Monday, September 26, 2011

The euro is not the problem; it is the solution.

   I'm in the uncomfortable position of agreeing with the eurosceptic Telegraph commentator, Jeff Randall, even while he lambasts people like me who supported, and continue to support, the single european currency. He's right that some politicians were profligate fools for believing that monetary union could be achieved without any political union. He's right that the EU allowed Greece to join even though everyone knew it had fiddled its figures. He's also right that voters were deluded that debt fuelled consumption was the path to prosperity.

  But wait a minute. It wasn't the fools in Brussels who believed that debt was the way to prosperity. In fact, the Bundesbank has been a bulwark against the debt delusion perpetrated primarily by the Anglo Saxon economies of Britain and America.  Who were the countries that allowed the epic real estate bubble to grow unchecked? Not France or Germany for sure.  British politicians have spent years grumbling about the European Central Bank's apparent obsession with monetary stability. British economists have been urging Germany to join the debt delusion by manufacturing domestic inflation. 

  And in Europe, who was it who blocked any political union and urged the EU to extend its boundaries while not deepening its union? It was Britain above all who wanted a `”wider but shallower union”. Randall writes as if Britain played no role in shaping the EU. Wrong. We have been in there all along, keeping alive the flame of economic nationalism.

And now, as it is in danger of falling apart, what has been Britain's response? To begin the great currency war that has propelled the euro economies to crisis. Is Jeff proud of the fact that Britain has debauched its currency in order to gain a short term trading advantage through a devalued pound? As a fiscal conservative, surely this is the kind of short term fix that he loathes. Is quantitative easing, the inflationary Anglo Saxon solution to debt, really preferable to international co-operation? 

And now that everyone is getting in on the act of protectionism, how does he believe the international economic Humpty can be put together again? But yet more American debt-fuelled growth? That appears to be what is on offer. Under the Randall plan, presumably Greece defaults, Germany turns the euro into a new deutschmark; France's banks go bust and America retreats behind tariff barriers.  Meanwhile three trillion of tax payer's money is thrown at a financial system, shaped by the City of London and Wall Street, that has turned into a kleptocracy.

But as I say, I actually find I agree with Randall's conclusion. Let me quote him in full: “This illusion of political primacy is perpetuated because a confession of impotence would not only undermine the worth of those in power but also expose the euro's fatal flaw: monetary union without fiscal union is a marriage that weds the prudent to the profligate with no control over the latter's spending” .  He is dead right there.  There is no solution without 'more Europe'.

Without increased monetary and economic union, the countries of the world face a stark choice. Either mutually assured destruction through economic nationalism or a massive debt splurge through existing international agencies like the IMF. But the danger of the splurge is that it entrenches moral hazard. All those French banks who lent to Greece will feel an immense sense of relief that they can return to making irresponsible but lucrative loans to countries and households who can't pay it back secure in the knowledge that the tax payer will bail them out.

And countries like Italy and Spain will give up trying to pay their debts or manage their economies because they know that they will also get bailed out, just so long as they borrow enough money they can't repay. . That isn't an alternative. That is economic anarchy. At least the euro was an attempt to resolve these problems through human reason rather than the law of the jungle.   

Saturday, September 24, 2011

So is this a Great Depression? Pt Deux

    Economists cannot predict the future; most can't even predict the past.   The dismal truth is that no one really knows what is going on - economists, politicians, historians all pretend to have some grasp of events but are only fooling themselves when they aren't trying to fool others.  Journalists at least don't pretend to have any special insight, but they are also prisoners of the current financial or political orthodoxy - that's when they haven't actually bought up by one or other vested interest.  (They know who they are). 
    But it seems reasonable to look to the past if only to rule out what might be happening in the present.  So, we have to look at the 1930s, because that was the last time the world faced a stock market crash linked to a crisis of banking insolvency,  allied to a burst real estate bubble.  Then America dominated the world economy, and what happened there pretty much defined the 1930s.  Those of a nervous disposition should look away now.

Friday, September 23, 2011

So, is this a now Great Depression or what?

  So, we are in the midst of another global financial shock.  Stock markets bungee jumping.  Dire warnings from the IMF.  Countries collapsing under the weight of their own debts.  Unemployment rising as real incomes fall (except of course for the rich who do well whatever happens).  What do we call this?

  Is this still the Great Recession, that followed the 2008 banking crash?   Is it the Great Contraction, as 30 years of accumulated debt finally has to be paid?  Or is it, as some forecast as early as 2007, another Great Depression?. Well, none of these terms is very precise.  Recession is just two quarters of negative growth, and there is no accepted measure of economic depression.  But I can't think of any better way of describing it.  

