute generation - is one of privileged and pretentious layabouts whose radicalism is hampered by an inability to get up in the morning. But the Young Ones are long gone, along with the Dave Sparts. Students still tend to dress as if they’ve been sleeping in their clothes for week, but they are a lot more mature and hard working than I ever was. Universities have become white collar factories turning out legions of managers and financial controllers for the banks and corporations. And not without financial reward: graduates who actually got a proper job in 2008 could expect around £24,000 a year according to the university careers service, Prospect. But the good times are over, and the annual milk round has turned sour as the big firms cut back. .
Or rather become more exclusive, I would urge Mr Milburn to examine reports that the firms who are still hiring are concentrating on five elite Universities; Oxford, Cambridge, Imperial College London, University College London and the London School of Economics. You may notice that these are not in Scotland. Yes, Edinburgh is regarded as one of the elite universities, and used to have one of the highest rates of graduate employment thanks to the towering presence of Royal Bank of Scotland and HBOS. Unfortunately, those institutions have other things on their minds right now, as does the rest of Edinburgh’s financial services sector.
There are 60,000 students in Edinburgh’s various universities and colleges, wondering where on earth they go from here. Something needs to be done as a matter of urgency about graduate debt. Indebted students are discovering that that their bank managers are rapidly turning nasty over credit cards and overdrafts. A minimum income guarantee for students of £7,000 to bring them up to the official poverty line would be a good start. Whether on grants or loans, students can’t possibly survive on £4,500. The government is talking about funding three month internships, which is a reasonable idea, so long as graduates aren’t exploited. Funding voluntary work might be better. The Scottish Government could help by reversing its decision to cut funding to the Projectscotland volunteer programme.
Above all, the universities need to improve their teaching, so that students are properly equipped for the jobs market. No, university isn’t all about getting the right job, at the right salary. It is about producing well-rounded individuals, creating an educated society, promoting research and extending the bounds of human knowledge. It is an investment in social capital. But in the age of mass higher education, when 50% of school leavers are studying, it is also about making a living. People of my generation, need to realise that graduates are no longer privileged members of an educated elite, but ordinary workers. If they don’t get work, we may find that students rediscover their radicalism faster than anyone imagined possible.
Alan Milburn’s new task, announced as part of the Prime Minister’s jobs summit, will be to help more working class students get into professional jobs. The former Health Secretary is to conduct a review of the obstacles faced by children from poorer families seeking careers in law, medicine and the media. Well, I think I can help him out here. There is one very obvious reason why so many medical students and lawyers come from well-off families: they can afford to take on the £20,000 debts that many have to shoulder to become qualified. Working class school leavers are twice as likely to be discouraged from going to University because of debt than middle class students.
Gordon has shown a nice sense of irony in handing this task to one of the most market-oriented politicians around. Alan Milburn was an advocate of university top up fees, which made success at university even more dependent on family background and wealth. But at least Brown can’t be accused of promoting class war. Milburn and the Labour minister, Liam Byrne, apparently believe that the preponderance of privately-educated graduates in law is not about money but something to do with “character”, acquired at private schools. Character education is the new buzz phrase in New Labour circles. Comprehensive head teachers better start clearing their staff rooms now to make way for the legion of ‘character workers’ sent in to sort out slummy kids.
This is patronising nonsense. State-educated students don’t lack character, they lack opportunity. Working class graduates get discouraged when they find that their expensive degrees still don’t get them into professional jobs because they didn’t go to the right schools. Private education isn’t better than the state, it just gives you better contacts - a calling card for a world of connections and privileges. In many well-heeled Edinburgh dinner parties the first subject of conversation remains: ‘and where did you go’.Which may be one reason why the law in this country is so antiquated.
Forget class, a little meritocracy would work wonders. Take the media, of which I have some experience. Especially in London, where the jobs are, areas like broadcasting are increasingly staffed by people who can afford to work for nothing for the years it takes until producers can remember their names - which tend something like Tamsin or Phoebe. Class envy? Absolutely. Who wouldn’t envy trustafarians who can subsidise themselves, not just through four years of college, but another four years of internships until they get a proper contract. There are people in their thirties in the media who have worked all their adult lives and never had a job.
This situation is only going to get worse as graduate employment evaporates and competition increases. This is a very post-modern economic recession in which students are increasingly find themselves in the front line. Youth unemployment is growing faster than among any other age group and of the 3 million likely to be unemployed by the end of the year, 1,25 million will be under 25 and many will be holding degrees. They are being called "Generation Crunch". Even many middle class students are questioning the value of higher education when they slog away for four years, taking on massive debt, only to find themselves in a temporary job in M&S.
I have to declare an interest here since I have been asked to stand for Rector of Edinburgh University and have been speaking to a lot of students recently some of whom are working 22 hours a week in a bar to help pay for their education. Student accommodation costs up to £750 a month in Edinburgh. The popular image of student life - forged I admit by my own dissolute generation - is one of privileged and pretentious layabouts whose radicalism is hampered by an inability to get up in the morning. But the Young Ones are long gone, along with the Dave Sparts. Students still tend to dress as if they’ve been sleeping in their clothes for week, but they are a lot more mature and hard working than I ever was. Universities have become white collar factories turning out legions of managers and financial controllers for the banks and corporations. And not without financial reward: graduates who actually got a proper job in 2008 could expect around £24,000 a year according to the university careers service, Prospect. But the good times are over, and the annual milk round has turned sour as the big firms cut back. .
Or rather become more exclusive, I would urge Mr Milburn to examine reports that the firms who are still hiring are concentrating on five elite Universities; Oxford, Cambridge, Imperial College London, University College London and the London School of Economics. You may notice that these are not in Scotland. Yes, Edinburgh is regarded as one of the elite universities, and used to have one of the highest rates of graduate employment thanks to the towering presence of Royal Bank of Scotland and HBOS. Unfortunately, those institutions have other things on their minds right now, as does the rest of Edinburgh’s financial services sector.
There are 60,000 students in Edinburgh’s various universities and colleges, wondering where on earth they go from here. Something needs to be done as a matter of urgency about graduate debt. Indebted students are discovering that that their bank managers are rapidly turning nasty over credit cards and overdrafts. A minimum income guarantee for students of £7,000 to bring them up to the official poverty line would be a good start. Whether on grants or loans, students can’t possibly survive on £4,500. The government is talking about funding three month internships, which is a reasonable idea, so long as graduates aren’t exploited. Funding voluntary work might be better. The Scottish Government could help by reversing its decision to cut funding to the Projectscotland volunteer programme.
