Iain Macwhirter Now and Then

A financial nativity tale

2011-12-24T09:03:00.000Z

Herald.

A telling conversation with ghost of Christmas present

Columnist

Christmas Eve at St Andrew's Square, in the centre of Edinburgh's financial district.

Wet snow falls on the scattering of tents housing the Occupy protesters. Jake Rice sweeps the slush out of the mess tent ... and onto the £300 hand-made shoes of Andrew Duncan, an investment banker.

AD: Jesus Christ!

JC: Oh, sorry. Didn't see you.

AD: Aye, well. You can now. And I'm bloody soaked.

JC: Um, but who ... what d'you want.

AD: Well, I was going to give you these bottles, but I'm tempted to drink them myself now.

JC: Why? You look like one of the people who've stolen 1% of the wealth. You're not from the tabloids again are you?

AD: No, and I've stolen a damn sight less of the wealth this year, I can tell you. Bonuses have been trashed by the crash.

(Sound of child crying.)

AD: Christ! you got kids here? In this?

JC: Only during the day.

AD: Yes I forgot, you lot all go home at night don't you – back to your warm middle-class beds.

JC: Actually we don't. I've been here for two months. Before that I was at St Paul's.

AD: Hear they've given up.

JC: No they haven't. They've agreed to move on rather than be forcibly removed in the New Year. We aren't going anywhere.

AD: OK, sorry. Look, I've been watching you here every day since you pitched up. Never believed you'd last. Which is why I'm bringing this crate. Just thought you deserved a bit of a winter warmer.

JC: That's kind of you, but I'm not sure we should really be taking donations from the people who've been wrecking the financial system, destroying public services and throwing people out of their homes.

AD: Ha, ha, ha! What school did you go to?

JC: That isn't the point. It's not where you come from that matters; it's what you do.

AD: Aye, well. I went to one of the worst schools in Edinburgh. We used to throw stones at people like you in your poncy blazers.

JC: Now it's my turn to tell you where to go ... If you don't understand why that doesn't matter then you can't possibly understand why we're here.

AD: Actually, I understand a lot better than you might think. Look, I'm sorry, I didn't come here for an argument or to jeer at you. As I say, in a curious way I respect what you are doing here. I'm glad someone's doing it.

JC: Why don't you join us then?

AD: Nah, I'm just not into that. I'm not a demo kind of person, never have been. Can't take it seriously.

JC: What do you actually do?

AD: I work in financial derivatives – currency mainly, and a bit of securitisation – but that's all frozen up at the moment.

JC: So you're a speculator then.

AD: Not really. I try to predict what various currencies will be worth, then we short on exchange traded funds valued in euros. At any rate, that was what we did.

JC: What possible value can there be to society in speculating on currencies? Don't you realise how people like you have driven commodity prices so high that people in Africa are having to sell their bodies to eat?

AD: Look, I never made the system. Really, it's just a job. Actually, I'm one of the people who agree about a Tobin tax, you know a tax on currency transactions – like George Soros says.

JC: A Robin Hood tax? You?

AD: I hate that phrase, but yeah. Why not? You have stamp duty on houses. Currency is just a market, it's just like selling anything – clothes or food. You make a profit on the sale. If you didn't have markets you'd not have this tent.

JC: Actually, this came from Blacks which has just gone bust thanks to people like you.

AD: I'm not to blame for high-street shops being hit by the internet. That's you lot with your MacBook Pros. You don't realise how you are changing everything with those things.

JC: OK. But if you look at the crisis as a whole, it's got a lot to do with greed, lax regulation, inequality, tax avoidance ...

AD: Well, actually. I agree with a lot of what you say. It's been appalling. Those financial scandals: endowment mortgages, payment protection insurance, private pensions, precipice bonds ... It's an utter disgrace. Trouble is ordinary people just don't understand the financial system. The politicians don't either. Next year, this Government is going to introduce a new semi-compulsory pensions system for the low paid which has been designed entirely to protect the profits of the pension providers. Bet you'd never heard of the National Employment Saving Trust?

JC: I don't have a pension.

AD: Course not. People like you don't work at all.

JC: The people are kept in ignorance by a compliant media, by the lies of the banks, and by corrupt politicians.

AD: Tell me about it. I couldn't agree more. People are completely defenceless. They should be taught about finance at school. They don't know how much they're being robbed because they're blind.

JC: But you make a living out of it. How can you stand there and say that?

AD: Actually, we're not so smart either. Look around this square at these grand bank buildings. There's absolutely nothing behind them. Empty shells. The money has all gone. They've killed themselves by their own greed.

JC: What about the trillion in public money that the Government gave you people to pay for your mistakes?

AD: Got me there, friend. Madness. Rewarding failure. Government handed a trillion to us, no strings. So what were we going to do? Go bust? That would have meant an economic depression.

JC: We're in an economic depression, or hadn't you noticed?

AD: (Turns to go) Actually I had kind of ... I've just been made redundant. Happy Christmas.

The last throw of the dice? ECB gives bankers a happy Christmas..

2011-12-21T22:46:00.002Z

Turns out that Francois Baroin, the French Finance Minister, wasn't far wrong last week. The most hated man in the City of London said that Britain was in just as bad financial shape as eurozone countries like France, and that the rating agencies should be downgrading British debt. We have higher inflation, lower growth and larger debts than France which is currently on the downgrade 'list of shame'. Now Moodies has put the UK on credit death watch too.

Who are the rating agencies? Well, they are private firms that specialise in giving credit risk ratings to banks and countries. Triple AAA means that the country is a very safe bet. Both Britain and France have this top rating, which allows them to borrow cheaply. But when they get on credit default watch, and both countries now are, then private investors think twice about lending to them, which makes the cost of their borrowing increase. The cost of borrowing has ballooned recently for countries like Portugal and Greece which the credit rating agencies think will default on their debts.

Yes,I know it's complicated, and the fact that it's all couched in the impenetrable jargon of the financial industry makes it worse. Few people can be bothered to find out what is going on in the financial fortresses of Europe because it is so difficult to make any sense of it. Take the year end rally.

In the dying days of 2011, the European Central Bank did what it said it wouldn't do and threw 489 billion euros at the busted banks of Europe. What happens is this: the insolvent banks can't borrow at the moment because no one is prepared to risk lending to them. So, what does the ECB do? It offers them unlimited funds at a give-away interest rate of 1%. The idea is that they will then lend to countries like Spain and Italy who are currently (because they are busted) paying 5% for their loans.

The banks are suddenly keen to gobble up the debt of Spain because they get a guaranteed "spread" that means a profit, on the deal. They borrow from the ECB at 1% and then lend to Spain at 5% and get 4% profit for doing absolutely nothing at all. They also use the money to lend to businesses at similar rates, and get millions of pounds of effortless profit. This becomes the bankers bonuses at the end of the year. This nonsense is what passes for financial management in Europe.

Because of this free money, everyone is suddenly happy and the stock markets forget about the eurozone sovereign debt crisis and deliver a nice year end rally, so that the financial community get a nice Christmas bonus. The European Central Bank is effectively giving money away - to incompetent and insolvent banks who have ruined themselves through their irresponsible lending policies. But the ECB can think of nothing better to do than to pour money over them like custard over a christmas pudding.

So, where does the ECB money come from? And if they can suddenly invent £500bn why don't they give it direct to countries? Well, this is the ECB version of printing money. It's what the Bank of England has been doing for the last two years. It violates all the principles of sound finance, needless to say, and stores up trouble for the future. But the alternative was an epic credit crunch in the New Year which would have seen the collapse of several very big European banks and a couple of countries. So the system has been salvaged again by the policy of stuffing bankers mouths with gold.

This is why Britain has suddenly become a dodgy credit risk. Last week, because it seemed easier for Britain to print money than the eurozone countries, the rating agencies thought Britain was less likely to default. This even though the inflation caused by money printing diminishes the value of investments denominated in sterling. But now, all of Europe is suddenly printing money, giving it away, trying to debase the euro and blow away sovereign debt by a wall of free cash. In the paradoxical world of high finance, this means that Britain has lost its inflationary advantage.

What is doubly bizarre, however, is that at the very same time as all this free money is being thrown around, the governments of the eurozone are undermining their own financial stability by imposing austerity regimes that destroy growth, increase government debt, and make the sovereign debt crisis even worse. The underlying problem is the absence of a central fiscal authority in the Eurozone able to issue bonds backed by all nations collectively. In the absence of a central treasury, the fixed exchange rate - coupled with the rigid austerity budget regime being imposed by Germany - is crucifying the weaker economies like Greece, Portugal, Spain and Ireland. The slowdown in growth makes it more expensive for them to finance their debts, which leads to credit rating agencies questioning their ability to avoid default. But for some reason, Germany seems to accept that it's ok for the ECB to flash the cash, even as it is forcing governments to rein in.

Ireland is in a particularly sad position here because it really tried to make austerity work, slashing public sector wages and pensions, and throwing everything at the debt numbers. The economy responded and exports recovered, and six months ago it looked as if the republic really had turned the corner. But now with Europe slipping into recession again, Ireland is back where it started. It's latest growth figures show a shrinkage of 2%. The rise in unemployment costs and the loss of tax revenue will make its debt crisis even worse.

The problem with Europe right now is that it is pursuing 1930s economics in a multinational age. This is what the IMF director, Christine Lagarde, meant last week when she warned of another Great Depression. Germany has persuaded itself that the eurozone problem is about lazy Greeks and Italians growing fat on borrowed money and expecting the hard working Germans to pay their debts. There is an element of truth in that of course, since the Med countries did allow borrowing to get out of control, and in Greece's case had largely given up trying to collect taxes. Fiscal discipline is important, but it is not the whole story.

What Chancellor Angela Merkel seems incapable of grasping is that the real problem is deflation and uneven development. Economies like Greece and Germany are so different that they cannot be expected to compete on the same playing field. In terms of productivity, Greece is still in the 1960s, whereas Germany has the most efficient and productive export economy in the world. But that success in exports is in part a result Germany's currency being effectively undervalued. If Germany were to leave the eurozone – of if the eurozone were to leave it - the deutschemark would rise rapidly against the currencies of competing nations. This would hit its exports and suck in more imports.

This is not an argument for ditching the euro, which has many benefits over the old ramshackle system of lots of little currencies inhibiting trade and investment. But as almost every economist in the world agrees, you can't have a common currency without a central federal authority to issue bonds backed by all countries, make financial transfers between rich and poor regions and in extremis to back the banks of member states in trouble. This is what the United States of America possesses: a federal government with power to raise taxes and to redistribute them among states. In Europe we have a disunited states which is locked in a death spiral of deflation. The more the austerity, the bigger the debt. The bigger the debt; the more the austerity.

This is a horrible place to be, and Britain isn't helping by indulging in schadenfreude and economic nationalism. One reason Britain is so out of sympathy is because we tried to steal a march on all of the euro countries two years ago by devaluing the pound in a bid to undercut them and boost our exports. Didn't work, as it happened, but that doesn't make the EU feel any better about it. There really is only one way out, and that is for all the G20 nations to recognise that they have played a role in creating the debt crisis and have a responsibility to resolve it.

Christine Lagarde is right to say that if nothing is done we will be back to the 1930s – to protectionism, competitive devaluation and worse. There will have to be a arbitrage on indebtedness in Europe, and a new global system of financial regulation. But this is very difficult and slow, and politicians prefer quick and dirty solutions, involving blame and retribution. Last week, we saw how quickly economic problems become translated into national confrontation. Fortunately, this is not the 1930s and we do not go to war as readily as in the past. But as this grim year staggers to a close let's hope all nations realise that – trite as it sounds – there is no solution without goodwill. Happy Christmas.

Salmond's first own goal. Sectarianism

2011-12-14T23:19:00.002Z

From The Herald. Like most people concerned about freedom of speech, I've been watching the progress of the Offensive Behaviour at Football and Threatening Communications Bill, with mounting alarm. Outlawing the singing of songs at football matches seemed such a ridiculous proposition that initially I thought the Scottish government weren't serious. That Alex Salmond just wanted “send a message”, and that the loopier parts of this unnecessary legislation would be dropped. And if not, MSPs would realise that such a law as unworkable as it is objectionable. Surely, reason would prevail. It hasn't.

Yesterday, MSPs in Holyrood passed a law that could make the singing of the national anthem punishable by a five year prison sentence if it is associated with “offensive or threatening behaviour” in any context that involves football. No one knows exactly what “offensive and threatening behaviour” is, and anyway, because of the Catch 22 drafting, the very singing of “sectarian” songs is itself deemed offensive. There is no list of proscribed songs because to compile one would invite ridicule - “Give Ireland Back to the Irish” - Paul McCartney? This dumb law could also make the carrying of flags, colours or religious symbols illegal at football matches, in the trains going to football matches or in pubs or any public place where football is being shown. It could make singing The Sash illegal in a pub, but not in the street outside it. This is utter madness.

Anyway, there are worse things than singing Up the Ra at a football matches. Using the law for political purposes is one of them. This legislation is otiose, contradictory, authoritarian, subjective, illiberal, anti-democratic and contrary to internationally accepted definitions of basic human rights. It is threatening and offensive to freedom of speech, freedom of association, freedom of thought and to personal liberty. It hands discretionary powers to the police that are wholly inappropraite in any civilised society, effectively giving individual officers the power to deprive people of their liberty if they don't like the way they are behaving.

It also offends against the most fundamental principle of the law: that there should be equality before it. The singing of “Flower of Scotland”, for example, which celebrates violent behaviour against English people, will be illegal at Hampden but not at Murrayfield simply because they play rugby there. Why on earth should a song be offensive at one sporting event and not another? And don't tell me that people don't engage in offensive and threatening behaviour at rugby matches. Just look at what happens on the pitch.

Behaviour liable to lead to public disorder is already illegal .. Section 38 of the Criminal Justice Act 2010 outlaws '”threatening or abusive' behaviour likely to cause a reasonable person to suffer fear or alarm”. The Offensive Behaviour Bill takes the law into an entirely different realm altogether, into subjective hate crime. It will criminalise thought and behaviour that other groups might find offensive. Well, someone should tell the FM and his MSP clones that the right to offend people is the most basic right in any democracy.

Now that this principle is accepted in football stadiums, there will be inevitably be pressure to extend it to work places, public spaces, parks, meetings, concert halls, theatres, cinemas. schools – indeed anywhere where “offensive” ideas might be ventilated. For if they are illegal in one public setting how can they possibly be legal in another? How could films like “Michael Collins”, about the IRA leader, be shown in Glasgow cinemas? Should Scottish Nationalists be allowed to chant the bloody anti-English dirge, “Scots Wha Hae”, at Bannockburn? That's threatening and offensive. The Edinburgh Festival Fringe will become a playground for litigants claiming to be offended and threatened by productions like “Singing I'm No A Billy I'm a Tim”

The government has tagged a feeble “freedom of speech” clause to the bill which only underlines the extent to which this is an violation of it. The Lord Advocate insists that jokes and satire will not be actionable. But who is to decide? The law has a notoriously tin ear when it comes to irony, and is incapable of distinguishing between banter and abuse. Yet now, calling someone a “hun” a “fenian” or a “bluenose” could lead to imprisonment and a hefty fine if the words are uttered while footie is on the TV. Well, if my experience is anything to go by the police will be prosecuting every TV and newspaper newsroom in Scotland. One of the ways in which people have sought to defuse sectarianism is by lampooning it, parodying it, satirising it. Many Celtic supporters call themselves “Tims” and even “Fenians”, the way Afro-Americans call themselves “niggers”. Are they now to be prosecuted if someone overhearing these remarks feels threatened? Pity the publicans who are required to enforce this nonsense.

Worse, the government has made attempted to curb freedom of speech on the internet by saying that “threatening communications” will also be punishable by five years in jail. Leave aside the virtual impossibility of enforcing this law on social media sites like Facebook which has 800 million users, who on earth is to rule what is and is not threatening? Two years ago, Paul Chambers, a 27 year old accountant, lost his job and was fined thousands of pounds for a joke tweet that read: “Robin Hood airport is closed. You've got a week and a bit to get your shit together otherwise I'm blowing the airport sky high!!". Alex is going to have to hire a lot more police. No wonder they're about the only people who support it.

This is an unjust law which has been criticised by almost every legal body that has reviewed it. It has achieved the impossible: uniting Rangers and Celtic, the Church of Scotland and the Church of Rome, lawyers, civil liberties organisations, the Conservative Party and the Greens - in opposition to it. It has been frog-marched through parliament by an act of elective dictatorship. This is Alex Salmond's first own goal, if you'll excuse the pun. He should have listened to parliament and dumped it last summer when he had the chance. The only hope now is that courts and juries will treat it with the contempt it deserves.

Who are the separatists now? Take Britain out of Europe and you can take Scotland out of the UK

2011-12-13T23:33:00.000Z

David Cameron's decision to take the UK out of Europe will take Scotland out of the UK. The Prime Minister's use of the veto against the EU treaty on budgetary reform looks like the game-changer that the SNP leader Alex Salmond has been waiting for. Attachment to the Union in Scotland is likely to evaporate as Scots realise that they have become an appendage to an essentially isolationist England with a sceptic media saturated with an ugly chauvinism. The hostility shown towards European nations is like a bad version of the hostility that old school Scottish nationalists used to show towards England. Only they grew out of it.

David Cameron's narrow nationalism, putting the interests of the City of London above those of resolving the EU budget crisis, has fatally undermined the moral case for sticking with Britain. If the UK is now a Banker's Union, dedicated to protecting the privileges a delinquent financial elite, what price internationalism, democracy, social welfare or any of the values that were supposed to define the common British project?

The SNP has suffered greatly in the past from accusations that it is a "separatist" party, seeking selfishly to divide the UK, and pit nation against nation. But who are the separatists now?

The argument for sticking with Britain was always that this gave Scotland representation at the highest levels of decision-making in Europe. This is clearly no longer the case. The UK is marginalised in Europe, whatever the Prime Minister may say - a "union" of one against 26. This isolation is the culmination of decades of revanchist anti-Europeanism, which has coincided with the decline in popular attachment to the symbols of Britishness on both sides of the border.

As England turns in on itself, lapsing into a financial parochialism, Scotland turns out - seeking to rediscover in Europe the communitarian values that it believed underpinned the UK. The SNP used to be criticised for demanding "Scotland's Oil", for seeking to grasp the nation's natural resources for itself. Well, Scotland gave the oil away, and now finds that it was used, not for the common good, but to build an evil empire of greed. It surely won't get fooled again.

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From Sunday Herald 11/12/11

So, Scotland – in or out of the euro? It might seem a daft question to ask when the very future of the European Single Currency is in doubt. But that hasn't stopped people asking it. Danny Alexander, the UK Treasury Secretary, in a speech on Friday demanded to know whether Scotland would be in or out, saying that the “deafening silence” from the SNP on the euro was “deeply damaging” to Scotland's economy. Margaret Curran MP, Labour's Shadow Scottish Secretary, weighed in pointing out that “If a separate Scotland did use sterling, we would be in the weakened position of using a currency over which we had given up all influence and control”.

She has a point. How could it be in Scotland's national interest to remain in a sterling currency union which is shaped in the interest of the South East of England? Mind you, that is rather the case with Scotland at the present time, as the Nationalists see it. They regard keeping the pound as a temporary measure until such time as Scotland can have a debate and referendum on the euro. At least, that was the line before the Great Split. For, the extraordinary events of the past few days mean that the whole debate about Europe has been turned on its head.

David Cameron's decision to use his veto in Europe in order to protect the bankers of the City of London from financial regulation by Europe has altered the course of history - though no one is quite sure yet in what direction. In the early hours of Friday morning, Britain showed its hand; and Europe called its bluff. Rather than abandon a “Robin Hood” tax on financial transactions, and drop other measures to curb the excesses of investment bankers, Europe effectively showed Britain the door. And David Cameron walked straight out of it. Britain remains a member of the European Union, of course, but without any power or influence over what happens to it. Sounds familiar, doesn't it?

Britain is now more remote from the core of Europe than at any time since the referendum on Europe 36 years ago. There a momentum toward disengagement that looks unstoppable. David Cameron will now be under intense pressure from the 100 or so eurosceptic Tory MPs who are demanding that he hold a referendum on renegotiating British membership – a euphemism for detaching Britain from the European Union altogether. The PM promised he would call one if there were any significant changes to the Treaties or to Britain's relationship with the EU. There are profoundly significant changes taking place and that suggests that a referendum will be extremely hard to avoid.

This poses interesting questions for Mr Alexander. There has also been a deafening silence from the pro-European Liberal Democrats in the coalition over the prospect of Britain effectively leaving Europe.David Cameron has not just rejected the eurozone, he has taken this country to the outer fringe of Europe, where he will reside in splendid isolation with the Hungarian leader, Viktor Orban, who has recently introduced forced Labour camps, called the “Goulash Archipelago”. to deal with the unemployed. I can't see Nick Clegg – lifelong supporter, not only of the European Union, but also of the euro – being able to put up with that for long.

If David Cameron holds a referendum on renegotiating British membership of the EU, the Coalition partnership between the Conservatives and the Liberal Democrats will be over. It may be over anyway, because the consequences of isolation in Europe will place intense strains on the Liberal Democrats. The City of London may be laughing all the way to the bank, but British manufacturing industry is desperately worried about Britain excluding itself from decision-making in the European Single Market. Even Margaret Thatcher, the godmother of euroscepticism, always insisted that Britain had to be represented in Europe, and that the “empty chair” policy meant UK interests going by default. Nicolas Sarkozy has made absolutely clear that Britain cannot remain as a non-member of the club telling it what to do

Britain is now the Iceland of Europe – the most highly indebted country in the world with a delinquent banking sector – in self-imposed isolation. Where will Scotland stand on that? It seems plain to me that Scotland's interests may no longer lie with sticking with the pound if that means begin excluded from Europe. The SNP always said that Scotland should have a “seat at the top table” , now it doesn't have a seat in the building because the UK has decided to head for the exit. In such circumstances, an independent Scotland might listen with interest to overtures from the rest of the European Union to become an independent nation at the heart of Europe – now that England has made its excuses and left.

The idea, put about by Labour MPs, that Scotland would be denied entry to Europe, even as England leaves it, is revealed as unalloyed nonsense. In its present mood, there's nothing Europe would like more than to see the UK disintegrate and for Scotland to join the euro. I am pretty sure that Scotland would be given membership at a very reasonable rate. The new country would also be offered generous financial incentives, possibly even a derogation on corporation tax, to smooth its entry. And as a petro currency, might benefit Scotland considerably, because currencies based on natural resources like oil have a habit of appreciating rapidly, thus making exports uncompetitive. Linked, at a favourable rate, to the euro, Scotland would not face that problem.

