Saturday, 22 November 2008

The Swedish Depression

I've long been of the view that the suddenly fashionable Swedish solution - the temporary public ownership/co-ownership of banks to allow them to be re-capitalised and sold back to the private sector - is, actually, not likely to be that temporary. Robert Peston reminds us that governments around the world have bailed out those banks to the tune of $500bn - about one sixth of the entire annual output of the world. That's not so easy to recoup in a declining market. Where are these private sector investors with another sixth of the world's output who would want to buy these recapitalised banks?

For banks to be attractive to private investors again they'd have to be profitable. Which is achievable, at least in principle: but only at the cost of being much, much more cautious in terms of who they lend too and at what rates. And therein lies the problem. New Labour - well, all mainstream politicians - are caught between a rock and a very hard place. Get their money back from the banks or get the economy working again. The point of Keynesian anti-cyclical reflationary measures is not boost government spending forever, but to stimulate a private sector up-turn. Which can't happen if the banks won't lend on reasonable terms.

Which allows the Newt a clever solution to that undergraduate essay so many people have blanched at about comparing and contrasting Marx and Keynes:

"...the most rational, and by far the cheapest, way to sort out the disastrous situation in the UK financial sector would be to proceed immediately to wholesale bank nationalisation. The immediate crisis, whereby the banks are refusing to lend even after the bail out packages, may make it the case that the only way out of the economic downturn is by wholesale bank nationalisation - a sort of Keynesian solution in the overall economy and a socialist solution in the catastrophically affected financial sector.
Indeed, t may be put more strongly. If the government retreats in face of the present policies by the banks, with their refusal to lend then it will not be possible to apply a Keynesian policy in the overall economy. Truly socialist policies, nationalisation, in the financial sector may well turn out to be the only way to apply Keynesian policies in the economy as a whole."

Well, yes, I can see that. Even mainstream politicians can see that. But there is a further twist for Britain in particular. Peston lays it on the line:

"On Monday, the chancellor will admit, by implication, that the government's industrial policy of the past decade has been something of a disaster.

Actually to call it an industrial policy is a bit misleading - but what I mean is the Treasury's celebration over many years of the UK's growing economic dependence on the City of London and financial services.

The City contributed around a third of our economic growth in the recent past and about 10% of total output....

The slump in the City has knocked around £40bn - yes £40bn! - from annual tax revenues.

And much of that tax revenue has probably gone forever, or at least for as long as the time horizon of most sensible forecasts (viz, up to five years). "

So I think this means that 'sensible people' - not bug-eyed lefty economic illiterates like me - are beginning to worry that:
(a) a Keynesian reflation package can't work without stronger state direction of bank lending practices ;
(b) But forcing the banks to lend on terms advantageous to the rest of the economy will, at minimum, delay their recovery of profitability and thus potential sale;and
(c) The banks aren't ever, at least in the foreseeable future, going to be as important to the British economy as they once were; so I ( if no one else) conclude
(d) We need to getting our people working in other sectors or face a future where the government can't afford to organise a meaningful Keynesian reflation in the first place.

I must go back to those books on the pre-1914 2nd International mouldering somewhere on my shelves. I have a distant memory of some people in that movement who argued that capitalism not merely had a inherent tendency to crisis, but contained within it the seeds of its own destruction and even that it would, inevitably, collapse almost without any intervention of the workers' movement. Laughable really - or at least I was taught to laugh at such lack of theoretical sophistication in my youth.

But the Swedes aren't famous for their jokes, are they?

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