UK economy: Why Brown gives billions to bankers

It’s official – Britain is in recession. The statisticians in the government have confirmed the UK economy shrank 1.6% in the last three months of 2008. Following a decline of 0.6% in the last quarter of last year.

Not that it needed number crunchers to tell us this. Unemployment jumped to a shade below two million by last November, and a stroll down high streets up and down the country this month reveals 1 in 10 shops closed or closing,

The pace of output collapse and tempo of job losses is up there with the last UK recession in 1990-91, which lasted 15 months, while unemployment kept rising well into 1993.

Of course it could get worse than that, perhaps as bad as the Thatcher slump of the early 1980s. The causes have been pretty much well-rehearsed. The deregulation of the financial markets in the 1990s, combined with the invention and adoption of many new highly risky financial products by the banking sector led to an explosion of debt and speculation which came crashing down from 2007 and neared a system meltdown in September 2008.

The UK benefited greatly from the boom in financial services, massively boosting bank profits and government coffers. London became the world’s leading financial centre early in this decade. The small, niche manufacturing sector shrank and stabilised but increasingly palled compared to the hypertrophying of the financial sector.

Now the exposure of this sector to the global meltdown has hit the UK harder than most; the banks’ bad debts forced first Northern Rock to be nationalised, then effective part-nationalisation of RBS.

But all this was too little and too late to prevent a major credit contraction from impacting the “real economy” from two directions at once. First many businesses found credit dearer and harder to get as banks tried to rebuild their capital; this has forced many out of business. On the other side, consumers (who had maxed out their credit cards and spent the rising equity in their homes to keep domestic demand booming) suddenly stopped spending; credit for them too was more expensive and harder to obtain. The house price crash from 2007 closed this cash cow too and then fear or reality of unemployment added to the squeeze of incomes and demand.

At the same time exports of goods and services have faltered as the credit crunch has gone global in its effects and so offers no respite to the decline in the home market.

The UK suffers from a triple whammy; overexposure to the financial maelstrom, a bigger than average house price boom that is in full reverse, and finally a manufacturing sector that is too small and specialised to act as any kind of compensating factor.

Brown’s strategy
Brown’s reputation as the Iron Chancellor who got rid of the bust bit of “boom and bust” is in tatters, but he now has shed one superhero garb for the mantle of Man of Action; Brown “led the world” in the bank recapitalisation plan, while Bush and Paulson dithered. Brown is throwing mega billions at the problem while the Tories denounce the government for “fiscal recklessness”.

Leave aside the little matter of Brown and Blair’s New Labour being co-architects of the global financial system with the US administration that has collapsed; the fact is the measures he has adopted have failed to stop or significantly mitigate the recession in the UK.

This is because the billions he has found (adding to government debt which will be paid for by hiking our taxes and cutting public spending should he ever be re-elected) and handed over to the banks has failed to unfreeze lending.

And the reason is simple – you don’t need an economics degree to recognise that banks have been told to get their bank balances in order and become commercially competitive again, which means keeping the “good” money the government gives them to set against the bad money (toxic debts) on their books. If they were to lend it on in the middle of a recession to businesses that may fail, or personal customers who may default, it will make the banks’ position worse.

And no amount of Brown bad-mouthing bank chiefs or Darling and Eddie George exhorting banks to “act responsibly” is going to change this fact.

This week Brown tried another solution: give the banks more money in the form of an insurance scheme that will indemnify the banks against losses on any loan they do make.

But the banks were still not convinced and neither were the banks’ investors who started mass sell-off of bank shares on 16 January. The reason they were dumping shares across the board – even of banks like Barclays which announced profits this week – is because they see the full nationalisation of these banks as inevitable, which, if and when it happens, will means their shares would be pretty worthless. So they reckon, better to get what you can now.

It has become as clear as the nose of your face that the only way t stop banks acting like commercial banks is to take away the market in money and credit. This means full nationalisation of the key banks, HBOS/Lloyds and RBS at least. Even the Labour-loyal chair of the Commons treasury committee John McFall has called for this, as has John Paulson the head of one of the UK's main hedge funds.

But Brown and Darling are being dragged towards this conclusion screaming and writhing- why?

Brown’s dilemma
Brown, in common with the neo-liberal elite globally who are responsible for this catastrophe, have had to abandon key elements of their neo-liberal dogma in practice in order to save capitalism. Free markets have failed and the state has had to rescue them, prop them up. But ideology lags behind this pragmatic action; they are reluctant to throw aside the whole edifice which is their life’s work, their religion.

They cannot embrace a semi-coherent alternative to neo-liberalism and run with it fully- Keynesianism. Sure, Labour picks bits from the menu like state money, expanding debt, a little tax cut; they even flirt with the idea of state regulation of the financial system. But Keynes would have see straightaway the need put the banks in state hands to resort the supply of credit. Brown is however fixated with private ownership.

There are only two steps within the framework of capitalism that Brown can take to break this stalemate. Either nationalisation of the banks, or setting up a state-owned “toxic bank” into which the other banks pour their bad debts, which at present cannot be valued because there is no market for them.

Then, relieved of their debts and recapitalised by government money they may start to lend long and on generous terms.

Will this happen? It might because of what is happening in the USA under Obama’s administration. Brown boasted that he left Bush on the starting  bloc last year with his plan to recapitalise the banks and since then the the USA has played catch-up.

But now the baton has been passed onto Obama, Brown is about to be swiftly passed on the back straight. It seems certain that Obama will announce soon a Toxic Bank, but more importantly he will announce a $4 trillion reconstruction package to create 3- 4 million jobs over the next couple of years.

Now that’s Keynesianism. Massive job creation (and job preservation), not encouraging banks to lend more, is the only emergency measure to fight deepening recession that counts. That and boosting benefits and wages.

Of course, who knows how much of this package will see the light of day, over what time frame; or how much will be siphoned off by local corrupt politicians, or go into paying fat bonuses to managers.

Obama is being compared to the depression-era president Franklin D Roosevelt who first won office in 1932. He only acted big on public works programmes after the working class started to take matters into their own hands with strikes, occupations and marches.

What the UK needs now is to get unemployment down, keep factories and offices open and those working to receive higher wages so they can spend more. So we need massive job conversion programme to retrain workers and retool factories to produce the things we need like green technologies, energy-efficient houses. We need to nationalise firms announcing redundancies or closures so that the workers and factories can be reconfigured for other uses.  Even paid up member of the pro-neo-liberals like Simon Jenkins can see the sense in throwing money at people under threat rather than bankers.

We need to double state benefits, hike the minimum wage, and we need to take the rich massively (including the energy companies) in order to pay for this.

Naturally, all this needs to take place within the framework of a state-owned and worker-run finance system so that investment can be planned and directed to the most socially useful ends.

Trade union inertia
Of course, for this to get off the drawing board, a mass movement from below –  angry, visible, militant and organised – needs to force our leaders to enact it.

Yet what do we get from the trade union tops? What strategy do they have for the recession? They moan about fat cats and bankers’ bonuses, but what do they do about stopping jobs losses? In the car plants that are closed for two months? In all the firms announcing redundancies?

All they can up with is to interpose their bodies between workers and bosses and ask for better redundancy terms, or even offer pay cuts in return for less job losses.

That will do a great deal to boost much needed demand in the economy won’t it?

Instead of trade union lefts organising conferences about what can of future Labour party we need, or what alternative reformist party would be good should Labour lose the next election, they should be rallying resistance here and now and forcing Brown and co to get their collective nose out of the bankers’ arse and act now.

Fri 23, January 2009 @ 15:49