Danny Alexander's suggestion that an independent Scotland would become one of the the 'poor men of Europe' like Greece, suffering permanent deflation, debt crises is as economically illiterate as it is offensive. Scotland would more likely become one of the many prosperous small states of northern Europe, joining countries like Holland and Finland. Assuming Europe survives, that is. Given the current state of confusion and uncertainty, and with the economy collapsing into what looks like a depression, it is perhaps facile to speculate about any future for the euro. But what is not in doubt is that Britain is on its way out, and that cannot but have profound implications for Scotland. As Der Spiegel put it: “Aufwiedersehn, England”.

£500 for independence?

2011-12-13T17:56:00.000Z

From the Herald. It sounds cheap at the price. 65% of Scots would opt for independence if they were £500 better off as a result, according to the latest poll from the Social Attitudes Survey. With all that cash the SNP has been accumulating recently through legacies and donations, Alex Salmond must be tempted just to send out a brown envelope with every referendum ballot paper. Perhaps they could redirect redirect some of that £60bn in fantasy funding for infrastructure projects announced this week. Scotland could be taking its seat in the United Nations before the decade is out.

There has been much scorn heaped upon Scots for appearing to put a price on their continued membership of the UK. Almost as much as has been heaped upon the Scottish Infrastructure Secretary, Alex Neil's, Mega Plan for road and rail projects, including a high speed rail link, with a sprinkling of housing and hospitals. Most of the projects won't come to fruition until the 2020s and beyond, and rely on optimistic funding from NPD, PPP, PFI or whatever form of private finance initiative happens to be in favour at the time. The Mega Plan also depends on the Scottish parliament getting the borrowing powers contained in the Scotland Bill, to which the SNP government is vehemently opposed. The consensus amongst the Mcchattering classes is that it has the ambition of Roosevelt's New Deal, but little prospect of becoming a real deal.

But at least the SNP are trying to do something. Industry bodies, including the Scottish CBI which is no friend of nationalism, have been praising the scheme for trying to inject confidence into a flatlining economy. Some foreign pension funds are reported to be interested in financing projects which, like rail, have guaranteed revenue streams. Most of the scornful newspaper comment concedes that someone somewhere really needs to be talking about growth and the SNP government is at least suggesting there may be life after the recession. Certainly Neil's plan puts the UK government's £5bn infrastructure plan announced in the Autumn Statement in the shade.

In a country like Scotland, where half the economy is the state, no one will invest if the government isn't taking a lead. For every £100 million invested, 1400 jobs should emerge in the wider economy. It's just a pity that so many of the projects are unimaginative road improvements, picked from the briefing sheets supplied by transport lobbyists: Forth Road Bridge, M8 link, A9 duelling, Aberdeen bypass, etc. I thought that the SNP was supposed to be in the green investment business, developing renewable energy.

But there is a broader political objective here. The SNP is playing a game of fantasy independence – giving voters some idea of how life might be in future if Scotland were to to it alone. Everything the SNP does right now, from Alex Salmond lecturing the Chinese on Adam Smith, to getting civil servants to research a “Scandinavian” prospectus for independence, is all about preparing the ground for the referendum, which looks like coming in the middle of 2014. The task is to eliminate the negatives – make independence sound like a bracing hill walk rather than a leap in the dark. The SNP is trying to think us into leaving the UK.

And that much-derided poll from the Social Attitudes Survey is, they believe, an indication that Scots are thinking the unthinkable.. A £500 a year bung may seem a crass, materialistic reason for seeking national freedom, but read differently it suggests that most Scots would now opt for independence if they thought it could be made to work economically. . Certainly, there appears to be precious little romantic or emotional attachment to the United Kingdom, kith and kin, the flag or any of the other symbols of Britishness.

Perhaps this a consequence of the very materialistic way that unionists have posed the argument. Opponents of independence invariably resort to versions of the “divorce is a costly business” argument. - the £4 billion deficit, the loss of the Barnett Formula. Scotland hurled out of the EU and left destitute like a single parent on a bleak housing estate. It is the cost of the divorce that is always emphasised, not the emotional bonds that led to the original marriage. In fact, the Union – Parcel o' Rogues aside – was a moral project as well as an economic one.

Even during the days of the British Empire, when Scottish soldiers shot the natives, Scots graduates ran the colonial administration, and Scottish bankers took all the money, there was a sense of mission: that this was somehow bringing civilisation to the world. After the fall of the British Empire there was a new moral union. It was based on working class solidarity, trades unions, the war against fascism, the 1946 Labour government and the National Health Service. Scots were fully signed up to the social democratic project, to the welfare state, and largely remain so today, even though the industrial working class is no longer a political force, and the welfare state is under challenge as never before.

Scots are thinking hard cash because they no longer recognise any coherent moral message from an increasingly eurosceptic United Kingdom, dominated by the City of London, and run by a government largely composed of ex-public schoolboys. Why should Scots keep faith with a union based on plutocracy, where personal enrichment is the only mission around? The SNP believe Scots are ready for a new political narrative in which Scotland figures as a rugged equalitarian Nordic nation, with a history of self-reliance and self-help, that doesn't need state handouts and can do very well on its own.

And talking of prospectuses, the nationalists think they can offer a pretty convincing IPO for the referendum: highly educated and versatile work force; £350bn in North Sea Oil; a quarter of Europe's wind and wave energy; thriving tourist industry, five world class universities and an awful lot of water. It would be pretty poor management that could make a mess of those numbers. If I were a Japanese pension fund, I might consider investing in it.

So, unionists should take little comfort from that risible price drop poll. Scots are increasingly taking independence seriously, and are costing the future. A leap in the dark might be better than being left in the lurch.

Black November: it's enough to drive you to drink.

2011-12-06T17:57:00.000Z

November was when the banking crisis of 2008 finally hit home. The governments of Europe have bankrupted themselves by taking on the debts of the banks. The latest move by Angela Merkel and Nicolas Sarkozy is the final nail in the coffin of the eurzone economies. It saddens be greatly to say that, but I can't see any way out for them now.

What was decided in Paris was that, in future, private investors will not incur any losses in future defaults by eurozone countries. In Greece, the banks and investment houses who had bought up Greek debt were forced to take a "haircut" of some 30-40%. This freaked bond investors and made them wary of taking on sovereign debt of any Mediterranean states - which is why Italy's borrowing costs leapt above the crucial 7%. Markozy decided that the only way to calm the markets was to give them a promise that future losses will be taken onto the state.

All very well, but the sovereign states of Europe are already effectively bankrupt, not because of public debt, but because of the 23trillion that has been lent by eurozone banks. This is the real wild card. By any reasonable standards, the eurozone countries are already insolvent. And there is no one left to come along and pay their debts for them. This is why the rating agency, Standard and Poor's (what a wonderful, Dickensian name that is) has put them all, even Germany, on notice of credit down grade. This will make it even harder for them to borrow money, and will increase debt.

But all those gloating over the misfortunes of the eurozone should remember that Britain is deep in the debt pit as well, and it is only because we have been debauching the currency and igniting inflation by Quantitative Easing that we have been left alone for the time being. There is a reckoning here too.

From Sunday Herald:

It's not all doom and gloom, Scotch whisky sales are up 23%, mainly to the so-called BRIC countries like Brazil and China. So someone's still doing well enough to celebrate with the golden stuff. Or perhaps they're just drowning their sorrows. For the success of the national drink was in stark contrast to the state of the nation as a whole in the week the message finally struck home. The financial crisis isn't over - three years after Northern Rock collapsed it has only just begun.

A few random headlines from Black November: Britain to face a double-dip recession, according to the OECD. Six years of blood, sweat and tears unveiled in the Chancellor's Autumn Statement. Incomes to fall by a record 7.3% in three years says the Institute For Fiscal Studies. Public sector net debt to rise to 78% of GDP in the same period says the Office for Budget Responsibility (OBR). The Governor of the Bank of England orders banks to slash bonuses and dividends as new financial crash looms. 'Ten days to save the European Union', says Olli Rehn, the EU commissioner for economic affairs. Two million public sector workers take to the streets over curbs to their pensions in the largest industrial action in thirty years. And Jeremy Clarkson apologises for calling for strikers to be executed in front of their families.

The corpulent Top Gear presenter's proposal was a moment of comic relief in a week of unremitting financial tragedy. As an overpaid employee of the state-owned BBC, some suggested that he should be the first up against the wall. Actually, the episode probably did more damage to his po-faced critics than to the ageing petrol head: our capacity for irony seems to be one casualty of the crisis. Almost as amusing was Jeremy Paxman's stunned silence after he asked whether the Treasury Secretary, Danny Alexander, was going to say his manifesto for the 2015 election that there will still have to be billions more cuts after it. “I'm afraid so, yes”, said Alexander. The great Paxo was lost for words at this barefaced honesty. Liberal Democrats across the country, and especially in Scotland, are wondering just how they can expect to get anyone to vote for them on such a dismal prospectus. They now sink or swim with the Tories.

Meanwhile, there was more theatre of the absurd in Europe, as the faceless suits of the EU called for calm even as they were kicking women and children out of the eurozone lifeboats.This is what the Weimar Republic must have been like, I thought. Commentators spent much of the week comparing last week's trouble with the 1920s inflation, the 1930s depression, the 1970 strikes and even the 1870s financial panic that followed German unification. But the search for historical precedents became facile, when you began to realise that this could actually be worse than any of them. Journalists like me who have been writing about this financial crisis for three years are suffering from superlative fatigue. There is no real historical parallel to the combination of factors that are contributing to this debt crisis. There was no single currency in the 1930s. In the 1970s, the West, led by America, still dominated the world economy. The long depression of the 1870s was mitigated by cheap food and raw materials from the colonies. And never, ever, in the history of the world economy has so much been owed by so many as today.

The euro crisis has been a useful diversion for the Chancellor, George Osborne`: he can try to blame Britain's problems on the eurocrats, even though our crisis is home grown. By rights, the Chancellor should be in the doghouse and his government on the way to political oblivion. After all, he got his numbers completely wrong. Even after his austerity budget – deeper cuts than inflicted by the Geddes Axe in 1921 – British debt is still set to rise until the next election and beyond. Everything the Labour Shadow Chancellor, Ed Balls forecast would happen, has happened: the private sector has not filled the gap left by the public sector cuts. Tax revenues have declined while benefits payments have increased with unemployment. The withdrawal of public spending has diminished aggregate demand and killed business confidence stone dead. This has all made the debt mountain even bigger.

It looks like incompetence of immense proportions. But here's the funny thing: if there were an election tomorrow, the government would probably be re-elected with an increased majority. According to the opinion polls, the voters are still behind the Coalition and believe the austerity programme is necessary. Ed Ball has not got his message across. Even though millions have been taking to the streets to protest about government cuts, David Cameron is actually more secure today than a year ago. Labour is learning the hard lesson that, in periods of great national crisis, people tend to support the government of the day.

If Ed Balls conveys an air of harried exasperation it's hardly surprising. But there is also a credibility problem with Labour's solution to the current crisis. With debt already unsustainable and rising, the idea of borrowing yet more money – as Balls suggests - simply sounds irresponsible to most voters. Surely, if the government were to launch an all out “dash for growth” along the lines of the Barber boom in 1972, there would be such a huge pile of extra debt that the international money markets would simply refuse to lend to Britain at anything like a sustainable level? The interest on current payments is already more than we spend on defence.

Keynesian economists like Paul Krugman argue that this is economically illiterate, and that it is the lack of growth, caused by cutting spending too fast, that is causing the debt pile to grow. But looking at what has happened across Europe, where countries like Italy with much less debt than Britain, have become insolvent, it seems like a pretty risky strategy to spend, spend, spend especially at a time of world economic slowdown. It's not that easy to stimulate growth when no one wants to buy your stuff. British exports have undercut our European neighbours because of the 25% fall in the value of the pound, but this competitive advantage hasn't stimulated any economic recovery.

For me, the frightening fact of the week was this: according to the financial consultants, McKinsey, Britain has the biggest debt problem in the world. If you add all our debts together – household debts, company debts, government debts, pension liabilities and bank debts – the total comes to 492% of GDP. That's higher than Japan's debt even after its “lost decade”. And British debt has actually increased since 2008, despite the deepest government cuts in living memory. Moreover, the debt is going to continue rising at least until 2016, according to Chancellor George Osborne's own numbers. The faltering of economic growth will force the government to take on another £158bn over the next three or four years. And that is assuming that European gets its act together and doesn't ignite another “Lehman moment” by allowing the eurozone to break up.

It's hard not to conclude that we are on a down escalator to financial armageddon, and that no one knows how to get off it. The debts will either have to be paid, thus impoverishing future generations, or else the debts will have to be diminished by hyper-inflation, also impoverishing future generations. Our debt is equivalent to five solid years of national economic output. No Carol Vorderman schemes for debt consolidation will get us off this hook. The Bank of England is already printing money faster than Zimbabwe's Robert Mugabe in an effort to boost inflation and spending. This of course destroys any incentive for people to save, since anyone foolish enough to do so is losing around 5% a year. No one is making any sense right now, not even central bankers. And don't be fooled by low interest rates on government debt – that's just because sterling has become a temporary safe haven from the eurozone crisis. The moment the bond vigilantes take a look at the reality of British debt is the moment we will have our own sovereign debt crisis.

Any way you look at it, British debt is simply too high and has to come down. But in a democracy it is difficult to persuade people to accept the consequences. Two million public sector workers took to the streets last week to demonstrate their anger at having to work longer and pay more into their pensions. Their sense of injustice was palpable. Why should bankers escape with their bonuses while they lose their security in old age? Inequalities of wealth are inescapable in liberal democracies, but that doesn't make them any more acceptable. The very fact of those banker bonuses piling up while everyone else is suffering an economic squeeze itself makes the deficit reduction harder to achieve because it undermines nation unity and our willingness to make personal sacrifices for the common good.

Indeed, this is the most important reason why the 1970s isn't a very good comparison with today. Then, it was the" trades union barons” who were public enemy number one; now it is greedy banksters. There was a surprising degree of public support for last week's strike, even among private sector workers who can only dream of getting an earnings-linked, inflation-protected pension. Back in the 1970s, striking workers were blamed for inflation - which peaked at 25% in 1975. . This was unfair, since the real cause was the debt crisis coupled with a quadrupling of oil prices - but that's not how it looked. . If and when Britain calls in the IMF again, as in 1976, other scapegoats will have to be found - perhaps immigrants.

But while the unions aren't being blamed, Labour still faces the awkward political problem of appearing to be in the pockets of the small numbers of workers, mainly in the public sector, who are still unionised. The public sector unions are Labour's principal paymasters, so it was particularly agonising to see Ed Miliband's contortions last week as he attempted to have it both ways. He did not support the strike, but he was “not prepared to condemn it”. As a fudge that is straight out of the Neil Kinnock cookbook. You either support a strike, or you don't. Ordinary voters in focus groups might have the luxury of such a contradiction, but not political parties aspiring to be the government. Everyone knows that Labour, if it were the government, would also be making public sector workers pay more for their pensions – indeed, the present reforms were the product of an inquiry by John Hutton, the former Labour cabinet minister.

This has been a bad time for Ed Miliband. His economic policies do not carry conviction and he is all over the place on strikes, which will almost certainly be repeated, Everything is going wrong for the Tories and their Liberal Democrat partners, but nothing is going right for the opposition leader in Westminster. The policies of the Right are leading to economic catastrophe, but the Left seems bereft of any answer. Why?

Well, it has a lot to do with the fact that today, unlike the 1870s 1930s or even the 1970s, there appears to be no credible alternative to liberal capitalism. In the past, workers threatened to use industrial strength to topple governments, believing that the private enterprise system was morally wrong and historically anachronistic. In the 1930s, many intellectuals believed that capitalism was on its way out, even if they were opposed to Soviet style communism. The state, it was assumed, would take over more and more of the productive economy and plan for growth, rather than leaving it to the “vagaries of the market”. This alternative economic vision was almost totally destroyed by the collapse of communism in Russia, which revealed the system to be rotten to the core, and by the apparent success of liberal capitalism during the long credit boom.

Until three years ago, people genuinely believed that capitalist crises were a thing of the past. Central banks were so adept at dealing with inflation, and the financial system had become so expert at managing credit, that permanent growth was now the rule. This was why Gordon Brown said he had “abolished boom and bust” after relaxing lending regulations on lending in the City of London. People thought that the rise in house prices was simply a measure of how productive and wealthy the free market economy had become. This has turned out to be an epic delusion. British economic growth was almost entirely fuelled by debt - nearly £300bn alone was extracted from the value of British homes through equity release in the boom. It should have been blindingly obvious that this was simply imaginary wealth, based on no economic activity and unsustainable. But the entire country persuaded itself that this bountiful supply of imaginary cash from house prices could continue indefinitely. Now the bubble has burst leaving in its wake a succession of sovereign debt problems.

It's important to remember that the euro crisis is a consequence of the banking crisis and not its cause. It's just that the debts have moved onto the public account, wrecking the unity of the eurozone, as everyone hopes that Germany will bail them out. France and Germany say they will do whatever it takes to save the single currency. But it's blindingly obvious that they don't know what that “whatever” is. A fiscal union? Maybe. Print money? Perhaps. Create a new European Central Bank with powers to dictate national budgets?. Stuffed if I know. The crisis talks between the French President Nicolas Sarkozy and the German Chancellor Angela Merkel have become so mind-numbingly tedious that you almost hope they would just go to war with each other and have done with it. (PS that's also a joke)

Actually, the Polish Foreign Minister, Radoslav Sikorski did mention the war again last week. Picking up on Chancellor Merkel's recent remark that this was the most serious crisis facing Europe since World War 11, Mr Sikorski said that: “I fear German power less than I fear German inactivity”. In other words: “you are the masters now, so act like it!” He called on Angela Merkel to tell the European Central Bank that it can print money and issue bonds. But that isn't as easy as it sounds.

Any moves to invest the ECB with such power, or to allow it to issue bonds, mean giving unelected central bankers power over the finances of member states. This needs treaty changes. And given the state that Greece is in, it seems hardly likely that the voters of Europe will be enamoured of the idea of German bankers dictating their budgets. Anyway, it would take months and years to hold referendums in all the 17 eurozone states, and Europe doesn't have that time. It has about a week, according to Olli Rehn. The clock is ticking. The endgame is now not far off, and British banks, led by the Bank of England, is preparing for the worst. Now, where is that whisky bottle...

Everyone should have a decent pension.

2011-12-02T00:49:00.000Z

That's what the strikers' placards said, and they are right. Everyone should have a decent pension. The trouble is that the vast majority of workers in Britain don't have one, and don't have the remotest hope of having one.

The basic state pension in Britain is worth only 17% of earnings the lowest in Europe, £102 pw for a single person, or just over £5,000 a year. The average in Europe is 57% of average earnings, around £14,000. Even in the Netherlands, the second lowest, pensions are worth twice what they are here. Hardly luxury, but at least it is just about possible to live on it. The UK pension simply isn't enough to live on.

People here are expected to save for their retirement. But the iniquitous means testing that is applied to the pension credit actually discourages people from saving. Which is why so many don't. The average private sector pension is only worth around £20 a week, and yet this can disqualify a pensioner from receiving the pension credit which bumps the state pension from a £102 to £137 for a singe person. And to add insult to injury, this is classed as taxable income - unlike tax credits or interest on an ISA. Britain has the most complicated pensions system in the world, and many people who are eligible for the pension credit don't manage to complete the pages and pages of form filling.

Let the public sector workers keep their pensions - but only if the rest of the working classes are given similar security. The danger is that the majority of workers, who are not employed by the state, and who cannot afford any pensions, will refuse to continue to pay, through their taxes, for the relatively generous pensions of public sector workers. There has to be some kind of equity here.

From The Herald: 31/11/11

Welcome to the politics of fear. Following the gloomiest autumn budget statement in living memory – not even in the 1970s were so many facing so great a decline in their living standards – you can almost feel the fear spreading across the land.

Fear among the 80% of workers who have been told that they face the largest fall in living standards since the 1930s, a real cumulative drop of 10% by 2016. Fear among the millions of pensioners living on savings that are being destroyed by the collision of near zero interest rates and inflation at over 5%. Fear among families who see food and fuel bills racing out of control. Fear among the soon-to-be retired who realise that they face a catastrophic fall in their standard of life over the next decade, now that the pension ladder has been pulled up. And this is if the eurozone doesn't explode.

It's no accident that the nearest thing we've seen to a general strike since the 1970s has been over pensions, something that scarcely figured in trade union disputes in the past. The driving force of contemporary politics is fear for the future - only most people don't have unions to give expression to this anxiety. Union membership has halved since 1979, partly because of Tory trades union legislation and largely because the world of work has changed. Unions traditionally thrive in industries where there are large stable workforces with security of employment, and outside the public sector that just doesn't exist. Millions are in short term and temporary jobs, there are millions of non-union migrant workers willing to work for practically nothing. Half of all employment growth is in small and medium firms which can't afford to offer job security or pensions and go out of business if there is a strike.

Yesterday's strike was a remarkable success for the unions who organised it. It shows that it is possible to get at least some workers out on the streets. But the government is showing few signs of giving in to union demands. George Osborne clearly believes that this is the last stand of the British trades union movement; that they have walked into a “trap”; and that it will be for the public sector unions what the miners strike in 1984 was for the private sector. The government is confident that the majority of voters will see it as the defence of privilege by a group of relatively well paid employees who have pensions that no longer exist outside the state.

Here's a statistic to think about. At present annuity rates (that's what you get when your savings are converted into a pension) to buy an index linked pension of £24,000 - roughly what a teacher gets - a 60 year old would need to have saved over £600,000. It is impossible for normal people to save anything like this. The average personal pension savings “pot” at retirement is currently £30,000, which will generate about a £1100 a year, most of which is lost because the pensioner loses entitlement to means tested pension credit. And remember, a third of British workers, round 8 million, have no pension at all.

I'm not indulging in striker bashing here. But as the strikers' placards said yesterday: “Everyone deserves a decent pension”. It is one of the defining features of a civilised society that it ensures that those too old to work are kept in material security. But there is astonishing public ignorance about how much this costs in the age of quantitative easing and high inflation. What we are witnessing is an unprecedented combination of a debt crisis breaking at the moment when the baby boomer bulge is about to retire. The numbers of Britons over 65 years of age will double from ten to twenty million by 2050. Meanwhile, the economy is mired in the longest economic depression since he 1930s..

The only way to make the numbers work is economic growth. If by some miracle the eurozone sorts itself out, China's property bubble doesn't burst, America pays its deficit and world trade resumes, then things might be different. Government finances would improve because more people would be at work paying taxes and fewer would be unemployed receiving benefits. But of course, it isn't growing. The British economy is likely to be in recession in the New Year and any pick up in growth is going to be very slow, and the Office for Budgetary Responsibility says that by 2015, public debt will have risen – even with the Chancellor's austerity measures – from 67% to 78% of GDP.