Above all, the universities need to improve their teaching, so that students are properly equipped for the jobs market. No, university isn’t all about getting the right job, at the right salary. It is about producing well-rounded individuals, creating an educated society, promoting research and extending the bounds of human knowledge. It is an investment in social capital. But in the age of mass higher education, when 50% of school leavers are studying, it is also about making a living. People of my generation, need to realise that graduates are no longer privileged members of an educated elite, but ordinary workers. If they don’t get work, we may find that students rediscover their radicalism faster than anyone imagined possible.
Saturday, January 10, 2009
It's time to nationalise the banks
When even New Labour is talking about nationalisation of the banks, you know that the financial crisis really has become serious. The Labour chairman of the Treasury Select Committee, John McFall - no Marxist he - called last week for a State Bank, based on the Post Office network, to provide credit for industry. Some unlikely people are thinking along similar lines. The Financial Times columnist Sam Brittan, a veteran apostle of free markets, floored me recently by announcing at a Number 11 reception that he didn’t regard private banks as a necessary part of the market system. The Governor of the Bank of England, Mervyn King, said last month that further bank nationalisation may be necessary if the banks continue their lending strike.
This is a historic moment. The financiers have so discredited themselves, by their bonuses, predatory lending and sheer irresponsibility, that they are being disowned even by capitalism’s greatest defenders. Forget Socialist Worker, British industry is practically manning the barricades. Last week, Peter Hughes of Scottish Engineering called on the government to “get an arm lock on the banks”. Gordon Brown is doing his best not to listen to the clamour for state control, but he is going to find it difficult to defend throwing more billions at the banks only to see it disappear into the vaults.
Of course, we are some way down the road of nationalisation already since the government owns Northern Rock, Bradford and Bingley, 60% of Royal Bank of Scotland and a sizeable chunk of the Lloyds behemoth which swallowed TSB and HBOS. On top of this formal equity stake, the Bank of England has been funnelling £500 billion to the banks in swaps, loans and guarantees. People forget that the Bank of England was itself a private company until it was nationalised in 1946. The entire British banking system is already on life support from the public sector, so maybe we should carry this to the logical conclusion.
We cannot go on socialising bank losses just so that the same old bankers can privatise the profits in the upturn. The banks have lost any moral claim to be managers of our collective social capital.The only justification would be if private banking the most efficient way of providing finance for the economy, which it manifestly is not. The economy is now in the grip of a credit famine. The manufacturing figures are appalling, with output falling at its fastest rate for 27. It is a bitter irony for British industry which had been sidelined during the decade of the financial services bubble. Now that the falling pound has made manufacturing competitive again, firms are unable to take advantage of the opportunities because the banks won’t give them credit. Some £50bn in corporate loans have to be refinanced this year and the money just isn’t there. Cutting interest rates is futile when the banks have made clear they don’t intend to pass it on.
Why are the banks hoarding cash? Well, they insist they aren’t of course - but the real problem is that they are so massively in debt themselves, from all the crazy loans they made during the bubble, that they are using any cash they can get their hands on to shore up their balance sheets. They have a funding gap of around £700bn between what they’ve lent and the deposits they have to back it up. The banks can’t raise money by borrowing from other banks because none of them trust each other any more. The collapse of the UK housing market - down 20% already and with and expected 20% this year - is further undermining their balance sheets. So, there’s no point in just barking at the banks to lend: they just won’t.
The government is caught in a contradiction. It wants the banks ultimately to become private companies again, free from state control. But to restore their commercial viability, and shareholder appeal, the banks have to restrict their lending to businesses. It’s a vicious circle. The banks are cutting back their lending in the middle of a recession that the banks themslseves have created. This causes further write downs and losses for the banks. Something has to break the feedback loop.
The government is trying to play down the prospect of another bank bail out but there seems no realistic alternative another injection of billions of public funds into the banking system. Which raises the question: when is a bank not a bank? Is RBS still a private bank when we own 60% of it? Well, yes, for two reasons. One, the government doesn’t want to own it and has left the old management in control of lending policy. And two, because the liabilities of RBS - its £2 trillion balance sheet - are not on the government’s own books represented as public debt.
The big question now is whether the UK government could recapitalise the banks again and still maintain the fiction that the banks are private companies - that it owns the good bits of the banks but not the bad bits. As soon as that myth is exploded, then we find the £4 trillion or so of bank debt landing with a thud on the Treasury doormat. The Bank of You and Me suddenly becomes Bankrupt You and Me. If the government takes on the full liabilities of the British banks there might be a collapse of sterling and a phone call from the IMF. Interest rates might have to rise to Icelandic levels to ensure that the government could borrow. Taxes would have to rise to pay down a debt that is four times GDP.
But something like this is almost certainly going to happen anyway. There’s no easy way out of this crisis. The government is now threatening to resort to quantitative easing, the euphemism for printing money. This will lead to hyper inflation in a couple of years which will itself need high interest rates and higher taxes to quell. It would be better, surely, to move now to an orderly nationalisation of the banking system. At least then the government could direct credit to where it is needed - to the sunrise industries which have to be built up now to provide for our economic future. This is the McFall plan in essence. A giant finance bank - similar to the nationalised investment bank that featured in Labour’s 1983 election manifesto, which would finance the reconstruction of the British economy.
The prospect emerges, perhaps, of a new kind of democratised state capitalism, in which governments actively manage the flow of credit. It wouldn’t be socialism because most of the economy would remain in private hands. But the business of banking would become a function of the state, rather like education or health. Instead of leaving industry to the vagaries of a financial system which is only interested in its own short term bonuses, the government could ensure that vital areas of the economy are not starved of funds.
Critics say a state bank would be run by dull bureaucrats who don’t understand the way modern finance works. Well, having seen the way modern finance works, many people would opt for dull bureaucracy any day. Banking is not difficult when all you are doing is taking money for virtually nothing from the Bank of England and then handing it on at 5% to a select few companies and lenders. Anyone could do it. The non-profit mutual societies, like Nationwide, which have survived very well in this crisis, show that non-profit banking - relying solely on deposits for lending - is preferable to the crazy financial engineering of the City. Never again!
This is a historic moment. The financiers have so discredited themselves, by their bonuses, predatory lending and sheer irresponsibility, that they are being disowned even by capitalism’s greatest defenders. Forget Socialist Worker, British industry is practically manning the barricades. Last week, Peter Hughes of Scottish Engineering called on the government to “get an arm lock on the banks”. Gordon Brown is doing his best not to listen to the clamour for state control, but he is going to find it difficult to defend throwing more billions at the banks only to see it disappear into the vaults.