It is four years since Northern Rock became the first major retail British bank to suffer a run on its deposits since the Second World War. Since then, we have had a secular decline in living standards, a return of inflation, growing unemployment and part time working. There has been a collapse of small businesses, an investment strike and two rounds of quantitative easing - money printing.   Britain lost about 6% of output in the 2008-9 crash and while this hasn't been made up, the economy has been growing, albeit painfully slowly.  The massive fiscal stimulus delivered by the G20 in 2008-9 has done its work.  But it appears that the same problems are recurring: a failure of banks to lend, investment strike by corporations.  

   This does look very like 1933.  After the Great Crash of 1929, the stock markets recovered quite quickly, and a lot of people made money fast.  Everyone thought that it was back to business as usual.  It wasn't and by 1933 all the nasty symptoms were returning.  This was when Roosevelt finally grabbed the economy by the scruff of the neck. 

   I think we have been through a period of denial.  After 2008, nothing really changed.  In Britain we handed the banks £1 trillion of public money and essentially told them to get on with it.  There were no banking reforms.  Governments didn't want to know. They wanted the good times to roll again, and they thought that by stuffing the banks with taxpayer's money, all would be well again.  No one was prosecuted for fraud, even though most of our financial institutions had been involved in misrepresenting the value of assets and selling financial products which they knew to be highly risky. 

  The Union Bank of Switzerland story tells it all.  There is no better parable for the failure of governments to realise the nature of the 2008 banking crisis and the sheer irresponsibility of regulators in failing to do anything about it.  Those who refuse to learn from history are condemned to repeat the mistakes of the past.  

Quick - send for Gordon. Or anyone who knows what they're doing

 Quick. Someone send for Gordon. What is signally lacking in this new and most dangerous phase of the Great Contraction is someone, anyone,  who seems to command the authority to get political leaders to focus on resolving the crisis.  In 2008, at the London G20, Gordon Brown banged heads together and got the international community to launch a co-ordinated multi-trillion dollar stimulus that prevented the recession becoming a depression.  There seems to be no one around with either the will or the vision to do this in 2011. Which is very unfortunate for the world.

     What is most striking about this latest twist to the financial crisis is that it is currently largely political rather than financial.  Yes, there are problems about Greek debt and deficits, and there is a great "deleveraging" taking place - that's a euphemism for paying debts.  But we should not be facing  the melt-down that followed the collapse of Lehman Brothers bank in 2008, when banks stopped lending to each other and world trade froze.   Most of the Western banks have either been nationalised or recapitalised.  There is economic restructuring certainly in countries like Britain with over-valued real estate and a bloated and parasitic financial "services" sector.  But apocalypse it isn't. 
  Germany has been an economic powerhouse of export led recovery.  Asia is growing faster than ever. Corporate profitability is high - or was before the banks stopped lending - and there is no shortage of capital around.  It's just that it is being hoarded by banks and companies because they have become gripped by fear.  Or rather fear of fear.  This is the moment when leadership becomes absolutely crucial to world events.  

As Jim O'Neil of Goldman Sachs put it to the BBC yesterday:  "The thing that really brought the world to a better place in 2008 was genuine collective action involving both the developed and the developing world through the G20"  Perhaps this sense of collective action will happen at this weekend's meeting of the G20 in Washington.  But I'm not holding my breath.  There is an ugly mood of economic nationalism sweeping through Europe - mainly focussed on the "sun-Med" states or the PIGS - Portugal Italy Greece and Spain.  People are fed up with bail outs and hand outs and constant .  Perhaps this is the moment the real crisis begins. 

Wednesday, September 21, 2011

9/11 Origins - How America joined the bad guys

 Everyone remembers where they were when the towers came down. I was in my attic writing a column for the Herald about Tony Blair's forthcoming confrontation with the Trades Union Congress in Brighton. I turned on the television to catch the live conference coverage and found that I was watching a Hollywood disaster movie. If only.

Out of interest, I dug out the articles I filed in the immediate aftermath of the greatest terrorist atrocity in history.. “President Bush's first instinct after yesterday's attack”, I wrote on 12/11/ 2001, “will have been to launch massive and unpitying retaliation - except that he has no obvious target. Osama Bin Laden? The Taleban? Afghanistan? The West Bank? Iran? Iraq?”. I went on: ”An unbridled pursuit of revenge would turn the world into a vastly more dangerous place...History will not excuse America if it now inflicts indiscriminate violence and terror against innocent peoples because they happen to live in the Middle East or Asia, have a brown skin or follow the Islamic faith”. America then proceeded to do precisely that.

Tuesday, September 20, 2011

Why the absence of communism is behind the financial crisis.

 It is a convenient myth of democratic politics that we elect people who know what they are doing.  We don't. We elect people who look good, can raise a lot of campaign funds and sound plausible.  They might be good; then again they might be smooth talking scoundrels like Tony Blair who, it has emerged, made several trips to Libya after he left office to help Col Gadaffi with his investment plans.  Nice of him.  