This is touch and go as far as the bond markets are concerned. Britain has avoided a sovereign debt crisis by devaluation and quantitative easing, but this can't go on indefinitely. If you take public and private debt combined, Britain is one of the most indebted nations in the world, with 400% of GDP on tick. If British interest rates increase even slowly, this could become unmanageable and hyper-inflation or debt default will be the only way out, because there will be no eurozone bail out fund for us. And of course, if there is a break up of the eurozone most of our banks will have to be rescued again.

So fear is what we are faced with, all of us except the very wealthy, for the foreseeable future, and the trouble with fear is that it feeds on itself. Everyone will be cutting spending this Christmas. Families will be trying to save to pay inflating bills for food, energy, motoring costs. Anyone with anything left over will be saving for the future. This withdrawal of cash from the high streets makes the economic depression even worse because shops and factories close and more people are out of work, leading to more debt. It's what Keynes called 'the paradox of thrift' – meaning that for individuals saving is a good thing, but for the economy as a whole it is a disaster.

Now we all know what Roosevelt meant when he said in 1933, that we have nothing to fear but fear itself. Fear is itself an economic variable, a feedback loop. It will take real political leadership and imagination to break the cycle, guide us out of this climate of fear. There is no sign of it yet.

High pay equals low growth.

2011-11-22T09:40:00.002Z

The High Pay Commission has told us what we already knew: that the very rich have turned the economy into a personal wealth-generating machine. Earnings for CEOs have risen thousandfold over the least thirty years as average earnings have only tripled.

  There is no conceivable economic justification for their extravagant wealth, which has arisen largely through regulatory indolence and public ignorance. Remuneration committees composed of highly paid executives naturally acquire an exaggerated sense of their own worth. The idea that those dull boardroom suits, with their bad breath and stale management speak, are 'masters of the universe' is laughable.

  The capitulation of successive governments to neoliberal fantasies about how the productive economy actually works has allowed a climate of kleptocracy to command Britain's boardrooms. If even Labour politicians are "relaxed about people getting filthy rich so long as they pay their taxes" (Peter Mandelson, 01) then it is hardly surprising that the wealthy have filled their boots.

  The trouble is that moral condemnation of this kind of elite behaviour doesn't work. They don't have any morality beyond brute self-enrichment. What is needed is a critique of the economic implications of allowing he top 1% to acquire 40% of the wealth. In a British context it is about looking at the way this concentration of wealth undermines the productive economy.

   The kleptocrats don't spend their money in productive ways, they use it for speculation in property, commodities and other assets. This leads to stock market instability, spikes in the prices of property, oil and food, and to the creation of sophisticated financial products designed to increase yield, like hedge funds, special purpose vehicles, private equity. Poor people spend their money on food, clothes and other consumer goods all of which generate economic activity and employment.

   Grotesque inequality of wealth is not just an abomination, it is an economic depressant in the truest sense. It creates stagnant pools of wealth, sucking the vibrancy out of the economy and depressing growth. Roosevelt had the right idea when he slapped initially a 70% tax and then, ultimately, a 90% tax on incomes above $200,000. If you look at the history of taxation rates in the UK and US over the last eighty years, it is no accident that the most productive years of the capitalist economy were in the 1950s and 1960s when tax rates were double what they are today.

   That's the trouble with capitalism today. They don't know what side their bread is buttered.

UK Government launches sub-prime mortgage scheme

2011-11-21T10:30:00.001Z

How will using taxpayer's money to subsidise inflated house prices make home ownership more affordable? The UK housing minister, Grant Shapps has announced a "get Britain building" programme (inspired I fear by similar moves in Scotland) in which the state will lend most of the deposit on first time home buyers' mortgages. They say this is to help first time buyers, whose average age, according to the BBC, is now 43 years. It won't - this is just a sop to the construction industry which is tanking again because of the euro-debt crisis. The money will go straight to the builders of the over-priced doll's houses that are too small for family life.

There's a very good reason why building societies and banks are asking for deposits: because house prices are falling. Houses are still far too expensive in Britain, compared with continental Europe or America, and subsidising the sale of them will only keep prices unaffordable a bit longer. What first time buyers need are houses that they can afford, not yet more debt. Those lured into this scheme are likely to find, in future years, that they have taken on negative equity. Anyone who seriously believes that house prices are going to rise during a double dip recession needs to be saved from themselves.

The government also intends to increase the discount on the sale of council houses so that people will be able to pick them up for half of what they are worth. This is an unwarranted extension of the policy that has virtually destroyed social housing in Britain. Selling council houses for a fifty percent discount to the market rate is immoral and should be illegal. It is the taxpayer who paid for the construction of these houses and it is unforgivable to hand the capital gain to private home owners, many of whom will sell to buy-to-let landlords. These houses will then be let at rents that can't be afforded by most working people, let alone the unemployed or low paid. The inflated private rents will be paid by the government, the taxpayer, through housing benefit. This amounts to a systematic asset stripping of public assets.

But the worst thing about both these policies is that it is all about trying to solve a debt crisis by yet more debt. You would have thought after the last three torrid years that we had learned something about the dynamics of the debt economy, but apparently not. All we need now is for the newly privatised Northern Rock (or rather the profitable bit, since the £50bn in dud NR mortgages has been retained on the state's books) to start offering 95% mortgages and the cycle will be complete. If the government wants to help young people it should be taxing the profits and bonuses of UK banks who owe their existence to the tax-payer. It should restore the cheapest and most effective means of building affordable homes, which is council housing. And it should tax the speculators who sit on building land and make unjustifiable profits out of the housing shortage. Ultimately, the UK housing crisis cannot be addressed without some form of site value taxation.

From the Sunday Herald 20/11/11

Anyway you cut it, the unemployment figures look as bad at the end of the week as they did earlier. One in four young people workless in Scotland. A million in the UK. A dearth of ideas about what to do about it, except blame migrants coming here and taking our jobs. According to reports, young people are being press-ganged into working for nothing in Tescos and Poundland for 2 months unpaid “work experience”.

When a society abandons its young people it loses its moral integrity. The contract between the generations breaks down. We saw some of the consequences on English city streets last summer. We see a more constructive response in the tents being erected by the Occupy movement in city centres. What we don't see are the hundreds of thousands who end up resorting to drugs and alcohol. In the 1980s, when last we had youth unemployment at this level, Scotland was ravaged by a drug addiction binge from which the nation has yet to recover.

So, how did we get here? How could a society that was enjoying, if that's the right word, the most profligate consumer boom in history suddenly, within a few years, end up in the middle of an economic depression with millions facing poverty? The short answer, of course, is debt – public debt and private debt. We spent and spent on goods we mostly didn't need, from flat screen televisions to overpriced cafe lattes. Monster cars that block the roads. Piles of cheap disposable clothing that make instant landfill. The state hired legions of extravagantly paid bureaucrats.

But mostly we spent the money on houses. Yes, if you look at where the biggest debts lie, they are in real estate, and when you look at the roots of the current financial crisis, it is all to do with housing. The banking crisis really began the day that Nothern Rock started offering those 125% mortgages – the ultimate lending madness. The American property bubble collapsed first in the third quarter of 2006, when house prices started to fall. That undermined the value of those sub-prime mortgage bonds the banks had been trading which triggered a global credit crunch. . The Bank of England still holds 100s of billions of toxic mortgage—related paper. Countries like Spain, that at the height of the boom were building800,000 houses a year, are now drowning under debt as whole estates lie empty, which is why they have a sovereign debt crisis.

So, the eurozone turmoil may look like a crisis political leadership, or fiscal incontinence, but what lies beneath is the banking crisis caused by the collapse of the great noughties property bubble – a bubble that everyone, including the governor of the Bank of England, denied the existence of, until it popped. The sovereign debt crisis is a kind of pass the parcel – everyone trying to get out from under their huge pile. It's important to remember this as Britain blames Germany for forcing the pace on the eurozone; Germany attacks Britain for protecting the City of London; France blames Berlusconi; everyone blames the Greeks..

And here's the funny thing about debt: it isn't tangible. You can see a house – it is a physical object - but you can't see the debt that relates to it. Moreover, if all the debts and all the assets were to come together in some great financial reckoning in the sky, the books would eventually balance, and there would still be all the physical assets. The factories and ships, the Amazon warehouses filled with stuff. The laboratories and universities. That's a gross over-simplification, of course, but important to remember this because what happens in a debt-driven depression is a wanton destruction of these productive assets.

This is happening right now across Britain, as factories close because they are denied credit from the banks or because they have no buyers for their goods. The machines rust, and the skills of the workers deteriorate as they become unemployed. Young people don't get jobs, don't learn skills, and after a while become unemployable. This means lost production in future as well as human misery today. Britain had lost much of its manufacturing industry during the bubble years, now the remains are rotting.

John Maynard Keynes analysed all this in the 30's. It requires some political agency to stop the rot. Or perhaps accelerate it. One way of looking at the Second World War is that it massively accelerated the destruction of assets. It's no accident that the economies of the West boomed in the 1950s. All the debts built up during the Great Depression were erased during the war when the governments seized the banking sector. Post-war reconstruction – kick started in Europe by America's Marshall Aid programme – restored full employment. High taxes on the rich created the original consumer society as ordinary people were able to afford cars and washing machines.

So are we going to have another war? Of course not. Angela Merkell, the German Chancellor, says this is “Europe's toughest hour since the Second World War, but she's not about to invade Poland. The muttering about “German domination” in the British press doesn't mean that David Cameron is going to launch a rearmament programme. War is fortunately not an option any more – at least in Europe - mainly because the EU economies are so closely interlinked. The EU will have to do the reckoning.

The debt that is causing all the trouble isn't actually that large by historic standards. Also, the productive forces are so much greater today than ever before. Not just computers and the internet, not just robot factories , but renewable energy, efficient agriculture, pharmaceuticals, medical advances, nano-technology and life sciences. We are far smarter and immensely more productive than in the 1930s, which means that we can do more with less. Email means we don't need a labour-intensive postal service for example.

We just need to get the debt reckoning done, erase all the phoney wealth in house prices, reduce wealth inequalities, and a future beckons in which everyone can have a decent standard of living without having to work long hours or destroy the planet. We just need the political will to seize it. Perhaps, in those ragged tents in town centres, we may be seeing the beginnings of a movement that ultimately will. History tells us that revolutions arise when there large numbers of unemployed young men and women.

Sovereign debt crisis? The answer's in Frozen Planet.

2011-11-14T10:53:00.000Z

Think of the european nations as a herd of bison pursued by a pack of wolves. For long periods nothing seems to happen. Until, one of the bison gets separated from the herd and the wolves descend in a lightning coordinated assault. However, if the herd regroups and charges, the wolves have no chance and will back off again.

I'm grateful to Frozen Planet for this imagery, which isn't exactly how financial markets work, but is helpful in explaining the political dimension of the sovereign debt crisis. The point is that the nations always have strength in numbers. The markets, which have been picking eurozone nations off one by one, can only do so as long as governments don't unite against them. Politics trumps economics

The trouble is that the euro bison, instead of charging the wolves, are wandering around the tundra, nibbling the grass, butting heads and generally failing to get their act together. This is because there's a failure of leadership: there is no dominant bison to call the others into line and charge the markets. Well, actually there is dominant bison – Germany – but for understandable historical reasons, Germany is reluctant to tell the rest of the herd what to do. A German dominated superstate is a very frightening prospect for countries, like France, who spent half of the 20^th Century fighting them.

If the eurozone had a central authority, a proper central bank, or an institution like the Federal Reserve in America, the markets would be losers and would have to seek kills elsewhere – the cost of borrowing in Italy would be the same as in Germany because the Italian bonds would be european bonds, backed by the combined might of greatest economic force on the planet – the European Union. What is happening now is that the markets are testing highly indebted countries like Greece and Italy and the rest of the herd is leaving them dangerously exposed.

Last week, the cost of servicing Italy's debts rose above 7% briefly. This is the tipping point beyond which governments cease to be solvent, ie able to pay their debts. Italy has to “roll over” or refinance e300bn of its e1.9 trillion debt next year, and if rates go higher, then the interest on the debt will gobble up most of the nation's tax revenues. That's exactly what happened in Greece.

Of course, you could say, and some do, that there wouldn't be any debt crisis if the european governments hadn't borrowed so much money from the financial markets in the first place. Britain alone blew over £1 trillion on the bank rescue – according to the Bank of England. In a sense they had little choice, faced with the 2008 financial crisis, but to borrow more to stave off a depression, though there was no justification for simply handing this to the banks without any guarantees that it would be re-invested. It didn't help that Britain's borrowings had increased during Gordon Brown's boom years, when the government should have been paying down debt. But Gordon Brown had persuaded himself that, because he had 'abolished boom and bust', the debt would never have to be paid.

All Western governments suffered from this delusion, fostered by the Wall Street investment banks, that debt was an asset not a liability. Banks, like Goldman Sachs actually helped the Greek government to disguise its true debts by using sophisticated financial instruments called currency “swaps”. This allowed Greece to borrow at very low interest rates, even though the government had largely given up collecting taxes. But in the crazy sub-prime Noughties, anything seemed possible with financial engineering.

This delusion has now been shattered, which is why this present crisis is so dangerous and why financial analysts and even the business secretary Vince Cable, are talking about financial “armageddon”. A desperate pessimism has gripped the international financial sector. Just as with sub-prime mortgages, suddenly no one knows what sovereign debt is worth. Banks throughout Europe are sitting on hundreds of billions of Italian, Greek and Spanish bonds, which are worth a lot less than they paid for them. It's like negative equity, banking style. They can't afford to sell because they can't afford to admit the losses.The banks are now becoming afraid of lending to each other because they are afraid many may not be able to repay.

This is exactly what happened when Lehman Brothers collapsed in 2008. The shock waves spread across the entire planet and plunged the world into recession. British banks had to be nationalised. The governments of the G20 launched a coordinated fiscal expansion - spent lots of money they didn't have - to stave off an economic depression. That worked, but it boosted government debt. We are now approaching another “Lehman moment”, but governments have spent all the money they didn't have and can't borrow much more. As the economies of Europe slip into another recssion, there is a black hole opening up beneath the entire capitalist world.

Oh, and don't think that because Britain has not adopted the euro that we are not going to fall into the same hole. Half of British exports go to Europe, so a recession there works back on us. British banks have huge investments in Italian, Greek, Irish sovereign debt, and if there is a default, many will go bust, causing another wave of financial distress and possibly a run on the banks as depositors rush to take out their savings. We have a sovereign debt problem too - a deficit, which is not far short of Greek levels. The government bought time by its austerity cuts, devaluing the currency and boosting inflation. But the austerity has stifled growth, and without economic growth, debt can't be serviced. This is why the chancellor George Osborne has been so keen to promote the very European integration, "fiscal union" as it's called, that the Tories have always been against.

It's really hard to see a way out of this. Business is calling for a 50p cut in top tax, as a stimulus, which as well as being morally objectionable is economically illiterate. Rich people don't spend money in the shops but save it or speculate with it. Far better to give the money to lower income households who will spend in the hight street. The idea of a cut in VAT might help, like the car "scrappage" scheme in 2009 which boosted some economic actitivity.But matters have gone too far for fiscal tweaks.

It's as if everyone is going bust all at once: governments, big banks, families (British households owe 1.5 times annual earnings). Everything is interlinked; everyone is saddled with huge debts built up during the credit boom. Governments are making austerity cuts which is destroying economic growth. There is an acute danger that this will end in hyper-inflation as desperate governments resort to printing money.

The only hope is that they remember the bison. If the big beasts get together, they can sort this out. It will probably mean all of Europe's banks being nationalised, an orderly run down of debt, a central european government, a huge economic growth strategy, a new international reserve currency, and a financial transactions tax to pay for future bank bailouts. It's a big ask. . But it can be done – just as it was in World War 11, after the Great Depression. Only this time, hopefully, without millions having to die.

The Clarity Act is as clear as mud.

2011-11-13T17:38:00.000Z

There is an air of quiet desperation in Whitehall as civil servants and UK government ministers try to out-manouevre Alex Salmond over the referendum. They feel he's been getting away with murder, insisting on holding it at the time of his choosing and with an unspecified number of questions.

Westminster has finally realised that including "devo max" on the ballot paper as well as independence would leave Salmond with a win win - since he would happily settle for fiscal autonomy for Holyrood if independence is rejected, as opinion polls suggest it would be. Hence the threat to take it out of Scottish hands altogether and stage a pre-emptive independence referendum organised by the UK Electoral Commission. After all, as constitutionalists like Oxford Professor Vernon Bogdanor keep telling us, Holyrood doesn't have the legal authority to run a binding referendum because the constitution is reserved to Westminster. Why should England dance to the Nationalist tune? It is a complaint uttered by UK commentators and academics around bodies like the Constitution Unit at UCL, who really think it's time to jolly well stand up to these separatists, and beat them at their own game

The Labour minister, Margaret Curran, has wisely tried to head off this pre-emptive referendum which would of course play directly into the hands of the SNP. What better than for London to be dictating the constitutional destiny of Scotland? The SNP is hoping against hope that Westminster will make their day. The problem with the metropolitan political and academic elite - who only read the ultra-unionist headlines in The Scotsman - is that they have very little understanding of political dynamics north of the border, or how much attitudes have changed here over the last five years. The SNP has an absolute majority in Holyrood, and any attempt to impose a referendum would be blocked. There would have to be a consent motion passed by the Scottish Parliament for any legislation initiating a Westminster-led referendum.

So that is a non starter. The next trick is to introduce a Clarity Act such as the one passed by the Canadian Government in 2000, though never recognised by the province of Quebec which inspired it. This was the product of an examination of the legality of secession by the Canadian Supreme Court, and was seen by many Quebecers as an attempt to stifle their independence movement. The Clarity Act states that subordinate regions or principalities have no legal right to secede. However, if a referendum is passed in which the question is clear, and there was a substantial though undefined majority, then the other states in the union have a duty to respond to the demand for autonomy. It is a masterpiece of legal sophistry, open to almost any interpretion, from sending in the tanks to endorsing independence on the basis of a majority of one. The latter is how Quebec separatists see it.

The Clarity Act, a reaction to the knife-edge 1995 Quebec referendum has never tested, so no one really knows what it means in practice. It is the work of constitutional lawyers and, like economists, if you put twelve of them in a room you will get twelve different interpretations. But any attempt to use constitutional law to foil the Nationalists will backfire as assuredly as holding a pre-emptive referendum. The SNP holds most of the cards. Unionists would be far better advised to sit on their hands, and wait to see what Alex Salmond comes up with in 2014 – though I suspect that we'll be hearing about the question or questions long before that.

From the Herald.....

Who does Alex Salmond want to win the Scottish Labour leadership contest? Tom Harris MP. Well, it stands to reason: the script writes itself. Labour is so feeble that it has to look to the backbenches of Westminster to salvage its operation in the Scottish Parliament. “Uncle” Tom Harris will be cast as a London placeman, a political bag-carrier, an agent of unionism, sent north to crush the rebellious Scots.

All very unfair of course, since Harris is as Scottish as Alex Salmond and sits for a Glasgow constituency. Moreover, the former Labour minister looks the most able candidate. Expert in the use of new media, Harris has made a significantly greater impact than the other two MSP contenders, Ken Macintosh and Johann Lamont. But politics isn't fair, and the SNP know that there's nothing that the Scots voters hate more than the thought that they are being told what to do by Westminster. That, more even than the personality of Margaret Thatcher, was what all but killed the Tories in Scotland. The idea that a UK prime minister was saying no to the creation of a Scottish parliament while inflicting the poll tax and industrial closures on Scotland.

Yes, I know – that's all ancient history. David Cameron is no Margaret Thatcher, and has endorsed greater powers for Holyrood through the Scotland Bill, currently grinding its way through Westminster. But the dynamic remains the same: resentment of London interference – real or imagined – is what has driven Scottish politics for four decades. And it may yet drive Scotland out of the union, because it looks as if London may be about to make the same mistake yet again over the referendum on independence.

In despair at the abject failure of the Scottish unionist parties to deal with Alex Salmond, a united front is being cobbled together in Westminster between some Scottish Labour MPs Liberal Democrats and the Tories to take the referendum out of nationalist hands. The idea is to stage a single question referendum – separation: yes or no – to pre-empt Alex Salmond's promised plebiscite in 2014/15. Tom Harris, says Salmond should not be allowed to stage what he calls a “rigged” referendum by including “devolution max” on the ballot paper. And the Labour MP has made clear on his blog that if Salmond refuses to name the date, then he would support a move by Westminster to name it for him.

Almost the first act of the new Scottish Tory leader, Ruth Davidson, has been to endorse this idea of a pre-emptive referendum, which Number Ten is now actively examining. After all: if the nationalists really want their referendum, why not,as the former Scottish Labour leader Wendy Alexander put it, 'bring it on'? Why wait on Alex Salmond's pleasure? Well, for one thing, because only the day before yesterday, Labour and the Tories were saying that an independence referendum would be destabilising and threaten the integrity of the union. Indeed, Gordon Brown, disowned Ms Alexander's call very publicly at Question Time. As for the Liberal Democrats, the Scottish Secretary himself, Michael Moore, in May rejected the idea of Westminster holding a referendum. "We will not be bringing forward a referendum ourselves”,he said. “It's entirely a matter for the Scottish Government.”

So what's changed? Well, obviously that it looks as if the SNP may win it - or at least not lose, since Salmond supports devolution max as well as independence.. There's an air of desperation in Westminster at the way Salmond has been allowed to turn the referendum into a win win. But the idea of a Westminster-led referendum is fraught with risk. The SNP will claim it is illegitimate because the Scottish voters voted in overwhelming numbers in May for the SNP's policy of holding a referendum towards the end of this parliament. I don't know whether Alex Salmond really told the chancellor George Osborne, that he would use the police to “sabotage” a Westminster referendum, but he would certainly use parliament so to do. Such a move by would require a consent motion from the Scottish parliament - much as the current Scotland bill requires to be voted through by both parliaments. The SNP has an absolute majority in Holyrood and would therefore withhold consent.

If Westminster went ahead regardless, the Nationalists' first option might be to call on Scots to boycott “London's referendum” on the grounds that it doesn't include the option of “devolution max” or federalism. This is repeatedly cited by Scottish voters as their favoured choice – as in this week's TNS poll for the BBC's Politics Show. The SNP's aim would be to depress the turnout so that, a little like Brian Souter's Keep the Clause referendum on Section 2a in 2000, it can be dismissed.

Alternatively, there's the possibility that many Scots who seek change short of independence might be persuaded to vote for separation on the grounds that they are not being given a fair choice. Independence is anyway a flexible concept, and the SNP say nowadays that they would keep the Queen, the pound, the British army link and the UK diplomatic corps. Alex Salmond will campaign for what he calls a new “social union” with England, which could boost the "Yes" vote. Either way, the referendum would be unlikely to resolve anything.