Of course, we are some way down the road of nationalisation already since the government owns Northern Rock, Bradford and Bingley, 60% of Royal Bank of Scotland and a sizeable chunk of the Lloyds behemoth which swallowed TSB and HBOS. On top of this formal equity stake, the Bank of England has been funnelling £500 billion to the banks in swaps, loans and guarantees. People forget that the Bank of England was itself a private company until it was nationalised in 1946. The entire British banking system is already on life support from the public sector, so maybe we should carry this to the logical conclusion.
We cannot go on socialising bank losses just so that the same old bankers can privatise the profits in the upturn. The banks have lost any moral claim to be managers of our collective social capital.The only justification would be if private banking the most efficient way of providing finance for the economy, which it manifestly is not. The economy is now in the grip of a credit famine. The manufacturing figures are appalling, with output falling at its fastest rate for 27. It is a bitter irony for British industry which had been sidelined during the decade of the financial services bubble. Now that the falling pound has made manufacturing competitive again, firms are unable to take advantage of the opportunities because the banks won’t give them credit. Some £50bn in corporate loans have to be refinanced this year and the money just isn’t there. Cutting interest rates is futile when the banks have made clear they don’t intend to pass it on.
Why are the banks hoarding cash? Well, they insist they aren’t of course - but the real problem is that they are so massively in debt themselves, from all the crazy loans they made during the bubble, that they are using any cash they can get their hands on to shore up their balance sheets. They have a funding gap of around £700bn between what they’ve lent and the deposits they have to back it up. The banks can’t raise money by borrowing from other banks because none of them trust each other any more. The collapse of the UK housing market - down 20% already and with and expected 20% this year - is further undermining their balance sheets. So, there’s no point in just barking at the banks to lend: they just won’t.
The government is caught in a contradiction. It wants the banks ultimately to become private companies again, free from state control. But to restore their commercial viability, and shareholder appeal, the banks have to restrict their lending to businesses. It’s a vicious circle. The banks are cutting back their lending in the middle of a recession that the banks themslseves have created. This causes further write downs and losses for the banks. Something has to break the feedback loop.
The government is trying to play down the prospect of another bank bail out but there seems no realistic alternative another injection of billions of public funds into the banking system. Which raises the question: when is a bank not a bank? Is RBS still a private bank when we own 60% of it? Well, yes, for two reasons. One, the government doesn’t want to own it and has left the old management in control of lending policy. And two, because the liabilities of RBS - its £2 trillion balance sheet - are not on the government’s own books represented as public debt.
The big question now is whether the UK government could recapitalise the banks again and still maintain the fiction that the banks are private companies - that it owns the good bits of the banks but not the bad bits. As soon as that myth is exploded, then we find the £4 trillion or so of bank debt landing with a thud on the Treasury doormat. The Bank of You and Me suddenly becomes Bankrupt You and Me. If the government takes on the full liabilities of the British banks there might be a collapse of sterling and a phone call from the IMF. Interest rates might have to rise to Icelandic levels to ensure that the government could borrow. Taxes would have to rise to pay down a debt that is four times GDP.
But something like this is almost certainly going to happen anyway. There’s no easy way out of this crisis. The government is now threatening to resort to quantitative easing, the euphemism for printing money. This will lead to hyper inflation in a couple of years which will itself need high interest rates and higher taxes to quell. It would be better, surely, to move now to an orderly nationalisation of the banking system. At least then the government could direct credit to where it is needed - to the sunrise industries which have to be built up now to provide for our economic future. This is the McFall plan in essence. A giant finance bank - similar to the nationalised investment bank that featured in Labour’s 1983 election manifesto, which would finance the reconstruction of the British economy.
The prospect emerges, perhaps, of a new kind of democratised state capitalism, in which governments actively manage the flow of credit. It wouldn’t be socialism because most of the economy would remain in private hands. But the business of banking would become a function of the state, rather like education or health. Instead of leaving industry to the vagaries of a financial system which is only interested in its own short term bonuses, the government could ensure that vital areas of the economy are not starved of funds.
Critics say a state bank would be run by dull bureaucrats who don’t understand the way modern finance works. Well, having seen the way modern finance works, many people would opt for dull bureaucracy any day. Banking is not difficult when all you are doing is taking money for virtually nothing from the Bank of England and then handing it on at 5% to a select few companies and lenders. Anyone could do it. The non-profit mutual societies, like Nationwide, which have survived very well in this crisis, show that non-profit banking - relying solely on deposits for lending - is preferable to the crazy financial engineering of the City. Never again!
It's resignation time again.
It’s become almost as much a part of Scottish tradition as Burns night. Around this time of the year, as the days start to get longer, you hear the first plaintive cries of SNP ministers offering to resign. Last year it was the First Minister, Alex Salmond who promised to fall on his sword; this time it was the turn of the Finance Secretary, John Swinney to ask for his P45. Of course, it’s all about money.
The Scottish government has decided that the best way to get its budget through the Scottish parliament is to attach it to a resignation letter. This forces the opposition parties to contemplate the nuclear option: voting against the budget bill and risking the wrath of the Scottish voters furious at having an unnecessary election. The Scottish Liberal Democrats have already gone nuclear having had their 2p tax cut summarily rejected by John Swinney on the grounds that cutting £800million in public expenditure might not be the best way to provide a fiscal stimulus to the Scottish economy right now.
This leaves the Tories and the Greens who say that this year they won’t just be government stooges. The Greens want what greens always want which is less hot air - a mass insulation programme worth a £100m a year. Since this is more or less what the government is doing, one suspects the greens may get a result here. But what of the Tories? They’ve insisted that they are not nationalist patsies and cannot be taken for granted. They have banged their fists on the table and demanded monitoring a scheme for hospital acquired infections and a week of outdoor education for children. Tough or what? I bet John Swinney is on the phone to the job centre as we speak.
Which leaves it to Labour to save Scotland from the evils of nationalism. Their leader Iain Grey spits in the face of ministerial resignation threats. Go on - if you think you’re hard enough! Unless the SNP scraps its Scottish Futures Trust and local income tax - which it won’t - Labour say they will vote against the budget later this year, come what may. Read. My. Lips.
Are they for real? Could Iain Gray be in Bute House by Christmas? Last year Labour insisted they would vote down the nationalist budget, which they effectively did - only they had to vote against their own amendment to ensure that this didn’t mean they had to face an election This elicited much ridicule from the proto-nationalist fellow travellers and quislings of the Scottish press. Surely they wouldn’t bottle it again. Would they?