   Then there is the priapic Silvio Berlusconi, a walking disaster area, whose inability to keep his zip fastened is matched only by his skills at economic management.   He reportedly called the German Chancellor, Angela Merkell, an "Unf@@@able lardarse" which is probably mild compared to what she calls him.   Unfortunately for the bunga bunga man, Italy looks like being the latest casualty of the rolling sovereign debt crisis, following its credit downgrade, and will be seeking financial help from the lardarse herself.  Then Silvio will be F@@@ed.

Sunday, September 11, 2011

Murphy review of Scottish Labour leaedership. Same difference?

  It may be the biggest overhaul in 90 years, but I'm not entirely sure what has changed in the Murphy Review of the constitution of the Scottish Labour Party.   Mr Murphy says that he intends to make devolution a reality within the party.  "From now on, whatever is devolved to the Scottish Parliament will be devolved to the Scottish Labour Party".  

  But that has explicitly been the case since the Scotland Act in 1998.    The Scottish Labour Party - to use the name Donald Dewar entrenched  - publishes its own manifesto for Scottish elections, and were Labour not already devolved internally it would never have been able to enter into a coalition with the Liberal Democrats in Holyrood.  

     Is clear that Ed Miliband will still be the Labour Leader, pre-eminent in all 'non-devolved issues'.  Since controversial issues like corporation tax, oil revenues and the constitution are not devolved, this still leaves control pretty much where it is now - in Westminster.   Indeed, these reforms will have to be ratified by the UK Labour Party Conference, and the Party leader - Ed Miliband. 

     The Scottish leader of the Scottish Labour Party will now be the leader of the Scottish Party, which is certainly a step in the right direction.  But the centre of power in the party still resides in Westminster with the UK leadership.  The review does not appear to set up a separate federal party in Scotland as has been recommended by the former labour First Minister Henry McLeish.  

   The biggest change will be to allow MPs to stand for the leadership, which is probably a good idea, since no one in the Scottish Parliament seems to be particularly capable or interested in leading the Scottish party.  But it will play massively into Alex Salmond's hands if the next leader is a Labour MP like Tom Harris - and he appears to be the only one interested in throwing his hat in the ring since Mr Murphy and ministers like Douglas Alexander are uninterested.  I agree with Henry McLeish that the leader should be an MSP. 

 As for setting up a "political strategy board", realigning constituency party boundaries and opening an office in Edinburgh - I think the scale of Labour's electoral defeat requires something more than a rearrangement of deckchairs.  This is not a move to rename Labour in Scotland, or create a new party as has been proposed for the Tories by their leadership candidate, Murdo Fraser. Strange that the Scottish Tories seem to  be making all the running in Scottish politics right now. 

Thursday, September 08, 2011

The Big Optimistic Case for the Union.

     Another review of the Barnett Formula.  Just what we need, as Scotland slips into a treble dip recession. I think that probably makes six reviews of Scottish spending since the Tory Scottish Secretary, Michael Forsyth, started publishing the GERS figures on spending in Scotland, which was supposed to resolve the matter once and for all.  It never did. 

    Alex Salmond seems to have ignored the call, just as he seems to have ignored the Treasury's demolition job on the Scottish Government's case for "repatriating" corporation tax.  Actually, I have some sympathy for Treasury Man in this particular row.  Cutting corporation tax would mean a the loss of a large chunk of an independent Scotland's revenues.  Unless you subscribe to the neo-liberal view that cutting taxes always increases revenues.  That might happen if the Scottish economy were to be galvanised into new business formation.  But there is no evidence that a simple cut in ACT would achieve this - even if Europe were to allow Scotland to go down the Irish route of 12% business taxes which is highly doubtful.  Many other EU countries resent the "fiscal dumping" implied by Ireland's tax policy.  

    Still.  This does not amount to a coherent case against independence, and nor does it answer the fundamental question of how Scotland can retain capital and investment against the relentless pull of London and the South East.  There need to be some oountervailing measures introduced, otherwise Britain's over centralisation will continue unchecked and Scotland will be reduced to a peasant economy based on tourism and whisky.  

Tramageddon: Swinney steps in.

   What is infuriating about the people who are supposedly running the civic administration of Scotland's capital city, is that they seem unable to accept responsibility for their actions.  After the Finance Secretary, John Swinney, refused to accept their plan to pay three quarters of a billion on a tram service that goes nowhere near any of Edinburgh's population, and has already caused three years of disruption, they eagerly voted down their own decision of only ten days ago. Oh yes, they said collectively, it was a ludicrous proposal and none of us had anything to do with it.  It was all the other lot.  I'm beginning to wonder if the only way to get someone to take charge is to bring in a mayor.  At least then the council tax payers of Edinburgh would at least know whom to blame.