The move to snatch the referendum from his grasp has coincided with what looks like a series of co-ordinated negative attacks on the economics of independence. Every day there seems to be a new report emanating from Westminster, suggesting Scotland would be bankrupt, would not be allowed automatic entry into the European Union, or if it were, would be handed a bill for billions and be forced to adopt the euro. Citigroup last week warned investors not to put their money in Scottish renewables. The former Labour energy minister, Brian Wilson, has trashed SNP policy on electricity generation. It certainly sounds as if the campaign has already begun.

There's no doubt though that, constitutionally, Westminster has the right to mount a referendum, but this is all about politics and history. And I can hardly think of anything worse for Labour than to ally with the Tories to foist a pre-emptive referendum on Scotland. Far better for the unionists to sort themselves out, wait a couple of years, and take on the SNP by force of argument, rather than constitutional force majeure.

Of course Scotland would be admitted to the EU. Look at Latvia, Estonia etc etc.

2011-11-10T13:57:00.001Z

I've been in this game too long. I remember being taken by the Tories nearly twenty years ago to Brussels to hear Baroness Ellis warn that Scotland would not be allowed to join the EU. Don't even think about it! France and Spain would block an independent Scotland to discourage their own separatist movements. England wouldn't accept Scotland as a legitimate nation. There would be years of wrangling over budgets. England would dump financial liabilities onto Scotland to reduce its contribution to the EU budget etc etc..

Scotland would end up broke and isolated, a ragged and homeless fragment lost in the North Sea. It was tedious rubbish then, and it is rubbish now. Yet, barely a week goes by without some report or other announcing that wee Scotland would be frozen out of Europe and told to go and sit on the naughty step.

I've just been looking at the latest report to hit the front pages. It came from the House of Commons Library and it is a background briefing note, not an authoritative assessment of the Scotland's legal status within the EU. It carries its own health warning "[This briefing note] should not be relied upon as legal or professional advice or as a substitute for it. A suitably qualified professional should be consulted." It goes on to rehearse all the arguments that have been made about Scotland's relationship to the EU that have been made over the years. Pros and cons - naturally, the Scotsman chose the con and headlined this as "£8bn Bill To Join The Eurozone". This presupposes that Scotland would automatically join the euro, which of course is not going to happen, at least in the short term. Just like Sweden, Scotland would have the right to decide whether and when to join the euro. The report goes on to question whether membership would be automatic and finds differing views among constitutional authorities.

Lawyers make their money from creating legal complexity, so you will always find that there are differing legal opinions about secession. But the political reality is that it is inconceivable that the EU would try to block an independent Scotland from entry. The EU is founded on the principle of national self-determination, so the idea that Scotland would not be recognised as a nation in Europe is ludicrous. Scotland is already a part of the EU through its participation in the United Kingdom, and as a nation in its own right, Scotland would automatically qualify for membership of the EU. It would take concerted action by the other member states to prove, either that Scotland is financially insolvent, or that it is not a democracy, or that it is in in violation of the European convention on human rights. That is not going to happen.

Sure, there may be bureaucratic obstacles to formal entry - calculations of Scotland's contribution, relationship to the eurozone, Shenghen - all of which are the subject of opt outs by the UK. But many of these problems would also face the RUK (Residual United Kingdom) in exactly the same way. How much should England and Wales pay exempt of Scotland? What weight should English votes continue to carry in the Council etc etc..

But the central question: Scotland's ability to remain in the EU, answers itself. in 2004, the EU admitted a raft of small European countries many of which had been part of the Soviet empire. The idea that the EU would reject Scotland because it used to be part of the UK is laughable. Iceland is being given a free entry ticket to the EU as I write. Scotland is a wealthy country, unlike Greece or the small former Eastern block countries like Latvia and Estonia or minnows like Malta. Scotland has around £400 billion in oil reserves, a quarter of Europe's wind and wave energy, five of the top universities in the planet.

I despair at unionists who make these arguments because they are only destroying their own case. If this is the standard of debate we can expect in the run up to the independence referendum then - roll on independence!

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From the Sunday Herald - The Demonisation of Salmond.

A spectre is haunting Scotland – the spectre of Salmond. In the past week the First Minister has been compared to the Zimbabwean dictator, Robert Mugabe. He has been cast as a “Jekyll and Hide” character whose true “bullying” tendencies have come to the fore since the May election. He has governed, some say, with a “sinister centralism”. To the London press the First Minister is a devious trickster, playing politics with the constitution. While City analysts Citigroup say his determination to plunge Scotland into the “uncertainty” of an independence referendum will destroy the Scottish renewables industry and deter investment.

And it doesn't stop there. The outgoing Labour leader Iain Gray, used his farewell speech last week to condemn the “ugly side of nationalism” under Salmond's leadership, which he claims is spreading “vile poison” across public life. The image is of Salmond as the Dark Lord, inspiring his “cybernat” demons to pollute the internet with what Gray called “smears and lies” against anyone who disagrees with him. Salmond was also accused of attempting to “nobble” critics, like the academic Matt Qvortrup who had objected to the two question referendum proposed by Salmond at his speech to the SNP conference.

Salmond has been here before of course, and he's well used to unionists attempting to link him to the “dark side of nationalism”, as Labour's former shadow scottish secretary, George now Lord Robertson used to put it. In the 1990s, Labour portrayed Salmond as a cross between Umberto Bossi of the Italian Lombard League and the Serbian dictator, Slobodan Milosevic. Salmond was famously dubbed the “toast of Belgade” for his opposition to allied bombing during the Kosovo conflict. More recently, before the 2007 Scottish election, the SNP leader was excoriated in the Scottish tabloid press as “the most dangerous man in Scotland”. During the recent Supreme Court row, the advocate general, Lord Wallace, accused Salmond of challenging the rule of law itself by his “aggressive interventions” against English judges.

The First Minister naturally dismisses these charges and points out that he remains hugely popular where it counts - among Scottish voters. They don't seem to think Salmond has horns on his head. The FM's personal popularity has been a huge electoral asset to the SNP, and it's not surprising therefore that unionists have been doing their best to tarnish it. What is surprising is how inept they are at doing so. The comparison with Robert Mugabe was as ludicrous as it was offensive – no one, even Lord Cormack who made the remark, seriously believes that the FM intends to lock up opposition politicians and foment violence on the streets. in the same debate, the former Tory Scottish Secretary, Lord Forsyth claimed, under parliamentary privilege, that the SNP leader had told the chancellor, George Osborne, privately that if Westminster tried to stage its own referendum on independence would “use the police” to frustrate it. The SNP say they've no idea what Lord Forsyth was talking about.

What the unionists never quite seem to grasp is that many Scottish voters – even some unionists - regard such remarks about Scotland's elected leader as a slight against them. Treating the First Minister of Scotland as a devious anti-colonial demagogue or a proto-dictator is offensive toward the Scottish people. Similarly, the charge that Scotland is too wee or too poor to govern itself is counterproductive and flies in the face of constitutional reality in Europe. Yet, hardly a week goes by without some politician claiming that Scotland would be in the red to the tune of £4bn – this week's figure quoted by Annabel Goldie in her swan song as Tory leader. There has also, in recent weeks, been a succession of “leaks” from “government sources” questioning Salmond's policy on Europe. One claimed that it would take three years and “billions” in lost revenue, before an independent Scotland would be allowed to rejoin the EU. Another said that if Scotland did remain in Europe, there would have to be border posts to control immigration to England.

The SNP suspect there is a degree of co-ordination to the assault on Salmondomics. No sooner had Citigroup warned investors against backing renewable energy in Scotland last week, than the Institute of Mechanical Engineers tore into Alex Salmond's industrial policy, saying there was “no credible evidence” for his claim that green energy can create 130,000 jobs. Nicola Sturgeon, standing in for Salmond at Question time in Holyrood, countered that Citigroup were wrong, that renewables were on target, and that, anyway, according to a report from Price Waterhouse Coopers, there was still £376 billion in North Sea Oil, waiting to be exploited. It was all rather similar to the debates before the creation of the Scottish parliament, when Edinburgh financiers warned of a flight of investment because of the "uncertainty" of devolution.

A degree of nationalist paranoia is understandable, but I very much doubt if there is a conscious conspiracy to demonise Alex Salmond. The Scottish unionist parties are in no shape to mount anything so coherent right now. Rather, there are signs that Westminster politicians, and the London media, are becoming more aware of what's happening in Scotland and are starting to ask more searching questions, not just about independence, but also of “devolution max” - which many believe is simply a ruse designed by Salmond to “rig” the referendum so that he can't lose. And it has to be said that many questions are legitimate: there are indeed gaps in the SNP's independence prospectus. If Scotland keeps the pound after separation, is that really independence? Do the SNP still support the euro, and how would it be introduced? Would England set up border controls if Scotland had a more liberal policy on immigration?

There has also been a more considered strand of criticism from liberal commentators like the journalist Joyce McMillan, who sat on the devolution constitutional steering committee in the 1990s. In an article last week, she warned that Scotland was becoming, by default, a “one party state”. “It’s time” she said, “for the people of Scotland to wake up to the dangers of this largely unforeseen situation; and perhaps to start developing some new and imaginative mechanisms for challenging the SNP’s dominance, forcing it to clarify its ideas, and holding it to account”. The SNP's decision, after the Scottish elections to “hog” the chairmanships of parliamentary committees is regarded as a sign of this centralism – though it has to be said that packing committees is what all governments do.

Since the May election, Salmond has certainly lost no time in sweeping aside opposition to his legislative programme. Last week, he pressed ahead with minimum pricing of alcohol, a measure that had been defeated by the opposition parties before the 2011 election. The SNP have also introduced a supermarket levy and Salmond seems determined to drive through with the highly controversial “Offensive Behaviour at Football Matches Bill” in the teeth of opposition. After the SNP won a comfortable vote on this bill on Thursday, Labour, Lib Dem, Tory and Green MSPs issued a joint statement, also backed by independent MSP Margo MacDonald, which accused Salmond of ignoring parliament: "If the SNP government exploit their majority to force through this rushed, flawed piece of legislation there is a real risk it will do more harm than good."

What ever happened, say opposition parties, to Alex Salmond's commitment to the “new politics of cooperation and compromise” that he proclaimed after the 2007 election? All politicians develop autocratic tendencies – remember Tony Blair. In Scotland, moreover, there is no second chamber, no House of Lords, to balance the power of the government in the lower house. Also, Scotland has traditionally been run by crony networks based on Labour Party membership – remember the Sinclair Report in 2001 which identified the networks of Labour patronage that radiated from the Fife offices of the former First Minister, Henry McLeish. There is a legitimate concern that the SNP might seek to replace the Labour “crony state” with a nationalist one.

However, it would take more than a few intemperate remarks about English judges to justify a claim that the SNP is running an autocratic administration still less an elective dictatorship. It's not been in office long enough to make such an impact anyway. As more key offices become available for patronage, we will be able to see which way the SNP intends to blow. For example, nominations close shortly for the post of Information Commissioner, to replace Kevin Dunion, a vigorous defender of freedom of information, who clashed with Alex Salmond over FM's refusal to public civil servants' internal advice over the merits of local income tax. If the SNP-dominated committee appoint some nationalist toady, we may be justified in concluding that there are incipient centralist tendencies.

But so far it is hard to justify the charge that the SNP has been creating anything like the one party states that Labour presided over in the past. The simple truth is that Salmond is popular because he appears to put Scotland first. Many non-nationalists support the SNP because Nationalist ministers appear to be doing a good job. By demonising Alex Salmond, the unionist parties risk undermining their own case. Like the SNP, they need to start talking Scotland up, instead of talking Alex down.

Hollywood and the arms trade.

2011-11-07T17:35:00.000Z

"The Shadow World - Inside the Global Arms Trade" by Andrew Feinstein Hamish Hamilton £25

There's a memorable sequence at the start of the 2005 Hollywood blockbustrer, “Lord of War” which shows a bullet's eye view of a bullet's life cycle, from a manufacturing plant through various intermediaries till it ends up in the head of an African civilian via the chamber of a Kalashnikov. The message is clear: arms don't come from nowhere. From factory to gun, there is a path that is easy to trace for anyone with the will so to do. The fact is, as Andrew Feinstein explains in this remarkable and couragous book, that governments are so heavily involved in the deeply corrupt world of arms dealing, that they turn a blind eye to the human cost and the damage they do to their own economic and moral integrity.

The “Lord of War”, played by Nicolas Cage, was based on the life Russian arms dealer, Viktor Bout aka “the merchant of death”, who made his name busting arms embargoes in African states in the 1990s. He helped arm the Liberian dictator Charles Taylor's murderous NPFL, and the psychopathic Sierra Leonian bandit Foday Sankoh's RUF, which used child soldiers doped with crack cocaine to kill tens of thousands of civilians. The activities of the RUF featured in another Hollywood film, “Blood Diamond”, starring Leo diCaprio, in 2006 which connected up the dots between the illegal diamond trade and international gun running.

Despite their lurid celebrity these master of war are rarely prosecuted. Viktor Bout was finally arrested after a sting operation in Thailand in 2008 when he offered to sell weapons to US DEA agents posing as members of the Colombian marxist group, FARC. He had been under the protection of Russian oligarchs, who were furious when their man was arrested in Thailand and put pressure on the Thai authorities not to allow his extradition. It took two years and the personal intervention of Barack Obama to get him to America, where he was finally convicted last week.

It may be that Bout's capture was only made possibly by Hollywood. Had it not been for the publicity generated by these films, it's unlikely that the President himself would have been involved. In “Lord of War”, it was suggested that Bout's immunity arose from his being a US intelligence “asset”. There is evidence that he and his associates were indeed involved in George W Bush's “War on Terror”, and provided information about terrorist organisations like al Qaeda which Bout had supplied. Indeed, Feinstein clams that an attempt by the Belgian authorities to arrest Bout in Athens in 2002 was foiled when US intelligence sources tipped him off.

Fact is indeed stranger than fiction. Which is good news for Hollywood, but bad news for the future world peace. If it takes a multi million dollar film before any of these monsters are arrested, then God help Africa. Mind you, there is enough in Feinstein's book for a dozen film pitches. Bizarre characters leap from the page - like Adnan Khashoggi,confidant of royalty, who claimed to be the wealthiest man in the world, and whose yacht, Nabila, was used in the bond film “Never Say Never Again”.. Then there is Dale Stoeffel, a US arms adventurer and ex special forces agent in Bruce Willis mould, who stood to make a killing out of the war in Iraq, but was himself killed in 2004 after he crossed members of the provisional Iraqi government. Yoshio Kodoma, aka “The Monster”, worked closely with US arms companies as they bribed and bought their way to the heart of the Japanese government.

But the grand-daddy of them all, and the source of most of the wealth of arms dealers like Adnan Khashoggi, was the al Yamamah arms deal, the biggest in the world, negotiated personally by Margaret Thatcher with the Saudi Royal family in 1985. It was an arms-for-oil deal worth £40bn, benefiting the UK defence conglomerate BAE systems, and according to Feinstein, Iron Lady's son, Mark Thatcher, who swept up the crumbs. Huge sums were paid in “commissions” to Saudi Princes and shady intermediaries. More than £6bn was paid out, and some of it, according to Feinstein, even flowed through the accounts of the Saudi fixer, Prince Bandar, into the pockets of two of the terrorists responsible for 9/11.

Feinstein's account of how the Serious Fraud Office was nobbled in its attempt to bring BAE to justice is deeply disturbing because of the insight it gives into the way that the entire British establishment has been subborned by decades-long complicity in the arms firm's questionable activities. Feinstein has seen BAE's modus operandi at close hand. He was an MP in the South African parliament after the collapse of apartheid, and he saw how the African National Congress was persuaded by BAE to spend £6 billions on weapons systems it didn't need while millions died of HIV/AIDS.

We knew the arms business was corrupt, but only a book as exhaustively researched as this one is able to reveal just how serious and extensive this corruption really is, and how democracy itself is threatened. “The tragic reality”, Feinstein says, “is that arms companies, large and small, and arms dealers and agents, get away with corruption and bribery on a massive scale, complicity in crimes against humanity and even murder. They operate in a shadow world, taking advantage of gaps in the international legal system and hiding behind the protective cover of powerful politicians and intelligence agencies.”

The Shadow World is a heroic book by an author who, in writing it, has placed himself in the firing line. We surely can't go on leaving this story to Hollywood. The global arms trade totalled $1.6 trillion in 2010, up 53% in ten years. As the world plunges into a double dip recession, with huge stockpiles of weapons, the script is being written for the ultimate disaster movie.

Greek referendum? Bring it on.

2011-11-02T13:43:00.001Z

Referendums and markets don't mix. A referendum on Scottish independence is coming, and already the markets, or at least analysts from Citigroup, are saying it “will create huge uncertainty” and advising investors to shun Scotland. The trouble is, democracy is all about uncertainty. Democracy is inconvenient. But in times of constitutional uncertainty, it is absolutely paramount that the people clearly register their support or opposition to change.

In Greece, where democracy began, the markets are threatening to bring the house down because the Greek government is going to put the EU rescue package to a referendum. This is being cast as a breach of faith, a spanner in the works, an “abject failure of leadership” as one financial pundit put it yesterday. How dare this jumped up prime minister, Papandreou, ask the people for their point of view? What have they got to do with it?

Well the people have quite a lot to do with it. It is they who will be losing their jobs, suffering a decade of falling wages, higher taxes and the humiliating presence of an “occupying force” of Brussels civil servants telling their treasury ministers what to do, where to cut, etc.. It seems to me that this involves such a diminution of national sovereignty that it really should be endorsed by the people. After all, changes in the Treaties of the European Union require a referendum of the people – though governments in countries like Britain are peculiarly reluctant to hold them.

The markets are a mob – a capricious and unthinking herd, liable to emotional spasms and irrational passions. Think of the dot.com crash, the property bubble, irresponsible bank lending. The markets are not capable of rational thought; only people are. The mistake was not to tag a ballot onto the Brussels bail out last week, so that it could be clear that the people of Greece would be fully behind the deal. Or not.

Now, admittedly, the referendum proposal did rather come out of the blue. The Greek government is in turmoil, and we don't even know, at this stage, whether Papandreou will survive in office long enough actually to hold it. But I have a simple view of these things, which is that the people do have a right to decide on their destiny, and moreover, that an austerity programme of the magnitude of the one facing the Greek people, really needs a democratic endorsement. Better a referendum than a protracted general election.

The choice before the Greek people is this: they either stick with the euro austerity plans, or they go for default. At present, there appears to be a considerable constituency for default – certainly on the streets and in the media. But as we all know, it is dangerous to simply take the political temperature from street demonstrations. No one really knows what the mass of ordinary Greeks really think. Opinion polls suggest that a majority of Greeks are unhappy about about the deal, around 60%, but we also know that around three out of four Greeks say they wish to stay in the EU. A referendum campaign is the way to reconcile these conflicting views.

The costs of default could be far greater than the cost of the Brussels austerity. Restoring the drachma, at a hugely devalued rate against the euro, would increase Greek debt by at least 60%. This is because the debt remains denominated in euros and will still have to be paid. The cost of Greek borrowing would also increase because Greece no longer has the powerful economies of the EU supporting its currency. Greek peoples' savings and pension funds will of course be destroyed, overnight, Greek banks will collapse and borrowing costs to small businesses will soar. Those public sector workers, so vocal on the streets, and so defiant against Brussels, would be in penury and out of work because the government would not be able to borrow the money to employ them.

On the other hand, a default along the lines of the Argentinian default of 2001, would make Greek exports competitive, because they would be a lot cheaper. Markets don't look back, and once the default is over, if the economy appears to be stabilising, it's possible that investors might start lending again in five years or so. Greece could also negotiate some kind of loose peg to the euro and remain within the EU free trade zone. Greek holidays would certainly become a lot cheaper, and that could help build an economic recover.

But do the Greek people really want to be impoverished servants of wealthy German tourists? Maybe they do. By the time the markets start lending again, the Greek economy will be a shadow of former itself. With few natural resources, and very little advanced manufacturing, it would be in the situation of some low wage north African and middle eastern countries. It's not at all certain that the fragile Greek democracy would survive – it is only thirty six years since Greece was run by a military junta, and the colonels are restive again. The great thing about membership of the EU is that it requires countries to respect democracy, civil rights and the rule of law.

So, Greece has a very grave decision to make, with momentous implications that will affect the country for decades. A majority for the Brussels deal would impress the markets and ensure that the Papandreou government had a firm mandate for austerity, to implement the Brussels plan. A majority for default would also clear the air.. Greece could tell the private investors that they can sing for their money – or take a 90% haircut. A vote for default might even make Europe come up with a better offer, it if looks like the euro would collapse as a result.

What I find offensive is the way commentators have reacted as if a referendum is somehow illegitimate, a damaging distraction. When countries like China, under a communist dictatorship, start telling democracies like Greece to “shelve its unhelpful referendum” I think we have to ask who exactly these ”markets” really are. Democracy is always the worse choice – except for all the others. Last night, European leaders grilled Mr Papandreou about his plans late into the night. I hope he stands his ground.

There's no greater enthusiast for the euro than...David Cameron.

2011-10-27T10:17:00.001+01:00

Now here's a thing. There is currently no greater enthusiast for european economic integration than the British government. George Osborne and David Cameron have become cheer-leaders for the euro, gatecrashing summits of the eurozone countries and appealing to EU leaders to press ahead with fiscal union - with creating the very "United States of Europe" that they condemn in their eurosceptic manifestos. On the latest deal, Osborne welcomed the measures as far as they go, but insisted that the eurozone must move to “greater fiscal union”.

Of course, this is out of national self interest not ideology. Britain realises that if the euro collapses so do we, not least because our banks are so heavily involved in European sovereign debt and because half our exports go to the EU. The City of London is a europe's leading financial centre. The economic destiny of these islands is therefore increasingly dependent on the success of the euro and the resolution of the crisis through the creation of a central european treasury.

But hang on - if we are so up to our necks in europe, and indeed have a potential noose around our necks if the project goes under, should we not be in there fighting to get the crisis resolved in a manner that benefits, er, the UK? And if there is no economic future for Britain without the euro, does that not mean that - defacto - we now accept it as the economic reality of the world economy. And if we accept that, should we not be a part of it, if only to ensure that Britain's interests are safeguarded. It's all very well to jeer from the sidelines - ha ha clever us for not adopting the euro - but the whole history of British involvement in the EU since the 1950s has been like this. We say no no no until economic interest forces us to say a belated yes yes yes.

This latest crisis summit over sovereign debt is a case in point. If we are so happy to be out of the eurozone, why are we so desperate to be involved in saving it? Surely if it is a busted flush , we should be urging teh EU to restore national currencies not set up a multi trillion euro bail out fund. And why are British Tory politicians arguing the case for fiscal union? George Osborne has for months now been calling for a fast forward to the "ever greater union" that Tories are supposed to despise. If integration is so good for Europe, and for the British economy, why are we so hostile to it?