Well, Iain Gray seems to think there wouldn’t need to be an election and that the Presiding Officer would let him take over unelected if the SNP budget were lost. I suppose he could just lock up the SNP MSPs in a Holyrood committee room and send tanks to shell Bute House. What a story! Scotland’s first coup d’etat. If only.
The Scottish government has decided that the best way to get its budget through the Scottish parliament is to attach it to a resignation letter. This forces the opposition parties to contemplate the nuclear option: voting against the budget bill and risking the wrath of the Scottish voters furious at having an unnecessary election. The Scottish Liberal Democrats have already gone nuclear having had their 2p tax cut summarily rejected by John Swinney on the grounds that cutting £800million in public expenditure might not be the best way to provide a fiscal stimulus to the Scottish economy right now.
This leaves the Tories and the Greens who say that this year they won’t just be government stooges. The Greens want what greens always want which is less hot air - a mass insulation programme worth a £100m a year. Since this is more or less what the government is doing, one suspects the greens may get a result here. But what of the Tories? They’ve insisted that they are not nationalist patsies and cannot be taken for granted. They have banged their fists on the table and demanded monitoring a scheme for hospital acquired infections and a week of outdoor education for children. Tough or what? I bet John Swinney is on the phone to the job centre as we speak.
Which leaves it to Labour to save Scotland from the evils of nationalism. Their leader Iain Grey spits in the face of ministerial resignation threats. Go on - if you think you’re hard enough! Unless the SNP scraps its Scottish Futures Trust and local income tax - which it won’t - Labour say they will vote against the budget later this year, come what may. Read. My. Lips.
Are they for real? Could Iain Gray be in Bute House by Christmas? Last year Labour insisted they would vote down the nationalist budget, which they effectively did - only they had to vote against their own amendment to ensure that this didn’t mean they had to face an election This elicited much ridicule from the proto-nationalist fellow travellers and quislings of the Scottish press. Surely they wouldn’t bottle it again. Would they?
Well, Iain Gray seems to think there wouldn’t need to be an election and that the Presiding Officer would let him take over unelected if the SNP budget were lost. I suppose he could just lock up the SNP MSPs in a Holyrood committee room and send tanks to shell Bute House. What a story! Scotland’s first coup d’etat. If only.
Thursday, January 08, 2009
The Gordian Knot
In 1988, when two City financial superbrats, Stephen Partridge-Hicks and Nicholas Sossodis, invented structured investment vehicles (SIVs) they inadvertently ignited the fuse that blew up the world’s financial system in the Crash of 2008. Their company, called “Gordian Knot” helped banks devise ingenious ways to hide their extravagant risk-taking by creating off-balance-sheet companies. Structured finance created a Gordian Knot all right - a system of interlocking financial mechanisms so complex that no one could unravel what was going on.
Gordon Brown, a latter day Alexander, tried to cut the Gordian Knot, but he may have simply cut the public finances adrift on a sea of debt. The state has now exposed itself to the billions of liabilities held off the balance sheets of Britain’s delinquent banks. October's stock market crash was largely a result of panic selling in this shadow banking system of structured finance. These vehicles of leverage, including hedge funds and private equity companies, are having to liquidate billions in assets as their business models collapse under the weight of collapsing share and house prices. Until these losses work their way through the system the British economy remains in intensive care.
The madness of the shadow banking system became apparent over a year ago when Northern Rock was nationalised, but regulators ignored the implications. The treasury minister, Yvette Cooper, discovered to her dismay that Northern Rock didn’t own most of its own mortgages. £50bn had been hived off to a Jersey based company, Granite, registered as a charity benefiting Down’s Syndrome Children in the North East of England. Needless to say the charity didn’t get any cash - this was a special purpose vehicle which allowed the Rock to trade in complex securities without having to meet the stringent capitalisation requirements of a normal bank.
But it wasn’t just the Rock. Most banks and financial institutions did exactly the same setting up “orphan companies”, often under charitable trust, that didn’t appear on their published balance sheets. This is one reason why apparently well-capitalised and solvent institutions like Royal Bank of Scotland collapsed so suddenly recently. Their true liabilities had been hidden for years in the shadow system while they make huge profits from irresponsible lending.
How did they get away with it? If you or I set up fictitious offshore identities to evade tax and conceal high-risk financial activities we would end up in jail. But the regulators turned a blind eye, partly because they didn’t fully understand structured finance, and partly because the government believed that it must be a good thing because it generated so much profit and tax revenue. This was the regime of “light touch regulation” of the City which turned the British economy into a cross between a Liechtenstein tax haven and a giant hedge fund.
The USP of SIVS, as with hedge funds and private equity companies, was that they had found ways of abolishing risk through complex financial engineering. Typically they packaged up long term debts, usually residential mortgages. sealed them with credit default swaps, and sold them as securities. It was a unique combination of self-delusion and sophisticated fraud ultimately premised on the notion that house prices could never fall. The financial engineers were often mathematicians who possessed brilliant minds but were devoid of common sense.
Like Medieval alchemists the hedge funds claimed to a mysterious gift called “alpha” which allowed them to make profits in any market, bull or bear, through speculative activities like short selling. In fact, their innovative alpha was based on boring old debt, cheap money. Buccaneering private equity companies used it to go on leveraged buyout raids on FTSE companies. Money was so cheap that you could buy billion pound firms by putting up less than a hundred million of real money - the rest was borrowed from banks eager to hand on the huge amounts of credit they were generating through their shadow banking system. It was a hell of a party, till it ended.
The exploding market in Credit Default Swaps CDS were an integral part of this world of fantasy finance. CDS’s are a bit like insurance policies taken out on the possibility of a company defaulting on its debts. They’re a bit like taking out insurance on your neighbour’s house burning down - only this is multiplied by hundreds thousands of other speculators also betting on your neighbour’s house burning down. The trouble was that no one actually knew what who was liable if and when the house really did burn down - until Lehman Brothers did exactly that last month leaving a charred hole of losses worth $300billion. Since then all the parties to these unregulated derivative contracts have been trying to avoid the losses from the conflagration of Lehman bonds.
The CDS market had grown from almost standstill to $62 trillion dollars in seven years. These CDS’s were themselves traded as if they were bonds, meaning that they turned into another source of credit and leverage. The global market in financial derivatives, of which CDSs are a part, has grown to over £500 trillion - a massive black cloud hanging over the world financial system. The truth is, no one really knows what’s out there.
The British government is in the process of spending £500bn to find out through nationalising banks like RBS and underwriting all new bank debt. The Brown package is imaginative, comprehensive and has won widespread praise - not least from the Nobel Prize-winning economist, Paul Krugman - but it is also a hell of a risk. The huge losses of the shadow banking system could now find their way on the public balance sheet.
