On Friday morning Google offered me one of their irresistible targeted ads when I punched 'financial crisis' into the search box. “The year 2008 marked the last of God's warnings to mankind” announced the blurb for a book called Gods Final Witness, “and the beginning of a countdown to the final three and one half years of man's rule that will end on May 27, 2012”. This was only marginally less apocalyptic than the commentary on the financial pages.
GFC2, it's being called – Great Financial Crisis 2. The recovery was illusory. Politicians are all fools. You can't trust no one no more. Grab a bag of gold and a shotgun and head for the hills. Financial panics are not supposed to happen in August – they do now. The Dow Jones lost an entire year's earnings in one day on Thursday. Some called for David Cameron, George Osborne and Nick Clegg cut short their summer holidays. Though how that would have halted the panic wasn't clear.
It wasn't too difficult to identify the immediate cause. The libidinous Italian PM had delivered a speech announcing that all was well with the Italian economy – a bit like getting Peter Stringfellow to deliver the budget. Italian debt costs rocketed as investors realised just how mad and bad the Italian situation really is. Then various EU leaders like Jose Manuel Barosso, president of the European Commission, made contradictory speeches insisting that there was no need to panic about Spain and Italy's debt problems, which of course made the panic worse. No one seems to be in charge in Europe any more. The “Greece+” rescue package we were sold only a couple of weeks ago appears to have been worth rather less than the paper it wasn't printed on.
So, what's going on? Why have all the trillions that went into the various financial rescues of banks and countries since Lehman Brothers collapsed in 2008 not sorted the financial system? Well perhaps it's because the real problem isn't to do with the banks and sovereign debt at all but with a fundamental weakness in the 'real' economy – that neglected bit where we actually make things. As the stock markets tumbled one stray statistic caught my attention: British families' living standards have fallen by almost five percent over the past five years. This according to the free market think tank the Centre for Economics and Business Research. It forecasts that over the next twenty five years, British families will lose a quarter of their earnings power.
A quarter! That's almost unbelievable, wiping out in one generation, the financial progress made in the previous two. It's part of a long term trend. The share of national wealth going to wages as opposed to profits fell from 65% in 1973 to 53% in 2005. This reduction in household spending power was largely disguised by borrowing. Average household debt was 45% in 1980, but rose to 157% by 2005. All based on illusory house prices.
What has all this got to do with the sovereign debt crisis in Italy, Greece etc? Isn't that all down to reckless borrowing by governments that couldn't be bothered to collect taxes? Well, no. The real reason why the countries of Europe have buckled under the burden of debt is because of the emergency steps they took after the first financial crisis in 2008. Trillions were thrown at the banks in a desperate attempt to keep them from going bust. Governments increased their spending to keep the economy going as fearful consumers closed their wallets and businesses stopped investing. This more or less worked, in that the banks stumbled on, unreformed – with the bankers ploughing the new money into bonuses and speculative assets.
But the net result of the 2008 rescue was simply to transfer the banks' private debts onto the public purse. The money had to be clawed back through increased taxation and public service cut backs – i.e. further cuts in the social wage. The syphoning of money from the general population to the financial elite – which is the story of the last three decades of neoliberalism – had already left a big hole in demand, in the ability of people to buy goods in the high streets. The bank rescue added to that. Government accounts simply couldn't cope.
So, what needs to be done? Well, in short, a lot of the wealth extracted has to be recycled back to the middle classes. It's devastatingly simple, but almost no one is suggesting that this could happen. Our political system is so dominated by financial lobby groups that no politician dare suggest higher taxation. Yet there's no doubt that it can be done. As the Nobel Prize-winning economist Paul Krugman, has argued US President Franklin D. Roosevelt, effected a massive shift of wealth from the super-rich to the middle classes in the late 1930s, when tax rates went up to 90%. Krugman calls it: “The Great Compression”. In 1929, the eve of the Great Crash, 67% of corporate income went to profits as opposed to 33% for wages. But by 1955, this had almost completely reversed with 66% of corporate pre-tax income invested in labour and 34% invested in capital.
When punitive taxation levels were retained after the Second World War, economists warned of doom. Instead, we got the consumer boom of the 1950s and 60s – the “Happy Days” era – based on the spending power of the middle classes. The economy roared ahead churning out cars, houses, white goods to meet this demand. It was capitalism's finest hour, and it buried communism under the weight of Western prosperity. Then things changed after the oil crisis of 1974.
In America and Britain, the story of the last 30 years has been the reversal of this democratisation of the economy. Income and wealth inequality has returned to the levels of the 1920s, with a tiny fraction of the super-rich taking a vast proportion of the wealth of the economy and investing it in stocks, houses and other speculative assets. This needs to be reversed somehow, or the recession will become a depression. Capitalism was saved from itself after the Great Depression in the 1930s. Somehow, it needs to be saved again.
In our political culture it is almost impossible even to begin a debate about taxation at the kind of levels that applied fifty or sixty years ago. It's hard enough to mount the case for retaining he 50p tax band. The conventional economic wisdom is that high taxation stifles enterprise and therefore economic growth. But the history of the 50's and 60's – the greatest decades of private enterprise in America – argues differently. That in certain circumstances, there is no alternative but putting money back in the pockets of the people. In Europe and America a start could be made by levying a super tax on bank bonuses, on speculative land holdings and on properties over £1m. And come to think of it, would anyone other than speculators vote against a package like that?