How long, Lord, how long must we suffer the excruciating tedium of the Sarkozy-Merkel roadshow? Two leaders of vastly different temperament, who clearly feel little personal warmth, parading around Europe like Little and Large, convening inconclusive summits that seem designed to avoid addressing the central issue: the need for a central European treasury. It surely can't go on like this – but it will. Until it no longer can.

However, it's not entirely fair to say that nothing has been achieved by these Sarkel talkathons. For one thing, investors have been given a clear sign that they're going to have to pay the price of their rash purchases of Greek debt. Only a few months ago, the idea of banks and pension funds in Britain and France taking a substantial “haircut”, or loss, on their investments in Greek bonds seemed inconceivable. What, accept responsibility for their own actions? The very idea...

Well, now private investors are being advised that they may have to accept a loss, not of 5% or 21% but more like 50% on their Greek bonds – not so much a haircut as a decapitation. Previously, everyone thought that such a defacto default by Greece on this scale would lead to a loss of market confidence in the debt of other sun-belt states like Italy, Spain and Portugal But this “credit event” no longer seems to be quite such a risk.

Confidence is a two way street. The banks have been very good at using the threat of a collapse of confidence in various Eurozone countries as a means of prising open the public purse. But if the banks did actually precipitate the collapse of the Italian, Spanish and Portuguese economies, who would be the first casualties? Yes, the banks. They have a collective interest in preventing another sovereign debt crisis because it would lead to most of them going out of business. European political leaders are involved in a game of poker with the financial markets, and they have just raised the stakes.

Another significant move has been the agreement by the European core states that there needs to be a better means of financing future bail outs, while at the same time reducing the risk of banking crises like 2008. The British government is hostile to the idea of a bank transaction tax, or Tobin Tax, to raise funds for future banking rescues, but both Sarkozy and Merkel have agreed in principle that something like it is essential. The idea was first put forward by the celebrated British economist John Maynard Keynes in 1936, and its time has arrived. In September the European Union formally proposed a transaction tax raising around 78bn euros by 2014.

Europe's mega-banks cannot expect governments to bail them out with tax payer's money indefinitely. Indeed, it is clear that, even if they wanted to, European governments simply lack the means to do so. Taxing some of their more speculative activities, like short selling, CDS swaps and currency arbitrage, will take some of the frenzy out of financial wheeler-dealing and will also create a central fund to deal with banking crises as they arise. The City of London, europe's largest financial centre, doesn't like it, which suggests that a transaction tax is probably on the right track.

Tobin tax money could find its way, ultimately, into the European Financial Stability Facility (EFSF), which is the other important achievement of the Merkozy talkabout. The EFSF is not just a bailout fund. It has the power to issue bonds, buy sovereign debt and even recapitalise banks, all of which were anathema to German central bankers and politicians only 8 months ago. This is clearly the embryo of a future central European treasury – though it currently lacks power to raise its own revenues through direct taxation. But the moment the eurozone countries accepted that a central, supra-national authority has the power to buy bank shares and bonds anywhere in the EU, a new era of European financial integration had begun.

Really, the issue is only one of scale. The original 440bn euro fund, agreed by the Bundesbank, is simply too small. The European Financial Stability Fund was always going to need greater firepower to deal with crises in economies the size of Italy, which has debts of 1.9 trillion euros. But the point is: the machinery is now in place. This is the “federal authority” that everyone says was lacking when the euro was introduced a decade ago.

Germany realises this, but doesn't want to be taken for a ride by countries like Greece, who lack fiscal discipline. Hence the prevarication and the demands for Greek and Italian austerity. Germany will have to accept higher interest charges on its sovereign debt if it takes the sun belt countries under its wing, so it is hardly surprising then that it wants to be sure that Greeks and Italians pay their taxes in future and don't retire earlier than German workers.

Finally, the crisis has made Britain back the euro. Oh yes. Listen to the Chancellor George Osborne and David Cameron and they are urging european leaders to introduce fiscal union as soon as possible. This crisis has shown that, while we may not have adopted the euro, Britain's fate is inextricably bound up with it. Eventually we may realise that if we want a say on how it develops, Britain - or perhaps Scotland - may have to join the club.

One way of looking at this whole summit psychodrama is that it has been about persuading the peoples of Germany, France Greece, Italy, Spain that they hang together or hang separately. That they are now condemned to come together as a European fiscal union because they can no longer survive on their own. It is only on a european scale that the problem of mega banks that are too big to fail can be addressed by governments. If we don't want to end up as serfs of the international financial oligarchy, we'd all better hope that the euro survives. And that Sarkozy and Merkel keep talking.

Labour has no option but to adopt "devo max".

2011-10-26T18:18:00.000+01:00

Things are stirring in the Scottish Labour undergrowth. While MP and leadership hopeful, Tom Harris. and the former aide to Tony Blair, John McTernan, continue to insist that Scotland has no future outside the union, and are warning Scots not to get big ideas about going it alone, others are beginning to realise that this is a doomed prospectus. The former Labour First Minister, Henry McLeish, and Malcolm Chisholm, the only Labour MSP who remained standing in Edinburgh after the May massacre, are urging the party not to fall into the trap being left open for them by Alex Salmond. Labour cannot afford to back the No campaign in the Scottish independence referendum. It has no real option but to support "devolution max" or federalism. Otherwise, Alex Salmond will win even if he loses because the SNP leader has colonised the centre ground. Alex will be quite happy to accept fiscal autonomy as another giant step towards full independence. He's a betting man and he likes an each way punt.

The phone rings. It's the Shadow Foreign Secretary, Douglas Alexander, wanting to talk about his forthcoming speech in Stirling. It's a long time since I've had a call from this stellar figure in the Labour firmament, even seen by some as a possible future leadership contender. But this isn't about Ed Miliband, it's about his unfinished business: Scotland. And he's serious.

Mr Alexander was the architect of Labour's most successful Scottish election campaigns and he's credited with having invented the slogan: Divorce is a Costly Business in 1999. He clearly thinks that politics in his own back yard has been allowed to fall apart while his back has been turned and sounds genuinely upset. “Labour were gubbed at the Holyrood election” he says – echoing the celebrated “Gubbed in Govan” pamphlet published by neo-nationalist Scottish Labour Action in 1988 after Labour's defeat in the Govan by-election.

“Gubbed in Govan” urged Labour to start taking home rule seriously and get behind the Scottish Constitutional Convention. Which under Donald Dewar it finally did The SNP lost the plot after 1988 largely because it boycotted devolution as a unionist trap, and allowed Labour to run away with Scottish hearts and minds. The Big Question Alexander addresses is why the party that delivered the Scottish parliament has almost been destroyed by it. Six months on from its worst election defeat in 80 years, Labour is still without a Scottish leader, and the candidates inspire little enthusiasm. Indeed, Douglas Alexander is unprepared, at this stage, to support any of them.

So, if Labour was indeed gubbed in May, is Alexander proposing anything similar the response to Govan 23 years ago? A radical extension of home rule? Well, no. Alexander isn't ruling out changes to Labour's line on devolution - but he isn't ruling anything in either. His analysis is that the SNP got where they are by a: being positive about Scotland, against Labour's 1980s negativity, and b: being competent in office. Both of these are true. But I'm afraid it will take time for Labour to convince Scottish voters that it has either become more positive or more competent – and time is something Labour doesn't have. As soon as the new Scottish leader is in place he or she will have to position Labour for the referendum on independence.

Labour cannot afford to go into a Scottish referendum “No” campaign alongside Tories like Sir Malcolm Rifkind and Liberal Democrats like the Treasury Secretary, Danny Alexander. These are the most politically toxic elements in Scottish politics. But as things stand, Labour will have great difficulty avoiding this radioactive alliance. The No campaign, clearly, will be based on the offerings in the UK Coalition's current Scotland Bill - based on the work of the cross-party Calman Commission in 2009 - which proposes increased tax powers for Holyrood. It was Douglas Alexander's sister Wendy who set up the Calman Commission and it would be very difficult for Labour to disown it. But I fear they may have to.

Alex Salmond has opened the door by offering a multi-opton referendum including the status quo (Calman); independence lite within the UK; and full independence without it. Labour has to colonise what will be the centre ground if it wants to marginalise the SNP. It can only do this by adopting independence lite - a form of federalism that essentially puts Scotland on the same economic and constitutional footing as states like Quebec in Canada or Catalonia in Spain. Labour has spent so long dissing Quebec as a backward nationalist anachronism that it has failed to notice what an egalitarian and prosperous place it has become. Go compare Glasgow and Montreal today. Universal child care for 7 dollars a day?

There can be no half measures any more. No dodgy divisions of income tax that sound like a post-Barnett fiddle. Professor Calman said that, to ensure accountability and responsibility, a parliament needs to raise what it spends. What's the point of making Holyrood half responsible and half accountable? Give Holyrood excise duties and sales taxes if it wants them. Even corporation tax if possible within the EU, which it probably isn't. Sweep away all those petty reserved powers on the Crown Estate, broadcasting, drugs and the like that make it look as if England thinks Scotland cannae be trusted.

Labour should also admit that Scotland is the only country, state, province, region or local authority that has discovered oil and has not directly benefited from it. An apology for that may be in order, given what we know about how Whitehall played dirty over Scotland's oil in the '70s. Scotland doesn't want nuclear weapons and England does – well, it doesn't take a genius to work out what to do with Trident.

Yes, it is true that lots of Scots are married to English people. But don't go around talking as if the SNP is going to repatriate English aliens and erect border posts or that an independent Scotland would be thrown out of the EU, because that kind of thinking arouses scorn and derision. Once all that negative baggage is thrown overboard, only then can Labour start refocussing on what the UK is good at.

The UK has been at is best when it has been serious about fighting poverty, disease, ignorance and idleness: creating the welfare state, the NHS, and offering free higher education. Unfortunately, that UK isn't really on offer at the moment, and New Labour didn't seem all that keen on it when it was in office. Well, Labour has a chance to reinvent social democracy in Scotland. It can start by not equivocating on things like tuition fees, prescription charges, minimum pricing on alcohol.

The Arc of Insolvency? Labour's response to the 2008 crisis was to jeer at “wee Scotland” and how it couldnae save its own banks. This was offensive and intellectually disreputable because,as the former Chancellor, Alistair Darling, knew perfectly well, RBS and HBOS had long ago ceased to be Scottish banks – they were UK behemoths and had to be rescued on a UK basis.

Labour should say this: that Scotland is a nation and should run its own affairs – all of them – except in those areas where UK cooperation is either unavoidable or clearly in the interests of both countries. Finance, currency, foreign affairs, non nuclear defence and social welfare. Only that will 'gub the nats' in 2015. What's the story? The UK is good for some things – for everything else there's Holyrood.

If David Cameron can support gay marriage - so can Alex Salmond.

2011-10-16T11:09:00.000+01:00

The campaign against the Scottish government's proposals to legislate for gay marriage reached critical mass last week - if you'll excuse the pun - with two senior members of the Scottish Roman Catholic hierarchy backing the former SNP leader, Gordon Wilson's call for a referendum on the issue. Archbishop Mario Conti of Glasgow and Bishop Joseph Devine of Motherwell have condemned same sex marriage as an abomination. "Those in government need to be respectfully reminded", said Archbishop Conti, that a mandate to govern does not include a mandate to reconstruct society on ideological grounds, nor to undermine the very institution which, from the beginning, has been universally acknowledged as the natural order and bedrock of society, namely marriage and the family". In other words: Alex, get your pink tanks off our lawn.

Archbishop Devine went even further: "We now have a straight fight between faith and atheism, morality and amorality, a culture of life and a culture of death,” he said last week. “The institution of marriage should not be corrupted by the transient fashions of society or by malevolent forces seeking to undermine the place of religious faith in society.” This is turning into a Holyrood epic, with pointed hats firmly pointed at the SNP government. Alex is ducking for cover.

Now as an atheist, or rather a humanist, I have to object here that the gay marriage issue is not about undermining religious faith and undermining he natural order of society, whatever that is, still less an attack on religion. Actually, if truth be told, the concept of same sex marriage is a triumph for the traditionalists and for people of faith. It is an admission that there is something more to love than living together and that relationships need

to be put on a firmer moral foundation. That moral foundation for - most people - still seems to be the essentially the Christian, to the extent that marriage is a Christian institution.

The fact that even gay people - the ultimate sexual outsiders- are now are seeking the sanction of marriage is surly the most obvious confirmation of that. If there really is a straight fight going on, the Christians appear to have won. That so many senior figures seem not

to realise this is strange.

Only twenty years ago, atheists, feminists and marxists condemned the "nuclear family" and marriage as a bourgeois institution that served to oppress women and block social progress. Marriage was seen as inherently conservative, as a transmission belt for reactionary attitudes of nationalism and patriarchy. Radical pyschiatrists like R.D. Laing - who has heard of him recently - railed against marriage as the cause of mental illness and even extreme political movements. In the sixties and seventies, people tried all sorts of alternatives to marriage - communes, 'open' relationships, serial adultery. Marriage appears to have emerged from arguably the greatest challenge it has faced in its two thousand year history.

Gay marriage is now supported by the Quakers, the Episcopalian Church and unitarians. The Church of Scotland has opened the door for gay marriage by accepting in principle the presence of openly gay and lesbian ministers. It would surely be inconceivable for the Kirk to allow homosexuals to speak God's word from the pulpit and yet not allow them to marry each other. Why is it that the Roman Catholic hierarchy seem to want to make this a political issue rather than a moral one?

I am treading into deep waters here and I don't have my arm bands on, so I'll leave it there. The Church hierarchy is seeking to hijack the Scottish government's current consultation on the subject. And it has done pretty well so far, especially now that the former leader of the Scottish National Party, Gordon Wilson has come out in favour of a referendum on gay marriage. He hopes it will be rejected. I'm really not so sure: the only opinion poll I have seen on the issue suggests that 60% of Scots favour legalising gay marriage. But judging from column inches, the Bishops are ahead on points.

We always said that the SNP's uncanny unity under its leader Alex Salmond couldn't last, but who would've guessed that it would be gay marriage, not independence lite or keeping the Queen – that would threaten the unity of the nationalist movement. And who would have guessed that Gordon Wilson, the most respected elder statesmen of the Scottish National Party, should be leading the splitters. Mr Wilson says same sex marriage is a “danger to Scotland” because it will lead to “social disintegration, sexual confusion and greater intolerance”.

Since he stood down in 1990 Mr Wilson has largely avoided policy debates so as not to be accused of being a back-seat driver. He speaks for a large number of ordinary SNP members and cannot be dismissed as a homophobic nutter. Worse, his call for a referendum on gay marriage evokes memories of Section 2a and Brian Souter's “Keep the Clause” referendum in 2000. Mr Souter is, of course, the SNP's principal pay master, having funded most of its election victories and has deep pockets. SNP MSPs like Bill Mason and Bill Walker have tabled motions critical of same sex marriage – a move which caused the Nationalist MEP Alyn Smith to refer to “the small, mean angry heads of bigots.”

This is all horribly reminiscent of 2000, when the newly-devolved Scotland seemed to be tearing itself apart over whether or not teachers could refer to homosexual relationships in class. Only it's not Donald Dewar, but Alex Salmond who finds himself battling on two denominational fronts. On the one hand the Roman Catholic Church has been mounting a determined campaign against gay marriage – undermining the SNP leader's attempts to court Scotland's 600,000 strong Catholic community on issues like denominational schools or the Act of Settlement. Now, he has Free Church member Wilson on his back. Salmond has said he personally favours gay marriage, but opposes it being imposed on `”unwilling denominations”.

Yet,in Holyrood most people thought that gay marriage was pretty much a done deal. Even the Tory leader David Cameron supports gay marriage - “because I am a Conservative” as he told the Tory conference last week. Civil partnerships had been so successful that it seemed a mere technicality to give the same sex relationship the same status as heterosexual marriage. The Church of Scotland voted in May to allow gay and lesbian ministers, opening the way for recognition by the Kirk of gay marriage. When the Deputy First Minister, Nicola Sturgeon announced a consultation on the issue last month she said that the SNP government was “minded to support gay marriage”. She didn't realise that she was walking into the same moral minefield that blew up under the Communities Minister, Wendy Alexander in 2000.

It took a speech by Tony Blair to the Scottish Labour conference the next year to kill the Keep the Clause issue when he said that the idea of pupils being force fed gay sex education was “utter nonsense”. It is time for Alex Salmond to do the same. He can't allow this issue to fester away in the SNP undergrowth. He needs to show leadership and imagination to prevent this issue becoming a nationalist schism. Like Blair should confidently argue the moral case for same sex marriage while reassuring social conservatives that priests and ministers are not going to end up in court for violating the Human Rights Act.

Gordon Wilson's claim that society will disintegrate because of gay marriage and that Christians will be “ostracised and discriminated against” is neither reasonable nor rational and the First Minister should address this head on. The idea that same sex partnerships undermine marriage is surely wrong: if anything it strengthens the institution in an age when it is under threat from divorce and cohabitation. Gay couples have discovered that they need more than just a recognition that they are financial partners. They need to make a formal commitment to each other, and in a sense to become one moral personality. While marriage may have been sanctified by the church, there is no legal or historical justification for saying that marriage is an exclusively religious institution. The European Convention on Human Rights regards the right to be married as inalienable and irrespective of faith.

This surely is the way round this awkward question. Leave the religious vows to the church and marriage to the people. In civil society, discrimination on grounds of race, colour religion or sexual orientation is of course intolerable. But this does not mean that individuals are forced to act in a way that violates their conscience. Members of the Roman Catholic will still be allowed to exercise discrimination of the mind by continuing to regard same sex relationships as a violation of God's word.

I can understand that there is a risk that Peter Tatchell or other gay activists might seek to make a test case out of a free church minister's refusal to conduct a gay marriage. But I can't see any prospect of it succeeding. So far as I am aware there has been no attempt to demand that homophobic passages in the Bible should be censored, or that wee frees attend re-education classes organised by the Lesbian Gay Bisexual and Transgender outreach workers.

Personally I don't particularly like the idea that gay couples might be barred from being married in certain churches, but I don't particularly schools that discriminate on religious grounds either. However, there's nothing to be served by going to war over these anachronisms. And it doesn't help for members of sexual minority groups to force confrontations with people of faith any more than for religious leaders to make hysterical declarations about gay marriage leading to the end of civilisation as we know it.

Live and let live is always the way to resolve these difficult issues of conscience. Gay marriage is coming whether its opponents want it or not because the couples themselves demand it. As with the issue of gay ministers, religious organisations only marginalise themselves by excluding people who love each other but happen to be of the same sex. True Christians should surely embrace them.

Sir Mervyn King, Montague Norman and fractional reserve destruction.

2011-10-09T19:14:00.000+01:00

Politicians and economic commentators are still scratching their heads over the Bank of England governor, Sir Mervyn King's remark last week that the financial crisis is worse than the 1930s. "Cheer up, Mervyn, it's not that bad" said Hamish Macrae in the Independent. "Talking us into recession" - said the Express. Not since Montague Norman took to his bed during the gold standard crisis in 1931 has a central banker been so publicly distressed about the state of the economy.

Perhaps that's the key. Sir Mervyn worries he might be the Montague Norman of the 21st Century, forced to preside over the collapse of the international financial system. Norman took to his bed when the British banks nearly went under in unison during the Great Depression as Britain's gold reserves dried up. He had been governor during the roaring 20s and was a bit of an international financial celebrity, like Alan Greenspan until the crash of 2008.

Sir Mervyn presided over what he called the "NICE age" of the noughties. "Non-Inflationary Continuous Expansion". This turned out to be a massive Ponzi scheme built on a massive property bubble. Right until it went pop, King insisted that there was no unsustainable inflation in property prices - even when banks like Northern Rock were handing out 125% mortgages.

He thought he had saved the day by cutting interest rates to the lowest in 300 years and by printing money. But clearly, he hasn't, and now the chickens are roosting all over Threadneedle St.. And all over Europe. The coillapse of the French-Belgian bank Dexia suggests that another wave of banking collapses is in the offing. King has warned banks not to expect another bail out, which can only mean one thing: that governments will have to step in and do the restructuring of the debt - seizing bank assets and managing a mega default.

Banks make money because of a trick called fractional reserve banking - lending money they don't actually have. At any one time a bank may only have £1 of capital for every £100 lent out. If only 1% of the bank's loans go bad, that means they are insolvent. Businesses, bond-holders and ordinary depositors will queue up to find that the money they thought they had safely in their accounts is no longer there. Fractional mass destruction then wipes out huge swathes of the economy. This is unlikely to make people well disposed to the central banker who didn't see it coming.

"This is the most serious financial crisis we've seen at least since the 1930s, if not ever," says Sir Mervyn King, the Governor of the Bank of England. Yes, it's official: this could be worse than the 1930s, the Great Depression. Men slumped on street corners and kids with bare feet. Inflation, fascism and economic war in Europe.

Now, I may be missing something, but isn't this just the kind of alarmist headline-grabbing remark that central bankers are supposed NOT to make in case it spooks the markets? It's people like me who're usually criticised for resorting to sensational forecasts about Great Depressions and the like. The commentariat's being done out of a job by the godfather of prudence. Whatever happened to “Keep Calm and Carry On”?

The Prime Minister, David Cameron, is said to be livid. Only the 24 hours before King forecast the end of civilisation as we know it, Cameron had told the country to“bring on the can-do optimism”. Well, not in the Bank of England, clearly. It's hard not to read this as an implicit condemnation of government economic policy. At the very least, the Prime Minister and his Chancellor, look as out of touch as the Labour PM, Jim Callaghan, when he said “crisis, what crisis” just as the IMF were about to take over the reigns of the British economy in 1976.

So what has spooked Mervyn? Well its the Greeks isn't it, stupid? Actually, it isn't the Greek default. It's us. Mervyn's panic attack coincided with the news that the rating agencies had downgraded the status of a raft of British banks just as interbank lending was seizing up. In real money, this means that financial advisers like Moody's are warning people with money in banks like RBS, Santander, Lloyds etc that they might not get it all back. Why? Because the banks are becoming stressed again, just like 2008, and there is no chance that this time the government will have the will or the means to bail out the banks with public money. There's very little public money left and the economy is slowing to a halt, which will make it hard for the government to pay it s own debts, let alone the banks'.

The bail out of the UK banks in 2008/9 required £1.3trillion – according to Mervyn King's own figures. And what did we get for putting up all that money? Well, Stephen Hester of RBS got £11 million last year. Bank bonuses accounted for another £13 bn.. The rest disappeared into the bowels of our rapacious financial institutions. So what do we do now? Well, if there isn't any public money, let's just print it anyway. The last round of quantitative easing, that's money printing, placed £200bn in the banks' accounts in 2009.