There is a huge deleveraging underway which will mean trillions in losses across the world banking system. The hedge fund industry is literally disappearing before our eyes as worried investors pull their money from these vehicles that promised never to lose. The industry is expected to halve in value to around $1.000 bn, but its leveraged liabilities will be much larger than that figure.
If British property slumps by 35%, that means another trillion or so of value removed from the financial system, further undermining the value of all those mortgage-backed bonds in the SIVs. The UK stock market has lost another trillion or so this year, even after this week’s rally. Who pays? Well, pension funds will absorb much of the losses. They are estimated to have lost £150bn so far, but the true figure will be much higher. The 2.5 million homeowners who will in negative equity if, as expected, house prices fall by 35% , will also be paying debts for many years. Sovereign wealth funds who invested in British banks and equities will find themselves out of pocket.
But an awful lot of money is going to land on the public purse. The shadow banking system is an imponderable black hole of financial loss. According to the IFS, the liabilities from RBS alone could add £1.8 trillion on the public debt, taking it to £2,5 trillion. Britain’s GDP is only £1.4 trillion. These are terrifying numbers. Be in no doubt: if all the liabilities of the UK banks fell on the state, Britain could find itself in the same predicament as Iceland. Our economy is acutally very similar, only on a much larger scale.
Sorting out the shadow banking system, assessing liability and clearing out the debt, will be a massive task for the British government and people. It will take great ingenuity and international co-operation of a kind never seen before. Gordon Brown showed great political courage in cutting the Gordian Knot, but now he faces the much bigger task of cleansing the Augean Stables.
Gordon Brown, a latter day Alexander, tried to cut the Gordian Knot, but he may have simply cut the public finances adrift on a sea of debt. The state has now exposed itself to the billions of liabilities held off the balance sheets of Britain’s delinquent banks. October's stock market crash was largely a result of panic selling in this shadow banking system of structured finance. These vehicles of leverage, including hedge funds and private equity companies, are having to liquidate billions in assets as their business models collapse under the weight of collapsing share and house prices. Until these losses work their way through the system the British economy remains in intensive care.
The madness of the shadow banking system became apparent over a year ago when Northern Rock was nationalised, but regulators ignored the implications. The treasury minister, Yvette Cooper, discovered to her dismay that Northern Rock didn’t own most of its own mortgages. £50bn had been hived off to a Jersey based company, Granite, registered as a charity benefiting Down’s Syndrome Children in the North East of England. Needless to say the charity didn’t get any cash - this was a special purpose vehicle which allowed the Rock to trade in complex securities without having to meet the stringent capitalisation requirements of a normal bank.
But it wasn’t just the Rock. Most banks and financial institutions did exactly the same setting up “orphan companies”, often under charitable trust, that didn’t appear on their published balance sheets. This is one reason why apparently well-capitalised and solvent institutions like Royal Bank of Scotland collapsed so suddenly recently. Their true liabilities had been hidden for years in the shadow system while they make huge profits from irresponsible lending.
How did they get away with it? If you or I set up fictitious offshore identities to evade tax and conceal high-risk financial activities we would end up in jail. But the regulators turned a blind eye, partly because they didn’t fully understand structured finance, and partly because the government believed that it must be a good thing because it generated so much profit and tax revenue. This was the regime of “light touch regulation” of the City which turned the British economy into a cross between a Liechtenstein tax haven and a giant hedge fund.
The USP of SIVS, as with hedge funds and private equity companies, was that they had found ways of abolishing risk through complex financial engineering. Typically they packaged up long term debts, usually residential mortgages. sealed them with credit default swaps, and sold them as securities. It was a unique combination of self-delusion and sophisticated fraud ultimately premised on the notion that house prices could never fall. The financial engineers were often mathematicians who possessed brilliant minds but were devoid of common sense.
Like Medieval alchemists the hedge funds claimed to a mysterious gift called “alpha” which allowed them to make profits in any market, bull or bear, through speculative activities like short selling. In fact, their innovative alpha was based on boring old debt, cheap money. Buccaneering private equity companies used it to go on leveraged buyout raids on FTSE companies. Money was so cheap that you could buy billion pound firms by putting up less than a hundred million of real money - the rest was borrowed from banks eager to hand on the huge amounts of credit they were generating through their shadow banking system. It was a hell of a party, till it ended.
The exploding market in Credit Default Swaps CDS were an integral part of this world of fantasy finance. CDS’s are a bit like insurance policies taken out on the possibility of a company defaulting on its debts. They’re a bit like taking out insurance on your neighbour’s house burning down - only this is multiplied by hundreds thousands of other speculators also betting on your neighbour’s house burning down. The trouble was that no one actually knew what who was liable if and when the house really did burn down - until Lehman Brothers did exactly that last month leaving a charred hole of losses worth $300billion. Since then all the parties to these unregulated derivative contracts have been trying to avoid the losses from the conflagration of Lehman bonds.
The CDS market had grown from almost standstill to $62 trillion dollars in seven years. These CDS’s were themselves traded as if they were bonds, meaning that they turned into another source of credit and leverage. The global market in financial derivatives, of which CDSs are a part, has grown to over £500 trillion - a massive black cloud hanging over the world financial system. The truth is, no one really knows what’s out there.
The British government is in the process of spending £500bn to find out through nationalising banks like RBS and underwriting all new bank debt. The Brown package is imaginative, comprehensive and has won widespread praise - not least from the Nobel Prize-winning economist, Paul Krugman - but it is also a hell of a risk. The huge losses of the shadow banking system could now find their way on the public balance sheet.
There is a huge deleveraging underway which will mean trillions in losses across the world banking system. The hedge fund industry is literally disappearing before our eyes as worried investors pull their money from these vehicles that promised never to lose. The industry is expected to halve in value to around $1.000 bn, but its leveraged liabilities will be much larger than that figure.
If British property slumps by 35%, that means another trillion or so of value removed from the financial system, further undermining the value of all those mortgage-backed bonds in the SIVs. The UK stock market has lost another trillion or so this year, even after this week’s rally. Who pays? Well, pension funds will absorb much of the losses. They are estimated to have lost £150bn so far, but the true figure will be much higher. The 2.5 million homeowners who will in negative equity if, as expected, house prices fall by 35% , will also be paying debts for many years. Sovereign wealth funds who invested in British banks and equities will find themselves out of pocket.
But an awful lot of money is going to land on the public purse. The shadow banking system is an imponderable black hole of financial loss. According to the IFS, the liabilities from RBS alone could add £1.8 trillion on the public debt, taking it to £2,5 trillion. Britain’s GDP is only £1.4 trillion. These are terrifying numbers. Be in no doubt: if all the liabilities of the UK banks fell on the state, Britain could find itself in the same predicament as Iceland. Our economy is acutally very similar, only on a much larger scale.
Sorting out the shadow banking system, assessing liability and clearing out the debt, will be a massive task for the British government and people. It will take great ingenuity and international co-operation of a kind never seen before. Gordon Brown showed great political courage in cutting the Gordian Knot, but now he faces the much bigger task of cleansing the Augean Stables.
So what the hell do we do now.
So, what the hell do we do now? The G7 meeting delivered nothing specific and merely restated what we already know about the crisis. It’s bad. Political leaders promised “decisive action using all available tools” but didn’t say what those actually were. The idea of central bankers wielding their spanners on the broken down world financial system - like AA men on your car - is a comforting one, but it isn’t actually happening. Here are ten things that could.
1) Further co-ordinated cuts in interest rates, like last week’s .5% reduction by central banks. This is more as a psychological boost since the financial crisis has gone beyond anything that can be resolved by cheap money. But it would provide confidence that the world can work together, and we need that.
2) A co-ordinated guarantee of banking deposits across the G7 to halt the current systemic run on the banks, and to restore confidence in bank lending. This will require the creation of an international liquidity and debt guarantee fund of several trillion dollars. The UK model shows it can be done.
3) Nationalisation of leading banks in the G7 economies removing their chief executives, closing down insolvent banks and recapitalising the rest. The establishment of a genuine international bank, based on the existing Bank of International Settlement in Basel, with powers to enforce responsible banking practice.
4)Co-ordinated tax cuts on middle and lower income earners throughout the mature economies paid for by increased taxes on the wealthy. Ordinary people have lost fortunes in their pensions and their houses. If they stop spending altogether, as is now likely, a depression will ensue - that’s what happened in the 1930s. Society needs to be rebalanced after the Age of Irresponsibility. Gross inequalities of wealth were a large part of the problem as bonus-driven executives took ever greater risks in pursuit of huge and largely untaxed earnings.
5) The managed collapse of what has been called the shadow banking system of highly leveraged hedge funds, private equity groups and off balance sheet vehicles created by the big banks. They’re going bust anyway, but this needs to be orderly so that fire sales of assets are avoided where possible. It's called "triage".
6) Similarly, there must be regulation of the £500trillion global derivatives market so that markets in instruments like credit derivatives are managed openly and transparently through a proper exchange - like the stock exchange, and futures exchanges. These require evidence that traders have financial reserves to meet losses. The collapse of Lehman Brothers led to a £400bn hole in CDS contracts and more will follow as defaults continue.
7)Public investment. Government spending will be seriously constrained in the medium term in all industrialised countries, but they must find a way of collectively laying the groundwork for economic recovery by mobilising investment - just as Roosevelt did in America in the 1930s - through public works and infrastructure projects. As it happens, climate change could provide the basis for this. It is a global problem that requires global solutions and will create a new era of ‘green industries’.
8)All this will have to go along with a commitment in future that central banks will INCREASE interest rates to encourage saving, discourage personal debt and prevent asset bubbles like the British property boom ever happening again. Tax incentives which encourage property speculation must be stamped out forever. Houses are for living in, not investing.
9) Reform of the international financial institutions like the IMF and the World Bank, which have acted as cheerleaders for US “risk” capitalism and now have lost the confidence of the developing world. The recovery of the developed world now depends on the goodwill of the developing countries like China, India, the Middle East. We needs their cash reserves, to be invested, not in property speculation, but in national recovery projects financed by bond issues.
10) Cross fingers, touch wood, pray. Go for long walks. Think pleasant thoughts. This will all end.
1) Further co-ordinated cuts in interest rates, like last week’s .5% reduction by central banks. This is more as a psychological boost since the financial crisis has gone beyond anything that can be resolved by cheap money. But it would provide confidence that the world can work together, and we need that.
2) A co-ordinated guarantee of banking deposits across the G7 to halt the current systemic run on the banks, and to restore confidence in bank lending. This will require the creation of an international liquidity and debt guarantee fund of several trillion dollars. The UK model shows it can be done.
3) Nationalisation of leading banks in the G7 economies removing their chief executives, closing down insolvent banks and recapitalising the rest. The establishment of a genuine international bank, based on the existing Bank of International Settlement in Basel, with powers to enforce responsible banking practice.
4)Co-ordinated tax cuts on middle and lower income earners throughout the mature economies paid for by increased taxes on the wealthy. Ordinary people have lost fortunes in their pensions and their houses. If they stop spending altogether, as is now likely, a depression will ensue - that’s what happened in the 1930s. Society needs to be rebalanced after the Age of Irresponsibility. Gross inequalities of wealth were a large part of the problem as bonus-driven executives took ever greater risks in pursuit of huge and largely untaxed earnings.
5) The managed collapse of what has been called the shadow banking system of highly leveraged hedge funds, private equity groups and off balance sheet vehicles created by the big banks. They’re going bust anyway, but this needs to be orderly so that fire sales of assets are avoided where possible. It's called "triage".
6) Similarly, there must be regulation of the £500trillion global derivatives market so that markets in instruments like credit derivatives are managed openly and transparently through a proper exchange - like the stock exchange, and futures exchanges. These require evidence that traders have financial reserves to meet losses. The collapse of Lehman Brothers led to a £400bn hole in CDS contracts and more will follow as defaults continue.
7)Public investment. Government spending will be seriously constrained in the medium term in all industrialised countries, but they must find a way of collectively laying the groundwork for economic recovery by mobilising investment - just as Roosevelt did in America in the 1930s - through public works and infrastructure projects. As it happens, climate change could provide the basis for this. It is a global problem that requires global solutions and will create a new era of ‘green industries’.
8)All this will have to go along with a commitment in future that central banks will INCREASE interest rates to encourage saving, discourage personal debt and prevent asset bubbles like the British property boom ever happening again. Tax incentives which encourage property speculation must be stamped out forever. Houses are for living in, not investing.
9) Reform of the international financial institutions like the IMF and the World Bank, which have acted as cheerleaders for US “risk” capitalism and now have lost the confidence of the developing world. The recovery of the developed world now depends on the goodwill of the developing countries like China, India, the Middle East. We needs their cash reserves, to be invested, not in property speculation, but in national recovery projects financed by bond issues.
10) Cross fingers, touch wood, pray. Go for long walks. Think pleasant thoughts. This will all end.