What happens is this: the Bank of England electronically creates money which it uses to buy bonds from the banks. This injects funds directly into the banks' balance sheets, wiping out their losses, and “restoring the health of the financial system”. The money is supposed then to be lent to small businesses and people wanting mortgages,boosting economic growth. Except that this didn't happen. The banks hoarded it instead and paid themselves huge bonuses. All QE 1 really succeeded in doing was increase inflation to 5%, which is generally what happens when governments print money. This has eroded peoples' savings, pensions and salaries, meaning that they haven't been buying much in the shops. Which in turn is why the economy is sliding back into recession. Britain has one of the lowest growth rates in the OECD and has one of the highest fiscal deficits. Stick that in your budget, Mr Osborne.

So why on earth is the governor printing another £75bn of QE? It looks like the economic equivalent of blood letting: a pointless medical procedure that only weakens the patient. This is the great unanswered question of the age: why are policy makers unable to see any solution to economic crisis that doesn't involve stuffing the mouths of bankers with gold? When historians look back at this period they will criticise governments for inactivity, short termism and denial.. But they will condemn them utterly for throwing oceans of public money at the very people who caused the crisis and were least to be relied upon to resolve it.

Instead of handing money to banks, in the vain hope that it will boost economic activity, why doesn't the government hand it to poor people? I'm not joking. At least lower income groups can be relied upon to spend the cash in the high streets – in shops like Tescos, which has just announced its worst sales figures for 20 years. Give them VAT rebates, interest free loans, tax 'holidays', elderly care grants, home improvement loans - anything to get money into the system. Giving liquidity to people who don't have it is the surest possible way of boosting economic activity. QE is like trying to get the car started by giving money to oil sheiks in Saudi Arabia.

Of course, the bankers would respond that, yes it's all very well giving money to people other than us. But if you don't hand over your cash, we'll just go bust like Lehman Brothers, and that will cause a global financial and economic collapse. Ha ha. And of course, they're right – they are too big to fail. If say, RBS went under the shock waves would be so great that bank lending would halt overnight. This means that companies who depend on short term loans from banks to manage their accounts would go under too. International trade would freeze because there would be no credit for exporters. There would also be a run on the banks, as happened in October 2008, when people and businesses withdrew their cash from banks like Northern Rock and HBOS because they didn't believe their funds were safe. In 2008 according to the then chancellor, Alistair Darling, Britain was 24 hours away from the ATMs closing and people being denied even cash withdrawals.

Could we really be going back to all that? Well, yes - the Belgian-French bank, Dexia has just gone bust for the second time in three years because people started withdrawing funds at an unsustainable rate and its share price collapsed. It could be the first of many, and governments cannot bail them all. Which means that if you are lucky enough to have more than £85,000 in any one bank – that's the limit of the deposits guaranteed by the government's deposit insurance scheme – then you'd be well advised to get it out sooner rather than later. I know that sounds alarmist, inflammatory, but listen closely, and that's what the Guvnor is saying.

But there is an alternative. Instead of pouring more printed money into the banks, why not nationalise them completely? We already own RBS and most of Lloyds. The nationalised banks could be used to set up smaller, more responsible banks with a remit to lend to industry rather than speculate on derivatives and the commodities market, which is what they have been doing since 2009. If the financial crisis really is as bad as the Governor says it is, and we are about to drown in a hyper-inflationary sovereign debt crisis, then the government would be able to freeze asset deposited in the banks and conduct a kind of debt 'triage'. Those with more than £85,000 in deposits would be required to accept a proportionate reduction in the value of their deposits in order to stabilise the financial system and remove the debt burden on the state. This could be done by converting bank deposits into government bonds redeemable at a later date. This is rather like QE in reverse. Needless to say, all bank bonuses would be scrapped, and bankers put on civil servants' salaries.

There would be howls of anguish from the rich at their wealth being hi-jacked in this way. But they should be told that the alternatives are much worse: a run of bank failures, which mean they would lose ALL their funds over £85,000. Bond holders would not just have a haircut – they would be decapitated by default or by hyper-inflation. There is still a great deal of wealth in Britain, £7 trillion in household assets alone, according to the Office for Budget Responsibility, but this is largely held by the very wealthy and 'sterilised' in property and other assets. If we are facing the ultimate crash, the government will have no choice but to commandeer these resources and use them constructively to manage the national finances. Roosevelt did something similar in 1933 when he ordered all the gold held by individuals to be deposited with the government.

I doubt if any politician has the cojones to put this kind of scheme forward right now – most of them are intellectually in hock to the City of London anyway. But what is not in doubt is that that the Bank of England is already thinking the unthinkable. Various schemes for crisis debt restructuring are surely already being run the Bank of England's computer models, and though they can't admit it, this will inevitably involve some control of bank deposits and an orderly run down of debt. The government will probably opt to raid pension funds first, because they are harder to move off shore. This is what the Argentine government did in 2001 when it defaulted.

What the Governor is warning of is a truly apocalyptic financial event. The government has already seized large parts of the banking system and resorted to money printing. It may not be long before it breaks into peoples' accounts directly. You have been warned.

Eurogeddon. It isn't just Greece's fault. Really, it isn't.

2011-10-08T14:51:00.002+01:00

We all know what the problem is: Europe has a single currency but no central treasury - no overall financial supremo who can collect revenues and disburse them across the 17 eurozone countries on the basis of need and fiscal responsibility. As they head inexorably toward default, the Greek people are quite rightly furious at being blamed for the financial crisis. Ok - their public sector was bloated and pensions were extravagant - but they aren't alone in that. And yes, the Greeks aren't particularly fond of paying taxes. But this was hardly a secret - and the European banks who lent £400bn to the former Greek government were fully aware that Greece was a fiscal basket case. So why did they give them the money? What about due diligence? Why didn't someone notice that the government was cooking the books? The lender has a responsibility too.

But it's not just the irresponsible behaviour of French, German and British banks. When the single currency was introduced, without any safeguards, it played havoc with the less advanced economies like Greece. How could they compete with the Germans, who suddenly found that they were able to sell their cars and engineering plant at an artificially low price. Yes, an artificially low 'rate of exchange'. Just as the Greek euro was 'overvalued' , so the German euro was 'undervalued' - it got a massive trading advantage. This should have been recognised by the authorities and appropriate action taken. That's what happens in Britain with the Barnett Formula for Scottish spending, which transfers some wealth north to compensate for the fact that all economic activity tends to be attracted to the south east of England.

Ok, let's not bring up Barnett with all its baggage. The point is that there is a mutual interest between Germany and Greece in getting some equitable solution to the absence of fiscal union. . Punitive austerity clearly is disastrous - for Germany as well as Greece. German economic growth has come to an abrupt halt as Europe prepares for "D" day - default day.. To get all the countries of the euro going again there is going to have to be a central political and economic authority. And it has to happen now. And there really is no alternative.

I have a confession to make. I am one of the “guilty men” who supported the euro and now stand condemned in the eyes of history, according to the overwrought Telegraph columnist Peter Oborne, who has been gracing the television studios all week. He has penned a ‘j’accuse’ pamphlet, “Guilty Men”, exposing the “leftist clique” that supported European economic integration,. We should be strung up - only hanging’s too good for us.

Mind you, it’s an odd left wing clique that included the Financial Times, Tony Blair, the US State Department, Tory politicians like Kenneth Clarke and Lord Patten, and business leaders like the former boss of BP, Lord Browne, and the chairman of BT, Sir Mike Rake. Actually, left wingers have always tended to be highly suspicious of the EU and the euro because they regarded it as “a banker’s Europe” with no democratic accountability and dominated by a conservative European Central Bank. One of the main aims of the single currency was to lower labour costs by making it easier for workers from poorer regions to work in wealthier ones - so trades unions didn't much like the euro either. The idea that it was a left wing plot is utterly ridiculous. Almost as ridiculous as blaming the current economic crisis on the euro, instead of on the really guilty men: the bankers, whose reckless greed destroyed the financial system.

The sovereign debt crisis in Europe arose because European governments, including ours, unwisely sought to bail out the banks with trillions of taxpayers money. They thought this would bring stability, but it did not. By taking on the huge losses of the banks, the governments of Europe only risked making themselves bankrupt. This wasn’t the fault of the euro, any more than the British banking crisis was the fault of the pound sterling. The purpose of the single currency was merely to remove barriers to trade and investment. The purpose of the single currency was to remove barriers to trade and investment, to complete the single market. Transaction costs alone - that’s changing money every time you crossed a border - were equivalent to 1% of GDP before the single currency was introduced ten years ago. Mistakes were made, certainly: failing to stick to the EU borrowing rules among them. But this was a great civilising project, laying to rest the grim history of economic nationalism

And even now, reports of the euro’s demise are premature. Listening to europhobes like Mr Oborne you’d think that countries who’ve been flirting with sovereign bankruptcy, like Ireland, would be desperate to leave the eurozone and restore their old currencies. Not so. Go to Dublin - as I have - and you’ll find that most Irish politicians and civil servants have no desire to restore the punt, despite three years of heartbreaking austerity. Iceland, the worst victim of the banking crash, is lining up to join the euro. So are most of the countries of central europe. What do they know that we don’t? Well, Iceland discovered the hard way that having a unique currency in the treacherous global financial environment is like being a chicken without a hen-coop: you may be free, but you’re liable to get eaten for breakfast.

But if Oborne is right, and the euro is finished, what might Europe look like in ten years time? A happy collection of sovereign states living in peace and security under thier own precious currencies? Hardly More likely a collection of embittered, impoverished and fractious nations engaged in destructive protectionism and other forms of economic warfare. Take Greece. If it abandons the euro and restores the drachma, it will immediately default on all its debts, causing a banking collapse. ATMs will have to close indefinitely. Greek families will discover that their savings and pensions are suddenly worth a fraction of their old value - as happened in Argentina when it defaulted in 2001.

Greek sovereign debt, still denominated in euros, will continue to increase as the “new drachma” devalues. Taxes will continue to rise, as will interest rates, because no one will want to risk lending to the Greek government except on usurious terms. Yes, Greek exports will be cheaper. But Greece doesn’t actually do a lot of exporting, and any trading advantage from a depreciated drachma will be small consolation for the loss of around half of the nation’s wealth. Greece will be looking to tourism to restore its fortunes, but it may find that - with the rest of Europe in deep recession - no one has money to spend on holidays.

A Greek default will lead to a wave of shocks across the Mediterranean states and the former Eastern bloc countries. There will also be banking crashes in France, Germany and Britain because our banks, who lent irresponsible amounts to Greece, Spain etc, will be insolvent. If the euro breaks apart, it will be devil take the hindmost, as the ex-eurozone countries try to export their economic troubles by devaluing their newly restored currencies. This is what Britain sought to do after 2008 by allowing the pound to fall by 25% in the hope of gaining a competitive advantage. It hasn’t worked, here, and it certainly won’t work when every country in Europe is trying to devalue simultaneously. Trade will grind to a halt as countries erect tariff barriers to protect jobs in vulnerable industries. The social tensions unleashed across the Mediterranean and central Europe will lead to internal conflict as immigrants are scape-goated, and external conflict as countries blame each other for their misfortunes. Me? I’d stick with the euro for all its faults.

I don’t apologise for a second for supporting the European Union and the single currency it created. Not only has it fuelled unprecedented prosperity in Europe, it has been a major force for peace and human rights in the world. Look at the progress that has been made in countries like Spain - a fascist dictatorship as recently as the 1970s. Or all those former communist dictatorships in the east who have been lining up to join Europe. Look at Ireland today, compared with the backward, essentially agrarian economy of thirty years ago.

The architects of the European Union wanted to create a community of nations, united in prosperity, who subscribed to the values of liberal capitalism tempered by strong welfare policies. It was never a left wing project. And it isn’t going to go away. Restore all the old currencies and all that will happen is that Europe - and the world - will be plunged into an economic dark age. It has fallen to the euro to save the global financial syste

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

2011-09-26T09:58:00.001+01:00

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.

So is this a Great Depression? Pt Deux

2011-09-24T17:16:00.001+01:00

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.

Three years after 1929, on July 8th, 1932, the Dow reached its lowest level of the 20th century and did not return to pre-1929 levels until 23rd November, 1954. Note that it was a staggered collapse. The Dow Jones actually recovered significantly in 1930-31 and politicians were congratulating themselves on their wisdom. By 1933, everyone realised that they were in what was called "The Great Depression" By then the US stock market had fallen by 89%.

Now that clearly hasn't happened this time. Though the 2000 dotcom crash was of a similar scale on the Nasdaq index of technology stocks, overall stock markets have not collapsed on the scale of the 1930s - at least not yet. The governments of the west responded very differently to their predecessors in 1929-30. Instead of allowing "creative destruction" to work its way through the overvalued assets after 2000, central banks cut rates to near zero and actively encouraged a global property bubble. This led to the Great Moral Hazard as banks started lending irresponsibly,even to people who could never pay their debts, believing that they were backed by governments and would be bailed out for their losses.

The sub-prime crisis broke in 2006 in America as property crashed, undermining the value of all those dubious bonds based on inflated real estate like collateralised debt obligations. The "Financial Weapons of Mass Destruction" as the investor Warren Buffett described them as early as 2003. After the collapse of Lehman Brothers in 2008, governments reached for the kitchen sink and threw everything they had at the banks in a desperate bid to re-inflate the bubble. Britain alone devoted £1.2 trillion to the bank rescue according tot he Bank of England.

But this was futile because the banks across the world were insolvent, and in pretending that they were not, governments allowed themselves almost to become accessories to fraud. Certainly, it was the most profligate misuse of public money in history. The net financial result was that private debts were taken onto the public accounts leading to sovereign nations becoming insolvent. Hence the Greek crisis. .

Clearly this is all rather different to the 1930s. When President Roosevelt took his oath of office in spring 1933, unemployment in the US had risen from 8 to 15 million - around a third of the work force. American GDP had fallen by nearly half. This hasn't happened yet. Unemployment has not come anywhere near equalling the levels seen in the early part of the Great Depression. This is largely because of the myriad government schemes for keeping the economy going, plus the massive increases in personal indebtedness. Families have kept their spending up by borrowing. Though this may have reached the tipping point with British households now owing £1.5 trillion, more than GDP

Moreover, in 2011, governments are all over the place and, after three decades of neoliberal policies, have lost confidence in their ability to manage the economy. Even in the eurozone, where only the politicians stand between the nations of Europe and financial catastrophe, they seem unable to mobilise the will to act. In 1933 by contrast, FDR did the following: He created the Securities and Exchange Commission (SEC) to deal with financial fraud; Congress passed the Glass-Steagall Act mandating a separation between commercial banks and investment banks. The Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000. Finally, various New Deal agencies were set up to put millions of Americans to work on public works under the Works Projects Administration (WPA).

Unfortunately, this didn't get America back to work. That only happened after 1939, when the government took on colossal debts to generate the war effort. The "employment" of six million soldiers and another 6 million defence workers were what ended the Great Depression. The worrying lesson of the 1930s was that only war was able to get the economies of the west going again. That is one piece of history we don't want to repeat. Though there are worrying signs that a collapse of the euro may lead to economic nationalism and international conflict. The key here is probably China - of which more later

So, is this a now Great Depression or what?

2011-09-23T14:58:00.000+01:00

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.

Crazy name; crazy guy. Kweku Adoboli. the London based trader for the Union Bank of Switzerland, set a new benchmark for financial fraud last week, by losing £1.3bn. He made Nick Leeson, who ran up the £800m losses that brought down Barings Bank in 1995, look like he wasn’t trying hard enough. Really, calling this casino banking is an insult to casinos. No gaming establishment would allow one of its people to run up debts on this scale.

It was a salutary reminder that the bonus culture, which led to the 2008 crash, is still alive, and that young men are still being lured into risky trading by the prospect of getting rich within a few years. UBS has been exposed, yet again, as a rogue bank with little or no control over what its high earning employees are up to. Within hours of this story breaking, Knacker of the Yard was on the case and we had a statement from City of London Police Commander Ian Dyson that Adoboli had been arrested on “suspicion of fraud”.

But hang on a minute - what about the bosses at UBS? Why aren’t they in handcuffs too? This guy was trading at the sharp end of investment banking, on ETFs - Exchange Trading Funds. These have taken over from sub-prime mortgages as the financial derivative of choice for the fast set in the City. But surely there is culpability here higher up the chain of command? Adoboli’s line managers are guilty at least of dereliction of responsibility; at worst complicity in fraud. Why aren’t they being brought to book?

UBS has form. In 2009, the Swiss bank was collared by the US Revenue for concealing the identities of many rich American clients so they could avoid paying tax. It agreed to pay $780m in a “deferred prosecution agreement” . Lovely idea that. I wonder how many of the “feral youths” who robbed shops in Clapham were offered “deferred prosecution agreements”.

UBS was also heavily involved in sub-prime mortgage bonds and was taken to court for selling these dud securities to its clients even when they knew they were worthless. In this they behaved no differently from the other investment banks. Goldman Sachs, the biggest and baddest bank on Wall Street, also knowingly sold dud mortgage bonds to clients. It paid $550 million to settle fraud charges levelled by the US financial watchdog, the Securities and Exchange Commission. But no Goldman executive was ever arrested or charged.

This month, our own Serious Fraud Office, launched its own belated investigation into fraud in asset-backed securities in the City of London. Again, this was prompted by a US authority, the Federal Housing Finance Agency, filing law suits against 17 Banks including RBS, Barclays, and of course USB for selling bonds with “materially false or misleading statements or omissions..including...overstating the ability of the borrowers to repay their mortgage loans”.

Now, to any reasonable person, that means fraud, which makes you wonder why the bosses of these banks aren’t under lock and key pending bail hearings. But when the law and high finance collide, it is invariably the law that backs down. Policemen are frightened of people with lots of money, and it is assumed that they’ll hire lawyers to get them off any charges, so they don’t bother arresting them - unless they are dumb traders with names like Adoboli.

And the government appears to be little more resolute than the Met when it comes to policing the City. The Vickers Report last week called for ring-fencing of the investment and deposit arms of the big banks so that every time a casino trader goes under, the ordinary depositors don’t lose their shirts. This is the very minimum that Sir John Vickers could have demanded to rein in our “feral” bankers. But he has given the banks 8 years to conform, which is an eternity in the world of high finance. Many of them will probably not exist by 2019 or will have allowed themselves to be bought up by foreign banks which aren’t subject to the rules.

City lobbyists persuaded the government that to clean up the City any sooner would “harm growth”, “increase banking costs”, “damage London as a leading financial centre”. The banks allegedly claimed that there would be a flight of bankers out of the City. You might say “good riddance”. You might also say that the idea of RBS upping and leaving to the Caymans is as daft a threat as was ever made by a special interest group. But this government, like the one before it, is afraid of the power of the banks, and their ability to wreak havoc in the wider economy.

And that is the back-story to the chaos currently afflicting the eurozone. The increasingly desperate attempts being made by European leaders to prevent Greece leaving the single currency is not out of concern for the Greeks. No one cares about them. It is the fear that a Greek default will lead to lots of banks in France and Britain going bust because they lent huge sums to the Greek government without any guarantee that they would be paid back. This is why our eurosceptic Chancellor, George Osborne, seems so keen suddenly on promoting European political and financial integration. He wants Germany to back the Greek bonds so that he doesn’t have to bail out our dud banks a second time in three years.

Once again it is all about saving the banks from their own irresponsible lending. Turning a blind eye to financial fraud. Using taxpayer’s money to salvage banks from the folly of their own greed and dishonesty. Isn’t it time someone called a halt to this? Instead of flooding the markets with free dollars, as happened last week, world leaders should be setting up a genuine international central banking authority with the power to bring order to the financial world. It should issue a new international reserve currency and finance its activities by a tax on international financial transfers - the “Tobin” tax that Angela Merkell and Nicolas Sarkozy recently called for in a moment of fleeting sanity. This is what John Maynard Keynes called for after the Second World War, and as in so many things, the great economist was right. Bankers are fools who need to be saved from themselves.

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

2011-09-23T10:11:00.001+01:00

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.

9/11 Origins - How America joined the bad guys

2011-09-21T06:36:00.001+01:00

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.

I'm not congratulating myself here on my wisdom or foresight. Most sensible commentators, in Europe at least, could see within hours of the planes hitting the World Trade Centre the risks to world peace, and they urged America to think before it acted. Even Tony Blair took this line, initially, and after scrapping his prepared speech to the TUC went on to call for the world to unite against injustice and oppression from the “heart of Africa to the West Bank of the Jordan”. Whatever happened to that?

In fact, it was clear to just about everyone outside the Bush White House that launching military retaliation would be to hand victory to the terrorists. Ham fisted and illegal invasions of Muslim countries that had nothing to do with 9/1l - like Iraq - were precisely what Osama bin Laden wanted. It was to show the Umma that the Great Satan really was set on a Crusade against Islam. George W Bush stuck so closely to the script written for him by al Qaeda – even describing the invasion as a “crusade” - that you almost wonder if they weren't in collusion.

Of course, America had to do something after 9/11. A policing action to clear al Qaeda training camps in Afghanistan was a legitimate and measured response to al Qaeda's brutal and cowardly mass murder, as was pursuing its leader, Osama bin Laden into the caves of Tora Bora. These acts had the support of the world. But what was unjustified beyond reason was to invade a Muslim country allegedly in pursuit of weapons of mass destruction that didn't exist. Saddam Hussein was a foul dictator, like Gadaffi – but it should have been left to the people of Iraq to dispose of him, not the 101^st Airborne. Bush and Blair shamefully suggested, against all evidence to the contrary, that Iraq was somehow behind 9/11, and an astonishing number of American citizens still believe this – 41% according to a 2007 Newsweek poll..

On this false prospectus, Tony Blair threw Britain into George W Bush's disastrous war of retaliation for 9/11. The PM was, in Lenin's phrase, a “useful idiot”, there to give moral cover to, well, another idiot. We now know that the Prime Minister pledged Britain's involvement in the Iraq invasion long before parliament was informed. That he set aside the initial advice of Britain's senior legal advisers that an invasion would be unlawful. It was the greatest foreign policy error since Suez and destroyed Tony Blair's reputation.

Yet Tony Blair should've known better than anyone from his experience of Northern Ireland that you don't resolve these conflicts by force of arms, by military invasion, but by politics and policing. Had he not just felt 'the hand of history' on his shoulder' as he negotiated the Good Friday Agreement in 1999 that finally ended the Irish terror bombings? How, you wonder, after leading British soldiers out of the quagmire of Ireland could he have have led them straight into the quicksand of Iraq?

It is almost as if a collective madness gripped the “Anglo-Saxon” world after 9/11. America, certainly, was deranged by grief and anger.. Someone had to pay for this “Pearl Harbour” act of war. But what did it serve the dead of the World Trade Centre to cause more death and misery? Look at the 9/11inventory: the wars in Afghanistan and Iraq cost the lives of nearly 6,000 American servicemen – double the number who were killed in the twin towers. No one knows how many civilians were killed in Iraq but it is certainly well over 100,000, and 2,000,000 have been made refugees.