Tuesday, January 06, 2009
New Year; New Bank Bailout
A New Year, a new bank bail out. Forget the negative noises from Gordon Brown, the banks are in as big a hole as ever, and we are about to ride to their rescue once more. As house prices fall and businesses go bankrupt in 2009, the cash-strapped banks are heading for new and greater losses. According to the Bank of England, the UK banks have a £700 billion funding gap, which is the difference between what they lent during the bubble years and the deposits they have to from savers. Since 2001 this gap has been bridged by borrowing from other banks, which isn’t happening any more - so we have to do it. Again.
In November the banks swallowed £37 billion in the last great recapitalisation which saw the government nationalising much of the banking system. Stand by for the rest of the system to enter state hands in an extension of public ownership which would have shamed Fidel Castro’s Cuba. Where did the first £37 billion go? not to mention the £500 billion in loans, swaps and guarantees that the government offered to the banks after the October crash? It didn’t go to small businesses or first time home buyers, you can be sure of that. Some of it went scandalously to pay for last year’s City bonuses. But most of it has gone into bolstering the banks’ own balance sheets - paying down banking debt effectively. The banks have been lending our money to themselves.
But even as they do this, the values of the assets which underpin the balance sheet are falling along with UK house prices, which have already fallen 20% since the August 2007. The banks, remember, had been using mortgages as collateral for lending and now the value of those mortgage assets is collapsing. The banks are like a householder whose home is worth less than their mortgage - except on a massive scale. Some responsible financial institutions like Nationwide - which is funded entirely by deposits - are coping reasonably well with the problem. But they are being required to pay for the irresponsibility of delinquent banks like RBS who had been borrowing to lend and have £2 Trillion on their books.
By bailing out the banks indiscriminately, good and bad, the government has made itself the underwriter of all the worst practices of the bubble years. It has left itself with an open-ended commitment to funnel public cash into a black hole. This is NOT what Roosevelt did in 1933. The US President shut the entire banking system down while the US Treasury separated the bad banks from the solvent. It’s called triage, and only the sound banks were given access to Federal funds. fhis has not happened this here.
And there could be worse to come. There are reports that the UK government is considering adopting one of the US Treasury Secretary, Hank Paulson’s worst ideas: the Troubled Asset Relief Programme or TARP. The UK Treasury is contemplating gathering up all the bad debts of the banks into one big pot and then sitting on it. This would be the final folly of the age of irresponsibility - rewarding the worst banking practices in history by forcing future tax-payers to pay for its losses.
They might as well go the whole way and pay of Bernie Madoff’s debts for there is little difference between the Wall St fraudster’s pyramid scheme and the securitization scam employed by the UK banks to hide their liabilities. These banks are now in possession of a blank cheque signed by every taxpayer in Britain. Moral hazard is too small a word: it is moral self-annihilation: the wilful destruction of financial responsibility, wrecking the livelihoods of the next generation in a bid to revive the very financial monster that created the Great Crunch. The government apparently believes that by throwing money at bankrupt banks and by printing money we will all start borrowing again like 2007. Yes, they’re as mad as the banks.
We are being governed by people who have robbed words of their meaning. We are told that the Prime Minister is to launch a Green New Deal, promoting environmentally sustainable investment. But he plans to do this by pouring billions into a third runway at Heathrow and by bailing out Jaguar Land Rover, foreign-owned makers of high polluting four by fours which are not only an environmental abomination but vehicles no one actually wants to buy.
The final act of New Year madness will take place later in this week as the Bank of England slashes interest rates to their lowest level since 1694, debasing the currency, destroying what remains of our savings culture and stoking up hyper-inflation. Yes, I know we are all supposed to be worrying about DE-flation right now, but the official inflation rate is still at twice the level at which the Bank of England is supposed to intervene. The hardworking families Gordon Brown always talks of are still reeling from high food and energy costs. Clothing may be cheap in the sales, but with the pound losing a third of its value, the prices of imported food and clothes are going to increase dramatically - and we import most of what we eat and wear.
But what is the point of cutting interest rates even further when the banks have made clear they will not be passing it on? The only people who could benefit from a further cut in interest rates are be people with relatively small mortgages in large properties - a reward for mere occupancy. The losers will be the millions of people who have been saving for the future - in other words acting responsibly rather than living on debt. Now that savings rates are slashed below the rate of inflation, savers are actually losing money every day they continue to save. The government should have a care here because it is alienating the very people who decide the result of the general elections. Savers outnumber borrowers by seven to one; they are mostly over fifty and are much more likely to vote.
But the real reason why the low interest rate/high debt policy is objectionable is not moral, or political but economic. How are the banks going to meet their funding gap if they do not get more people to save? In the absence of the old securitizations scams, the banks can only meet their £700bn funding gap by attracting savings - hard cash from you and me. By destroying savings the government is only ensuring that it will have to bail out the banks again, and again until there is nothing left because public debt has risen to over 100% of GDP. Make no mistake, that’s where we are heading - unless someone gets a grip.
In November the banks swallowed £37 billion in the last great recapitalisation which saw the government nationalising much of the banking system. Stand by for the rest of the system to enter state hands in an extension of public ownership which would have shamed Fidel Castro’s Cuba. Where did the first £37 billion go? not to mention the £500 billion in loans, swaps and guarantees that the government offered to the banks after the October crash? It didn’t go to small businesses or first time home buyers, you can be sure of that. Some of it went scandalously to pay for last year’s City bonuses. But most of it has gone into bolstering the banks’ own balance sheets - paying down banking debt effectively. The banks have been lending our money to themselves.
But even as they do this, the values of the assets which underpin the balance sheet are falling along with UK house prices, which have already fallen 20% since the August 2007. The banks, remember, had been using mortgages as collateral for lending and now the value of those mortgage assets is collapsing. The banks are like a householder whose home is worth less than their mortgage - except on a massive scale. Some responsible financial institutions like Nationwide - which is funded entirely by deposits - are coping reasonably well with the problem. But they are being required to pay for the irresponsibility of delinquent banks like RBS who had been borrowing to lend and have £2 Trillion on their books.
By bailing out the banks indiscriminately, good and bad, the government has made itself the underwriter of all the worst practices of the bubble years. It has left itself with an open-ended commitment to funnel public cash into a black hole. This is NOT what Roosevelt did in 1933. The US President shut the entire banking system down while the US Treasury separated the bad banks from the solvent. It’s called triage, and only the sound banks were given access to Federal funds. fhis has not happened this here.
And there could be worse to come. There are reports that the UK government is considering adopting one of the US Treasury Secretary, Hank Paulson’s worst ideas: the Troubled Asset Relief Programme or TARP. The UK Treasury is contemplating gathering up all the bad debts of the banks into one big pot and then sitting on it. This would be the final folly of the age of irresponsibility - rewarding the worst banking practices in history by forcing future tax-payers to pay for its losses.
They might as well go the whole way and pay of Bernie Madoff’s debts for there is little difference between the Wall St fraudster’s pyramid scheme and the securitization scam employed by the UK banks to hide their liabilities. These banks are now in possession of a blank cheque signed by every taxpayer in Britain. Moral hazard is too small a word: it is moral self-annihilation: the wilful destruction of financial responsibility, wrecking the livelihoods of the next generation in a bid to revive the very financial monster that created the Great Crunch. The government apparently believes that by throwing money at bankrupt banks and by printing money we will all start borrowing again like 2007. Yes, they’re as mad as the banks.
We are being governed by people who have robbed words of their meaning. We are told that the Prime Minister is to launch a Green New Deal, promoting environmentally sustainable investment. But he plans to do this by pouring billions into a third runway at Heathrow and by bailing out Jaguar Land Rover, foreign-owned makers of high polluting four by fours which are not only an environmental abomination but vehicles no one actually wants to buy.
The final act of New Year madness will take place later in this week as the Bank of England slashes interest rates to their lowest level since 1694, debasing the currency, destroying what remains of our savings culture and stoking up hyper-inflation. Yes, I know we are all supposed to be worrying about DE-flation right now, but the official inflation rate is still at twice the level at which the Bank of England is supposed to intervene. The hardworking families Gordon Brown always talks of are still reeling from high food and energy costs. Clothing may be cheap in the sales, but with the pound losing a third of its value, the prices of imported food and clothes are going to increase dramatically - and we import most of what we eat and wear.
But what is the point of cutting interest rates even further when the banks have made clear they will not be passing it on? The only people who could benefit from a further cut in interest rates are be people with relatively small mortgages in large properties - a reward for mere occupancy. The losers will be the millions of people who have been saving for the future - in other words acting responsibly rather than living on debt. Now that savings rates are slashed below the rate of inflation, savers are actually losing money every day they continue to save. The government should have a care here because it is alienating the very people who decide the result of the general elections. Savers outnumber borrowers by seven to one; they are mostly over fifty and are much more likely to vote.
But the real reason why the low interest rate/high debt policy is objectionable is not moral, or political but economic. How are the banks going to meet their funding gap if they do not get more people to save? In the absence of the old securitizations scams, the banks can only meet their £700bn funding gap by attracting savings - hard cash from you and me. By destroying savings the government is only ensuring that it will have to bail out the banks again, and again until there is nothing left because public debt has risen to over 100% of GDP. Make no mistake, that’s where we are heading - unless someone gets a grip.
Friday, January 02, 2009
Digtal dyslexia - it's so difficult to talk about
My New Year’s resolution, apart from all the usual ones that get broken in the first week, is to stop feeling bad about new technology and about my digital dyslexia. Computers don’t actually work very well, but everyone has to pretend that they do work for fear of being accused of being technophobes or in the early stages of senile dementia.
It’s the little things that really drive me mad. Like when the text disappears from the screen because you’ve inadvertently hit an f button. Or iTunes loses all those songs you expensively downloaded. Recently my printer stopped recognising commands to print emails - it’ll print everything else. There is a malign intelligence at work here.
Infuriating incompatibilities remain year after year. PCs still don't accept attachments on emails sent from my Mac, which is like the Royal Mail refusing to deliver letters unless they are written on their own typewriters. I have a clever handheld computer which allows me to write on the move. It runs Windows, but the Herald’s Windows-based computers can’t open its Zip files. How insane is that?
Apple is little better than Microsoft. Last year they introduced a thing called Mobile Me which is supposed to allow you to access your email more easily from the web when you are abroad. It doesn’t. In fact, I can’t access my webmail at all now. There are hundreds of furious complaints about “Immobilised Me” on the Mac discussion sites, but Apple doesn’t seem to care. This is because they know, and Windows knows, that 90% of us will think it is our own fault that we can’t get the system to work.
We have been conditioned to believe that we are the problem. The conspiracy of silence is bad and not only because it makes everyone dependent on sneering nerds in IT departments. In the recession, people are even more reluctant to admit to digital dyslexia in case it's used as a reason for making them redundant.
But imagine if your washing machine were to stop working because it had been hit by a virus, or you were told that you had to buy a new one because Hotpoint had changed the configuration of the washing cycle. Or imagine pressing the half load button and being told that you had committed an illegal act and would be shut down. This is madness.
I don’t care if there are solutions to these problems if onlyI understood how the thing worked. I don’t have the time or inclination to find out how my computer works any more than I want to know how my TV works. So, I have resolved to stop feeling bad and instead get mad. We must fight back against the machine. We have nothing to lose but our domains.
It’s the little things that really drive me mad. Like when the text disappears from the screen because you’ve inadvertently hit an f button. Or iTunes loses all those songs you expensively downloaded. Recently my printer stopped recognising commands to print emails - it’ll print everything else. There is a malign intelligence at work here.
Infuriating incompatibilities remain year after year. PCs still don't accept attachments on emails sent from my Mac, which is like the Royal Mail refusing to deliver letters unless they are written on their own typewriters. I have a clever handheld computer which allows me to write on the move. It runs Windows, but the Herald’s Windows-based computers can’t open its Zip files. How insane is that?
Apple is little better than Microsoft. Last year they introduced a thing called Mobile Me which is supposed to allow you to access your email more easily from the web when you are abroad. It doesn’t. In fact, I can’t access my webmail at all now. There are hundreds of furious complaints about “Immobilised Me” on the Mac discussion sites, but Apple doesn’t seem to care. This is because they know, and Windows knows, that 90% of us will think it is our own fault that we can’t get the system to work.
We have been conditioned to believe that we are the problem. The conspiracy of silence is bad and not only because it makes everyone dependent on sneering nerds in IT departments. In the recession, people are even more reluctant to admit to digital dyslexia in case it's used as a reason for making them redundant.
But imagine if your washing machine were to stop working because it had been hit by a virus, or you were told that you had to buy a new one because Hotpoint had changed the configuration of the washing cycle. Or imagine pressing the half load button and being told that you had committed an illegal act and would be shut down. This is madness.
I don’t care if there are solutions to these problems if onlyI understood how the thing worked. I don’t have the time or inclination to find out how my computer works any more than I want to know how my TV works. So, I have resolved to stop feeling bad and instead get mad. We must fight back against the machine. We have nothing to lose but our domains.
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