America's post-9/11 wars cost between 3 and 4 trillion dollars, more than the cost of the financial crisis of 2008-9. Not only did Iraq destroy the fearful image of the American war machine – which was halted by a few thousand Iraqi insurgents - it vastly contributed to America's economic decline. China is now regarded as the world's economic powerhouse and is challenging the right of the dollar to remain the world's reserve currency. When historians come to analyse the decline and fall of the American empire, 9/11 will surely be the tipping point.

In Britain we were told that concern for civil liberties should not “get in the way” of the prevention of terror. As if our freedoms were a luxury we couldn't afford, rather than the basis of our very civilisation. We had Tony Blair's control orders, attempts to introduce 90 day detention without trial and those unworkable laws against “glorifying terrorism”. Britain became obsessed with “security” after 9/11 as a new bureaucracy arose feeding off politicians' fears, conducting ever greater surveillance of our lives, compiling vast databases of information. We nearly had to carry identity cards for the first time since the Second World War.

And then, of course, in 2005, the terrorists did finally strike, in the London bombings which killed some 55 civilians. A terrible act - but the irony was that the London suicide bombers were not agents of some foreign terror network, but home grown British citizens hailing from Leeds and Bradford. They were young men who had been radicalised, not by 9/11, but by the aftermath - by British foreign policy in the Middle East. No less an authority than the former head of Mi5,Baroness Eliza Manningham-Buller said in 2010 that the Iraq war “undoubtedly increased” the level of terrorist threat.

Of course, the Republican cheerleaders for the Iraq war saw it as part of their project for “A New American Century” in which, following 9/11, America would remake the world in its own image. It was the “End of History” after all. George W. Bush even said as much in one of his notoriously halting interviews. “We're remaking the world”, he said, as if he were some latter day Napoleon, World Spirit on Horseback. How does that look today?

It was Osama bin Laden who remade the world. His lucky strike on the heartland of America will be remembered, not just as the most brutal act of terrorism in history, but also the most successful in provoking military retaliation. If only America had acted with the dignity and sense of Norway after the Utoya massacre, and used it as an opportunity to celebrate the values of freedom and civilised behaviour. Or with the phlegmatic resolve of London during the IRA's bombing campaign in the 70s. Democracies do not need to fear terrorism, only their own reaction to terrorism

9/11 led to Guantanamo bay, extraordinary rendition and the use of “enhanced interrogation techniques”, ie torture. America is now regarded by the young idealists of the Arab Spring as little better, morally, than the dictators they have overthrown. Those pictures of American servicemen and women inflicting humiliation on suspected terrorists at Abu Graibh prision will remain imprinted in the minds of the young Middle East democracies for decades. In the hours after 9/11 the world's leaders, from Russia to the Pakistan, declared themselves to be “all Americans now” and called for the world to unite in defence of American values. You can't imagine that happening today – or perhaps ever again.

Why the absence of communism is behind the financial crisis.

2011-09-20T09:49:00.000+01:00

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.

Meanwhile time is running out for Greece which is being called upon to make 100,000 public sector workers redundant in order to qualify for more loan money from the ECB and the IMF next week. Greece is in a death spiral. The very austerity measures being introduced to addess the debt crisis is making it more difficult to pay them because tax revenues are evaporating even as the interest on Greek debt is increasing. There is a very real possibility of civil unrest making Greece ungovernable.

If Italy falls into the same state, it won't be the euro that is the first to suffer, but the entire global economy. Banks in countries like France, Britain and America would go bust if they had to write down the value of their dud loans.

What happens then? Well, no one really knows. Perhaps nothing, and Greece, Portugal and Italy will simply default on their loans. No one will lend to them again for a while, but they could probably cope with that, even staying within the eurozone. The bigger risk might be to the banks that hold Greek debt, like our own RBS, who might be plunged into a renewed solvency crisis - though one hopes that even our feral bankers have at least got their biggest risks covered.

Gordon Brown told the World Economic Forum last week that the present economic crisis is more serious than 2008, and that if the international community doesn't get its economic act together, we could be back to the 1930s. He foresees a prolonged economic slump, mass unemployment and a lapse into protectionism between nations. This warning seems all too credible from a politician who, whatever his personal failings, was renowned for his grasp of economics and finance.

But there is one big difference between today and the 1930s: dissent, or rather the lack of it. In the Great Depression there were industrial organisations, political parties and socialist intellectuals who had a clear vision for resolving capitalism's crisis. The trades unions, the Labour and Communist Parties and influential thinkers from John Maynard Keynes to Leon Trotsky, were all in various ways, committed to challenging the assumptions of the financial power elite, and urging the creation of a fairer society and international cooperation.

The very existence of an alternative economic model forced industrialists and financiers to accept high taxation and direction of industry in Roosevelt's New Deal. It led to remarkable achievements in international co-operation such as the Bretton Woods Agreement in 1944 that created the International Monetary Fund and laid the groundwork for the post war boom. Fear of Communism also prompted the Marshall Plan after World War 2, in which America financed the economic recovery of Europe.

The financial power elite has no such fears today. The socialist movement has been replaced by think tanks that broadly support the economic status quo. The communist political parties have mostly gone into the dustbin of history, and the British Labour Party, like most social democratic organisations, has long since abandoned any ideas of changing society. Indeed, Gordon Brown, introduced the very “light touch” regulation that turned the City of London into the international capital of casino banking.

Some politicians, like the Liberal Democrat industry minister, Vince Cable, were highly critical of the City and the banks' lending practices. But he was very much a lone voice, and his voice has become more muted still since his party entered coalition with the Conservatives. Cable may indeed veto attempts by the Chancellor, George Osborne, to abolish the 50p tax band on incomes over £150,000, and he may have prompted the Vickers Report last week that called for a division between investment banking and retail banking. However, his presence in the Cabinet hardly represents a threat to the capitalist system.

The trades unions are promising a Winter of Discontent, but they are very much weaker than in the 1970s, and seem to have become narrowly focussed on the immediate interests of their membership. The wave of strikes that is planned for next month is not about challenging the system, but defending the pension privileges of certain public sector workers. Demonstrations against cuts, like those organised by the young activists of Uncut, are sporadic and disconnected and easily dismissed by government.

Yet, it is clear what needs to be done. At the very least, the international community must act to tame the beast of globalisation by controlling and regulating the international activities of the banks, closing down tax havens and taxing short term currency movements to prevent countries being ambushed by financial speculators. Governments need to introduce growth and job creating policies to mitigate the impact of deficit reduction. They must increase taxes on the wealthy and level income inequalities, so that middle class families can spend again in the high streets. The countries of the eurozone must create political and fiscal institutions to match the currency union, and the European Central Bank must issue bonds, backed by all, which is the only way to prevent sovereign debt crises in countries like Greece spreading to Italy, Spain and even Britain.

This may seem a tall order. But what is the alternative? If the eurozone collapses, there will be a global slump that will make 2008 look like a blip. Banks would stop lending, and international trade would grind to a halt. Britain cannot remain isolated from this because our own banks stand to make huge losses from any Greek default. It was the failure properly to regulate the banks after 2008 that has led to this crisis. Instead of reforming the “feral bankers”, governments took on their losses, socialised the debt, and are now themselves becoming insolvent one by one. The only way out of this is a new financial system based on international cooperation and regulation. Time is running out. And the alternative doesn't bear thinking about.

Murphy review of Scottish Labour leaedership. Same difference?

2011-09-11T10:29:00.000+01:00

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.

A former used car salesman, a gay female kick-boxer and an MSP who wants to abolish his own party. The Scottish Tories certainly know how to attract attention. I mean - you wait years for the Scottish Conservatives to find someone interesting to lead them, and suddenly three come along at once.

And before anyone complains about my reference to Tory leadership candidate, Ruth Davidson's, sexuality and her recreational pursuits - I make no apologies. That the Scottish Tories could soon be led by a lesbian shows just how far we have come in Scotland from the dark days when most Tories believed homosexuality to be a sin. It is a cause for celebration. Of course, her sexuality is not the only interesting thing about Ruth Davidson – I worked with her briefly at the BBC and she was an outstanding news and current affairs presenter. But like Obama in America, Davidson's candidature is such a dramatic sign of the times that it is impossible to ignore the quality that defines her. She is a breath of fresh air.

However, I wouldn't want to stretch the Obama comparison too far. Ms Davidson's policy platform is pretty dull and conventional Tory stuff. No to changing the party name; no to more powers for Holyrood; no to saying sorry for Thatcher. Davidson was only six months old when The Lady came to power, and she says that like Disraeli, Thatcher is ancient history. Unfortunately a lot of voters in Scotland don't think that way. They haven't forgiven the poll tax or the wasteland Margaret Thatcher created in West Central Scotland through the programme of industrial closures. Ms Davidson's real handicap is her lack of experience. She has only been an MSP for four months after all.

Her rival, Murdo Fraser, the capable deputy leader of the Tories in Holyrood, clearly realised that he would struggle to compete with Ruth Davidson for media attention. So he decided to go for broke, and offer himself as the candidate who would finally do what the Scottish voters have been trying to do for years: kill off the Tory Party. It was an audacious move that appears to have backfired. The proposal to ditch the “toxic” Tory label aroused the wrath of Tory grandees like Lord Forsyth, Lord Sanderson and David Mundell MP, as well as Davidson and Carlaw. Curiously, it was metropolitan Tories, like Michael Gove, David Cameron and Angus Maude who seemed to favour hiving off the Scottish Tories into a version of the Bavarian CSU.

Perhaps a leadership election was the wrong moment to propose this voluntary euthanasia. 'Vote for me, and I'll abolish your party'. It forced the other candidates to define themselves against the whole idea of re-engineering the Tories, which probably means it will never happen. The best time for changing the name would surely have been back in 1997, when the Tories lost all their MPs and subsequently lost the devolution referendum by a landslide. Then, the Tories could have said: ok, it's a new Scotland, new parliament – time for a new party. But now, fourteen years later, it looks like an act of desperation. Jackson Carlaw, the somewhat less interesting candidate, must be hoping that he can come through the middle in this race. But if he wins, he will be taking over a party divided about its very existence.

But at least the Tories have interesting people with radical ideas who want to lead their Scottish party. Over at Labour they're having trouble finding anyone half decent to stand as leader to replace Iain Gray, who led the party to its worst parliamentary defeat in 80 years. So far, the Westminster blogger, Tom Harris MP and the Scottish deputy leader, Johann Lamont, are the only ones to have thrown hats tentatively into the ring. Ms Lamont must be the favourite so far, if only because she is an MSP in Holyrood. A doughty fighter, whose facial expressions can kill at a hundred paces, she may not have the broad appeal that a Labour leader needs these days, now that the party needs to fight for every vote it can get. Ms Lamont would certainly scold Alex Salmond at question, but she lacks the intellectual depth of a Wendy Alexander or the stature of a Donald Dewar. Ken MacIntosh MSP, the nicely-spoken young man who sits for Eastwood is threatening to stand against Lamont – though eating and breakfast come to mind

Tom Harris made clear that he was really a stalking horse for someone of stature like Douglas Alexander, the Shadow Foreign Secretary, or Jim Murphy, the Shadow UK Defence Secretary, though neither have shown the slightest interest in giving up their Westminster careers for Holyrood. And therein lies the problem. For a UK Labour minister, the Scottish leadership is a big step down the greasy poll, if you'll excuse the mixed metaphor. The Scottish leader isn't even the leader - Ed Miliband is. In Labour's centralised party structure, the Scottish “leader” is only the leader of he MSPs in Holyrood. Same difference, you may say - but for Labour politicians who want to be where the action is, it is in London not Edinburgh.

A committee led by Jim Murphy and the MSP Sarah Boyack is currently reviewing the rules for Scottish leadership elections, as well as trying to find a way out of the current electoral impasse. It is expected to call for a "loosening of the ties" with London Labour. I spoke to one very senior Scottish Labour figure who said he'd made a submission but hadn't even had an acknowledgement.

A number of prominent figures like the former First Minister Henry McLeish want the commission to recommend that the Scottish Labour Party should become its own separate organisation – a bit like what Murdo Fraser is calling for, but without the name change. But don't hold your breath. London Labour will not give up control lightly. It will take something like a declaration of UDI from the Scottish MSPs. And it may come to that – there is immense frustration in the Scottish Labour Party right now.

In the meantime, political initiative lies with the Scottish Tories. Who knows maybe it is their time again? That's if they can remember what they're called.

The Big Optimistic Case for the Union.

2011-09-08T22:30:00.001+01:00

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.

It was the week the union struck back. After a war council convened by the Prime Minister David Cameron in Downing St,, key ministers in the UK Coalition were sent north to take the fight to the Nationalist enemy. The Scottish Secretary, Michael Moore, speaking to the David Hume institute, attacked the SNP’s “six unanswered questions” about independence: EU membership, defence policy, currency, bank regulation, pensions and the cost of separation. The Chief Secretary to the Treasury, Danny Alexander, then laid into Salmonomics at the CBI conference in Glasgow, declaring that an independent Scotland would be in debt to the tune of £65bn and that Scotland would not have survived the 2008 financial crash had it not been for English gold bailing out our delinquent banks. Plus, the oil’s running out - so there.

Westminster sources said that this was all part of a “big optimistic case for the UK”, but it didn’t sound very optimistic. It sounded like Gordon Brown’s desperately depressing case against separatism, which we heard loud and clear before the four Scottish parliamentary elections and which has been rejected in the last two. Arguably, this “big optimistic case” prepared the ground for the SNP landslide in May 2011. If you keep telling people they can’t stand on their own two feet, eventually they’ll try to prove you wrong.

If the unionist parties are going to save the UK, they’re going to have to do a lot better than this. First, EU membership is not a serious issue. If the European Union can welcome countries like the Czech Republic and Slovakia as well as a host of eastern european states that used to be part of the USSR, there is zero prospect of them blocking an independent Scotland. The right to national self-determination is the foundation of the European project. If a democratically independent Scotland wished to remain in the community, ways would be found to keep it there. Actually, the real question might be whether England, or the “Residual United Kingdom”, would still deserve to wield its current clout in the European Council.

An independent Scotland would undoubtedly begin life with a deficit of several billions, but given that the UK is running a deficit of £150bn, this is surely manageable. £65bn seems a fairly modest slice of the UK National Debt, which is currently running at 75% of GDP, or £870bn, according to the Bank of England. North Sea oil production may have peaked, but there is still around £1 trillion in reserves and Scotland has immense reserves of renewable energy in wind and tides. The claim that Scotland would’ve been left to cope with the banking crisis on its own has been discredited by economists like Professor Andrew Hughes Hallett, who’ve pointed out that there are established conventions for handling cross-border bank implosions. This stands to reason because most of the Royal Bank of Scotland’s branches, accounts and assets are located in England, mostly in NatWest. This is not Iceland. Any rescue would have had to be UK-wide, whether Scotland was independent or not, because the English banking system would’ve collapsed as ATMs closed and millions of English deposit holders staged a run on the banks.

These are all old and very tired arguments. The SNP has accepted that Scotland would remain in the sterling zone, and stay out of the euro, at least for the time being - which is also what Gordon Brown said when he was UK Chancellor. Pension entitlement is a big problem for Scotland with an ageing population, but it is just as big a problem for England. The Nationalists have largely abandoned the idea of having a separate army and diplomatic corps, though an independent Scotland would have its own defence force and would refuse to participate in illegal foreign wars.

There is vagueness certainly, about the SNP’s definitions of independence - but Moore’s are not killer questions. I’m beginning to wonder if there is a positive case for the union at all. Yes, Scotland does receive more per head in public expenditure than some areas of England - though not London, which receives more than Scotland. But this is pretty poor compensation for the hundreds of billions that Scotland has donated in oil revenues to the UK exchequer over the last forty years.

Socialists used to argue that nationalism was a means by which the ruling class divided the workers of the world. Well, no one talks like that any more, largely because the industrial working class largely has ceased to exist as a political force, and the Labour Party, under Gordon Brown, has became the party of City of London financiers. We used to be told that the National Health Service was the glue that kept the UK together, along with secondary and higher education for all. Well, the NHS is being privatised in England and had it not been for the SNP government, Scottish students would’ve been paying £9,000 a year tuition fees. Not much glue there.

Britain was at its greatest in the Second World war when Scotland and England united against fascism - but German militarism is a pretty remote threat today, unless you happen to read the Daily Mail. What really kept Scotland and England together was the British Empire and the exploitation of the colonies, but little remains of that today apart from Her Majesty the Queen, and the SNP insist that they want her to remain head of state. The Nationalists also say that they wants to forge a new ‘social union’ with England, based on common social objectives and free movement of peoples.

I’m beginning to think that the Nationalists are better unionists than the Unionists. At least Alex Salmond seems to have an idea about how the two nations of the union would coexist in a future relationship of equals. Certainly the old case for the union is lost, and unless a new and convincing one is found, the SNP might win the referendum by default. Looking at the diminished and dependent state of Scotland in the current union, it’s hard not think that there must be a better way than living on handouts from the Barnett Formula.

As a new political year begins, the political initiative remains with the SNP. Labour is leaderless, the Tories are going nowhere, and the Scottish Liberal Democrats have been destroyed as a political force. Things go on like this and it’ll be a question of: ‘will the last party to leave the Union please turn out the lights’.

Tramageddon: Swinney steps in.

2011-09-08T21:57:00.002+01:00

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.

We can’t go on like this. The threader reputation of Scottish civic governance has finally disintegrated following the Edinburgh trams fiasco. Local democracy has been brought into disrepute by incompetent councillors and overpaid officials. Hundreds of millions of public money has been wasted on a vanity project at a time when the public sector is facing an unprecedented financial squeeze. From the start the tram project has been grossly mishandled by almost everyone involved. If this were China, they’d probably be shot.

Now, in a move more in keeping with that authoritarian regime, the Scottish Finance Secretary, John Swinney, has effectively abolished local government in Edinburgh by ordering the elected members - including his own SNP councillors - to reverse a majority vote of the council taken last week to halt the tram lines at Haymarket. Few would criticise Mr Swinney for baulking at a ludicrous and loss-making plan that would force passengers to get off the trams 2 miles short of their destination. But he may live to regret putting his reputation on the tram line since the cost of extending itto St Andrews Square is almost certain to cost over a billion pounds - and it now has his name on it.

The councillors will wash their hands, grumbling about central interference. The contractors will rub their hands at the prospect of loading hundreds more millions of pounds onto the cost. The officials will get to work producing further mounds of worthless paper and rearranging committees. The whole project will stagger on into motion again, crushing yet more small businesses, alienating voters, turning Edinburgh into an international byword for incompetent public procurement. The only upside of the tram fiasco, as one MSP put it to me last week, is that it makes the Holyrood parliament building look like value for money by comparison.

The reason so many public sector projects like this go so disastrously wrong is that there is no clear line of accountability and culpability. No one is to blame. No one pays any penalty. Why should they worry; it’s not their money after all. Civic administrations are suckers for fancy projects like trams. Their officials show them glossy brochures and take them on trips to Seville and Amsterdam where they see trams trundling along sunny streets and they decide that they want them too. It’s like having your own big train set. The councillors then get their officials to provide fantasy figures to justify the project. This is handed it over to arms length organisations like TIE who are taken to the cleaners by the private contractors. Then everyone runs for cover.

In theory, of course, the elected members are collectively responsible, but in councils like Edinburgh accountability is blurred by coalition. Edinburgh is run by shifting alliances of parties led by nonentities. The hapless Jenny Dawe, the leader of the Lib-Nat coalition in Edinburgh, is a well-meaning individual totally out of her depth who behaves like an innocent bystander at a car crash. She clearly feels no sense of personal responsibility for what happens on her watch, because she can always blame her coalition partners, or the other lot, or Bilfinger Berger.

There is an alternative to this. In the past, I have been instinctively resistant to the idea of elected mayors on the grounds that they encourage headstrong individuals impatient with democracy to gain power through media projection. An elected mayor diminishes the status of the council and can reduce the elected members to the role of spectators in a cult of personality. But I can see no other way to improve the quality of civic administration, and provide something resembling effective leadership to Scotland’s cities. With a mayor, there is at least somewhere for the buck to stop. If Edinburgh had a mayor, he or she would be under immense personal pressure to ensure that projects like the tram actually work. They have nowhere to hide.

London has only had mayors since 2000, but it is already impossible to imagine the city without a high-profile civic leader. It has been effective too: the congestion charge was a prime candidate for local government mismanagement (a referendum on congestion charging was spectacularly mismanaged by Edinburgh in 2005) but Ken Livingstone succeeded, largely through the force of his personality, in introducing a workable system that is now part of the fabric of London life and provides revenue for other transport projects. Boris Johnson now has his bicycles and his Routemaster buses - and at least the voters know who to blame if they don’t work.

Mayors provide an essential element of accountability to prestige projects because their names are on them. They can’t shuffle responsibility off to other members of a coalition, and they can’t blame opposition parties when things go wrong. Elected mayors also provide an element of continuity. They know that they will have to see a project through to its completion. Mayors have personal authority that ordinary councillors lack. If local government officials don’t give them reliable cost forecasts, or keep them in the dark, a mayor has the power to remove them from their comfy offices. Councillors feel intimidated and inferior to officials, not least because of the latters’ high salaries. We are left with gormless councillors on Newsnight blaming bad decisions on “the numbers we were given at the time” . Well, if they aren’t given the right numbers, sack the number crunchers.

The position of mayor is, by virtue of its visibility, likely to attract more resilient and imaginative candidates for local government leadership, like Margo MacDonald who might have been a prime candidate for Edinburgh mayor in times past. Yes, it might also attract publicity-seekers and careerists, but that has been a problem for democracy ever since it was invented. Local government in Scotland is in such a desperate state, that almost anything would be preferable to the current arrangements which have alienated the voters and brought financial ruin to great cities like Edinburgh and Aberdeen.

Local government is dying in Scotland, as turnout falls and central government increasingly diverts the local revenue and tells councils what to do. The only thing that will keep local government alive is democratic engagement - the active support of the people. The voters of Edinburgh are sick of mediocrity and desperate for leadership - so let’s give it to them.

The only people who are going to try Abdelbaset al-Megrahi are the Libyan people themselves.

2011-08-28T12:34:00.001+01:00

They seek him here, they seek him there. The hunt for the man convicted of murdering 270 people in Pan Am 103 in 1988 Britain's, Abdelbaset al Megrahi, continues. He's not at his mansion in Tripoli, though neighbours claim he was there untll very recently - scotching one of the more fanciful rumours about the Lockerbie Bomber: that he's already dead and that a body double has been sitting in at Gaddafi's rallies. But what to do when they find him? There are reports that Libya's new government is reluctant to extradict him because he is a member of Gaddafi's clan. American politicians and commentators are calling for his capture - dead or alive. It shouldn't be too difficult to locate a dying man in a wheel-chair in a war zone. But when he is apprehended - the only people with the right to try him again are the people of Libya.

“More bad news for Megrahi”, said the headline in the Independent.” Scottish probation officers are on his trail”. I’m not sure that the man convicted of the worst terrorist atrocity in British history is exactly shaking in his wheelchair at the prospect of East Renfrewshire council being on his case. Under the terms of his release from Greenock Prison two years ago, al Megrahi is supposed to be in regular contact. Perhaps a crack team of special probation officers is preparing to be injected into the war zone to track him down.

I would worry rather more about those reports in June that a deal has been struck between Barack Obama and the Libyan rebels to hand Megrahi over to American special forces so that he can be extradited to America. There’s something of a bidding war underway among US politicians right now over bringing back the head of Adelbaset al Megrahi. Mitt Romney, the 2012 Republican presidential candidate, says he wants the Lockerbie Bomber seized and brought to face trial in America. This would raise some interesting legal issues, not least because Megrahi has already been convicted by a Scottish court in Camp Zeist in 2001 and the US doesn’t have any jurisdiction in Scots law. Of course, the American Seals have a tried and tested way of cutting through these legal technicalities, as the late Osama bin Laden discovered in Pakistan recently.

It’s all becoming just a little tasteless, this hot pursuit of a dying man. David Cameron didn’t help by saying this week that he agreed the Lockerbie bomber should be brought back to jail. The UK prime minister has no jurisdiction here either and he would have been wiser to keep his trap shut. Many US politicians and Lockerbie parents believe that the British government shared responsibility for springing al Megrahi in the first place. The New York lawyer, James Kreindler, who has represented the Pan Am 103 victims is in no doubt. “It was all a scam so (British Petroleum) could get its oil leases for Libyan oil fields”, he said yesterday, “which they’re using to pay for the damage caused by the Gulf (of Mexico) oil spill”. This masterful conflation of two mega scandals - Pan Am 103 and Deepwater Horizon - has placed Britain firmly in the dock of US public opinion.

`Of course, as we in Scotland know, oil and UK policy had nothing to do with the release of al Megrahi in August 2009 by the Scottish Justice Secretary, Kenny MacAskill. He was released on compassionate grounds under due process of Scots law on the basis of evidence from Dr Andrew Fraser, the director for health and care for the Scottish Prison Service that al Megrahi had only three months to live. Mind you, it’s hardly surprising that the Americans find this account hard to swallow, and not just because al Megrahi is still going strong two years on. The Cabinet Secretary, Sir Gus O’Donnell, admitted in February that Britain had pursued a covert policy to “discreetly” help the Libyans to repatriate al Megrahi. The former Labour Prime Minister, Gordon Brown, was fully aware of this policy even as he condemned the Scottish government for releasing al Megrahi - one of the most blatant examples of diplomatic hypocrisy since , well, since Britain sold £100m of arms to Gaddafi, including tear gas and sniper rifles, while condemning his record on human rights.

No one comes out of this affair untainted - except of course the victims. Even their families were criticised for accepting £1.7b in “blood money” from the Libyan government. The release of the Megrahi has undoubtedly caused damage to Scotland’s image abroad, especially in the USA, and has raised many awkward questions about the competence of Scots law. Perhaps, indeed, reopening the case could be the way to resolve this whole issue. But it has to be in Libya itself. It would surely be in the interests of everyone - victims, lawyers, politicians in America and Britain - if, rather than be assassinated by US special forces, or extradited to face an unfair trial in the America, Gaddafi's former intelligence officer were to be tried on Libyan soil. He has a lot to tell the world about what had been going on under his watch. From IRA arms shipments, to bombs on planes. Hopefully, the Transitional National Council will see the opportunity here to begin the process of peace and conciliation by making al Megrahi face trial in Tripoli.

In the end, they and only they, have legal authority to hold al Megrahi to account for actions that have so damaged Libya abroad and at home. American lawyers and Scottish civil rights activists would be free to provide the new Libyan prosecution service with all the evidence that has been collected on this extraordinary case over the last quarter century, including the evidence re-examined by the Scottish Criminal Courts Review Commission. One reason why feelings run so high in America is that they still believe that Megrahi really did bomb of Pan am 103 back in 1988 killing 270. In Scotland, many prominent public figures, like the former Labour MP, Tam Dalyell, and Dr Jim Swire, of the Lockerbie victims groups, are adamant that there was a miscarriage of justice and that al Megrahi is innocent. Kenny MacAskill claims that this climate of opinion didn’t influence his decision, but it certainly provided the backdrop. He must have known that the Scottish Criminal Cases Review Commission also had serious doubts because it agreed to allow al Megrahi the right to make another appeal. The was only abandoned when al Megrahi was released on health grounds, thus saving Scottish law any further embarrassment. We will know more when the SCCRC report is published next month. But for most people the revelation that the key prosecution witness, Maltese shop owner Tony Gauci, had been offered large sums of money, perhaps $2m, to give evidence fatally undermines the prosecution case.

If there were to be another trial, all this could be re-examined and the conspiracies laid to rest. Assuming, of course, that al Megrahi lives that long - as well he might since he is believed to be on expensive drugs that slow the progress of prostate cancer. We don’t need lynch law here. The best way to honour the dead of Pan Am 103 would be to let the new democratic Libya settle its own account with its bloody past.

If society is broken, who broke it?

2011-08-15T12:58:00.000+01:00

If society is broken, who exactly broke it? If there is a moral vacuum in society who sucked the air out of it? If people are out for themselves, who has set the bench-mark of selfishness? Iain Duncan Smith says on Today that "we all need to put our house in order". But who exactly is fixing the roof? MPs made huge sums of money out of abusing abusing their expenses, and the vast majority got away with it. The bankers who wrecked the economy out of greed and short termism, have been rewarded with huge sums of public money. The sections of the press that crow loudest about the need for law and order and respect for authority turn out to have been engaging in illegality on an industrial scale. If it is time to "make life hell" for the hoodies, as the government is promising, when is fire and brimstone going to land on the City of London, the Houses of Parliament, the offices of Wapping?

Remove benefits from young rioters, say petitioners. But when are the politicians going to give back the tens of thousands in capital gains they made out of flipping second homes? What about removing the bonuses bankers have been awarding themselves without any moral or financial justification? Why is it that the only person who has been punished in the News International phone hacking affair been the comedian who threw a pie in the face of Rupert Murdoch?

These aren't mere debating points. Society breaks from the top down. You cannot punish those below while those at the top are exonerated. You cannot lecture people on their responsibilities when those at the top show none at all.

If the response to these disturbances is purely to crack down on the dispossessed, single mothers, benefit claimants then there will only be more violence. Governments govern only by consent of the governed. Or else we have Leviathan.

Mindless violence is never totally mindless. Many of the rioters do have a moral universe, do have a sense of justice, and feel that middle class society has lost it. Look at the unemployment rates in the constituencies that were set ablaze. Almost half of young black men in some inner city boroughs are unemployed. They are locked out of the consumer society which taunts them from billboards and MTV. The roots of this problem are blindingly obvious.

And no - that doesn't make it right to riot.

Karl Marx called them the “lumpenproletariat”; Franz Fanon called them “the Wretched of the Earth”; conservative sociologists call them the “underclass”; the press call them “feral youth”. Last week they took on society on the streets of English cities – and it's not yet entirely clear who won. The first round went to feral youth and we are still waiting for the replay.

The police were the first casualties – humiliated by gangs of mostly young people who made the forces of law and order turn and flee. How long will it take the mighty Metropolitan Police, to live down that You Tube video from Woolwich where officers start to move against the hoods, hesitate, and then back away allowing a jeering swarm to take over the street. It was like one of those Zombie movies. Except that the undead are rather easier to deal with than the “kidz”.

Of course, they've always been there – the opportunist thugs and petty larcenists, drug addicts and psychopaths - who come out onto the streets when law and order breaks down. We've seen their familiar faces looking out at us from the newspapers. They come from all social backgrounds and none. Many are denizens of the sink estates – the so-called “shameless” products of welfare dependency. But there has been a sprinkling of graduates, classroom assistants and even some offspring of the well-to-do. The euphoria of violence is what unites them – the intoxication of destruction. It's 'Anarchy in the UK' – the kind that Johnny Rotten of the Sex Pistols yearned for before he became a b-list celebrity doing grocery ads. Here it was, finally, thirty five years on from the dawn of punk. “Don't know what I want but I know how to get it; I wanna destroy the passers by”. Never Mind the Bollocks could have been the rioters' manifesto. That and Pink Floyd “We don't need no education...”

But the scale of the anarchy is what has shocked everyone – Left and Right, Tory and Conservative, laissez faire liberals and moral reactionaries. It started with a peaceful protest in Tottenham over the shooting by police of a suspected gangster Mark Duggan. Within 48 yours, flash mobs of arsonists and thieves had broken out like boils all across the face of urban England. Shops and houses were set ablaze, including the Sony distribution centre in Enfield which housed 3 million CDs, including not a few by the gangsta rappers many of “da yoot” listen to on their ipods while they're trashing Asian stores. Liam Gallagher, the Oasis hell-raiser, renowned for his one-finger attitude to authority, woke up to find his shop in Manchester down by quarter of a million in merchandise. But don't look back in anger? Looters formed orderly queues outside Debenhams in Clapham while those inside tried stolen clothes on for size. This was petty thieving on an industrial scale.

Five people have died so far, and there have been well over a 1200 arrests and around £100m in lost property. Given the arson and random violence it's a minor miracle that there weren't more casualties. 16,000 police took to the streets of London on Tuesday and the courts have been working round the clock to punish offenders, including one teenager who got six months for stealing a bottle of water. This was the legal “fight back”, promised by David Cameron. But some have taken the law into their own hands. The week ended with images vigilante groups of sword-carrying Sikhs standing guard outside shops in Birmingham. Oh – and the rain, which some said was the real reason why the 'feral youth' left the streets and returned home to play Grand Theft Auto on their stolen X~ boxes.

There was no side to take here – though opportunist commentators and politicians sought to grind their axes. There was a brainless spat on BBC's Newsnight between Labour's Deputy Leader, Harriet Harman, and the Tory Education Secretary, Michael Gove, over the role of “the cuts”. But for once the nation was largely united, if only in shocked disbelief. On the streets, the offices, in universities and businesses, in Holyrood and Westminster everyone was saying the same thing: where are the police? Why are they letting this happen? Why didn't they break a few heads? Perhaps next time they will – this has been a watershed event for the police, and has ended the era of 'policing by consent'. Gene Hunt of Life on Mars may be returning to a street near you.

But what of the causes? Well, the first thing to say is that it was all very different from the racial riots of the 1980s. I vividly recall the original Tottenham riots in 1985 because I was working at the time as a current affairs producer the BBC's cerebral “World Tonight” programme, which decamped for a time to the epicentre of the troubles: Broadwater Farm Estate - a 1960s, le Corbusier-inspired monument to concrete brutalism, It was like visiting the front line in a war zone. People expressed a righteous anger at police behaviour, about racism and discrimination, poor housing and poor health. Community workers convened angry meetings. The tenants association was split on racial lines.

A protest at the death of a local resident, Cynthia Jarrett, by heart attack during a police search, turned into a riot ,and PC Keith Blakelock was murdered by machete. Bernie Grant, a council leader who went on to become one of Britain's first black MPs, was reported as saying that the police had got “a bloody good hiding”. There was none of that triumphalism this time, and no discernible political dimension to the 2011 riots. Black leaders were just as appalled by the nihilism. Diane Abbott the radical MP for Hackney even suggested a curfew in her constituency. Paul now Lord Boateng, who cried “today Brent South; tomorrow Soweto!” when he was elected MP in 1987, last week condemned the futility of the riots and praised the police.

It is a cruel irony that it was in Tottenham that last week's riots began. I passed by Broadwater Farm estate a couple of years ago and found it changed beyond recognition. The buildings have been refurbished and the estate had become a highly desirable place to live, not least because it has one of the lowest crime rates in the country. In 2005, not a single robbery or outdoor assault was recorded here and there was only one burglary, according to Harningey Council. In the third quarter of 1985 alone there were 875 burglaries, 50 robberies and 50 assaults. Broadwater is a model of urban regeneration, living proof that mixed communities can survive and thrive. 70% of residents are from an ethnic background and there are 29 languages spoken on the estate.

The Metropolitan Police have changed almost much as Broadwater Farm. A lot more of them are black for a start - 3,000; there were only 180 black officers in 1985. The Scarman Report into the Brixton and Toxteth riots of the early 1980s, began a 30 year process of reform which transformed relations between the Met and the ethnic groups in the capital. Gone are the “sus” laws, stop-and-search, and the Special Patrol Group, notorious for its harassment of any young man with a black face. No – we may want tougher policing but we should not, must not go back to the days when the Met was an occupying force.

So if we can't blame the estates, and we can't blame the police, who can we blame? Multiculturalism? Hardly, since the Asian community seems to have been standing firm against the rioters, many of whom were white, as we can see from the pictures of those who ended up in court. The international press, which gave extensive coverage to the violence, blamed inequality, poor schools, immigration and the break up of the family. CNN asked: “How long until we see this in the U.S.?”, which seemed grimly ironic given the history of urban violence there.

The riots gave dictators an opportunity to have a go at British hypocrisy. Robert Mugabe called on David Cameron to “put out your own fires” and stop interfering in other countries. The Libyan foreign ministry issued a cheeky communique saying that “David Cameron must go” and that the “international community [should not] stand with arms folded in the face of this gross aggression against the rights of the British people”. The Chinese dictators leapt on David Cameron's comments about controlling social media sites to justify its own internet censorship. “Now they are tasting the bitter fruit of their complacency”, said one commentators in the China People's Daily. But of course, this was emphatically not a revolt against an oppressive tyranny. This was no “London Spring” but an outbreak of mass criminal behaviour – a threat to freedom and democracy rather than a defence of it. Bloggers from Egypt's Tahrir square rightly condemned the British rioters for lacking any cause for their action.

The reason socialists have been so contemptuous of revolts by the “lumpenproletariat” in the past is because they are essentially ragged individualists, uninterested in and unconnected to the rest of society. Karl Marx dismissed the “beggars, pimps, pick-pockets” because they were incapable of developing class s consciousness through workplace organisation and were therefore incapable of contributing to the creation of communism. Unfortunately, the socially-conscious working man that Marx ennobled in the Communist Manifesto, failed to deliver. Capitalism has changed, and tries to do without workers - which has led to the proliferation of the underclass..

Perhaps not since the criminal mobs of the 1820s have the wretched of the earth come so close to challenging the very foundation of modern middle class society. They didn't have BlackBerries of course in the 19^th Century, but the London ruffians and footpads had equally effective means of communications through an underground criminal network using a complex language of double meanings and code, some of which evolved into Cockney rhyming slang. They were highly effective in out maneovering the forces of law and order. The moral panic over criminality and gin-soaked lawlessness led directly to the creation of the first police force – the “Peelers”, named after the Prime Minister, Robert Peel. the kind of repressive social controls that defined the Victorian era. Perhaps that is going to happen again, now that the PM has launched the fight-back.

However, David Cameron also said he intended to learn from, among other law enforcement agencies, Strathclyde Police in how to combat gang violence. It came as some surprise to learn that the West of Scotland, with its problems of drunkenness, sectarianism and knife crime, is apparently regarded as a policing success story. Gang violence has been reduced by 50% among gang members who sign up to the programme run by the Violence Reduction Unit. Since this involves a lot of understanding, counselling and even diversions like football and trips, this may not the kind of initiative that finds favour with the press. However, the fact that Cameron is taking this seriously is encouraging. He may not still be hugging hoodies, but at least he is still trying to understand what makes them tick.

Scotland of course was left unmarked by rioting, but no one – not even Alex Salmond – is daring to declare that we are immune to the disease, even though we have what the FM called “a different society”. Indeed, I'd have to say that the politicians responded rather well to the crisis, refusing to panic or indulge in verbal violence. Ed Miliband, even accepted Labour's share of the blame for the “me first” culture. A lot of people were talking good sense last week: the saintly Tariq Jahan, whose refusal to speak the language of retribution after the murder of his son Haroon, left the rest of us lost for words. The Malaysian student, Ashraf Rossli, left on the pavement with a broken jaw and robbed by rioters posing as samaritans, said he bore no ill-feelings towards his attackers. And of course, there was the Heroine of Hackney, grandmother Pauline Pearce, who confronted the looters, shouting “Get real, black people. Get Real”

And not everyone was exclusively blaming the rioters. “Certainly, the so-called feral youth seem oblivious to decency and morality.” argued one press commentator.”But so too are the venal rich and powerful – too many of our bankers, footballers, wealthy businessmen and politicians...The rioters have this defence: they are just following an example set by senior and respected figures in society”. And no ,that didn't come from Socialist Worker but from Peter Oborne in the Tory Daily Telegraph. I couldn't have put it better myself.

But last week's events left me with a deeply troubling thought: policing alone cannot stop this kind of rioting, and nor can politicians. London cannot keep 16,000 police on the streets for more than a few days. Plastic bullets and water cannon are of limited use when mobs disappear as fast as they emerge. The courts have ground to a halt and the prisons are already overflowing. Calling for longer harsher sentences is futile because so many of the offenders don't seem to care about being caught. They have nothing to lose. If as seems all too likely, the economy is going to fall into a double dip or a depression, could this be the shape of urban life to come?

Riots always happen under the Tories.

2011-08-11T10:50:00.001+01:00

'Nothing excuses violence/it's all about the cuts'. 'Parents are to blame/society is to blame' The riots are the legacy of the Labour years/ riots always happen under the Tories'. It's time we moved on from this sterile party political exchange. Of course violence is inexcusable and has to be tackled by a robust policing, but that doesn't mean you can detach the riots form social circumstances in which they arise - in particular the lack of jobs and opportunities available to young males in inner cities. We all share responsibility for social unrest by the dispossessed, but it would be ludicrous to ignore the role played by poor parentlng in breeding a generation of nihilistic young people who destroy their own neighbourhod. Urban unrest has no party affiliation, and rather than scoring points, the politicians need to demonstrate that they are capable of rising above their own narrow interests.

Parliament meets today in emergency session to debate the new British disease: urban self-destruction (and yes, I know that it is so far only English cities have been set alight, but I'm coming to that). MPs of all parties will be vying to show they are tough on yobbery if not the causes of yobbery. It will be a novel experience for the police, who are more used to finding themselves under attack from politicians for being too tough – as in the killing of Jean Charles de Menezes in 2005 and Ian Tomlinson in 2009 – or for being “institutionally racist”. Forget all that: now we want the gloves off.

I even heard Gavin Esler on BBC's Newsnight grilling a senior police spokesman over why they hadn't used plastic bullets at the weekend. If the police had used plastic bullets Newsnight would surely have been the first to condemn the injuries inflicted on rioters and the inevitable innocent bystanders. As with the calls for water cannon, which we will hear today from numerous MPs, the problem is that the police are not dealing with organised street fighters who stand their ground. They are dealing with flash mobs of looters and arsonists which are liable to pop up anywhere. That kind of riot control may be appropriate in Belfast, but not in Birmingham or Bristol.

And did I really hear Diane Abbott, the radical black MP for Hackney, saying there should be a curfew in her constituency? A curfew! Had that been suggested that after the urban riots in the 1980s, it would've been condemned by politicians like Abbott as an assault on black youth by a racist police force using the methods of a totalitarian state. “Red” Ken Livingtsone, the former London mayor, was out-bidding the Tories last week in calling for more police. So, this is a very changed political climate and a very changed Westminster.

David Cameron will insist that he never really wanted to 'hug a hoodie'. The prime minister isn't used to using the language of “loranordah', which helped give the old Tories the “nasty party” image, but he'll learn fast. We voters are fickle. We want criminals to be understood and young people given a chance – but not if it involves burning down shops in Clapham. Cameron has already indicated that he wants to see more prison places, which will bring him into direct confrontation with his Justice Secretary, Ken Clarke, who wants to empty the prisons of young people sent there for relatively minor offences like, er, hooliganism, shop-lifting and breaking windows.

Cameron is also going to have to placate the police, who have been complaining bitterly about cuts, not least in their generous pensions. There have been ugly suggestions that the police allowed the cities to burn out of pique at the government's assault on their privileges. I''m sure that's nonsense. Nevertheless, Margaret Thatcher made a point of upping police pay before the miners' strike in 1984 just to make sure...

The ghost of Tony Blair will be stalking Westminster today, but MPs aren't looking for ASBOs any more but broken heads. That's really what we're talking about. If those police officers who were seen running away from the rioters in Woolwich had stood their ground, there would have been blood. They were clearly outnumbered and would've had to use maximum force to disable the rioters – and that means breaking bones and skulls with their batons. Their reluctance to use force thus far is only partly down to `'political correctness' and is largely because of the likely repercussions of any fatalities. Now that the revolution really is televised, by CCTV and cameraphones, police know that they are under surveillance as much as the rioters and they wear identification. .

Of course, Labour will try to have it both ways by saying the rioting was “mindless and inexcusable” and then blaming it on government cuts, as Labour's deputy leader, Harriet Harman did in that eye-popping encounter with the Tory Education Secretary, Michael Gove on Tuesday's Newsnight. Gove erupted in righteous indignation at her suggestion that people were robbing J+D Sports because the education maintenance allowance is being scrapped. But Labour know that they can score easy political points here. Lack of jobs and opportunities is a obviously a factor. The rioters are the dispossessed of a society that is obsessed with material gain, bling, cribs whatever.. The hoodies see the government cuts while bankers enrich themselves, and even with their limited education can put together a spurious moral justification for theft, organised by Blackberry phones.

But not, it seems, in Scotland. Perhaps they haven't learned to use them here. The SNP leader, Alex Salmond, said that Scottish yobs have not been trashing their towns because “we have a different society”. I hope those words don't come back to haunt him. I'd like to think that the abolition of tuition fees was keeping Scottish youth on the striaght and narrow, but I suspect the same kind of nihilistic alienation is being incubated in Scottish housing estates, even though we have a more social democratic politics here. The Scottish yob doesn't tend to follow a lead given by the English, which I fear may explain the lack of copy cat violence in Glasgow or Aberdeen.

Of course, the unmentionable factor is that the Afro-caribbean community is much smaller in Scotland, and they tend to be the ones who have the most difficult relationship with the police. Remember that the trigger for the rampage was the shooting of the suspected black Tottenham gangster, Mark Duggan,last week. It was a protest against police delay in admitting that Duggan hadn't shot first that turned into the riot. It might take another factor, perhaps sectarianism, to spark similar violence among the white Scottish underclass.

So far as we know the Asian community is too busy running businesses to have the time to trash them. Now that three Asians have died in Birmingham trying to defend their stores, the police will be under even greater pressure to use whatever is necessary to protect lives and property. This is a watershed. Listen to parliament today, and you will hear a harsher, punitive almost Victorian approach to law and order. As John Major put it: they'll condemn a little more and understand a little less.

Financial crisis: too few consumers

2011-08-10T18:47:00.000+01:00

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?