Two Speed Europe?

We've all woken up this morning to the breathlessly conveyed news that the European political elites have staged an all nighter with the result that most of them have agreed to sign up to a new Treaty to deal with the crisis in the Eurozone. But not Britain.

Predictably, the initial coverage in our domestic media is very much focused on the 'Europsceptic v Europhile' axis. Some idiot Tory backbencher seemed to claim we had left the EU on the the Today programme. This is plainly not true, but we do now formally have the much heralded 'two speed Europe'' coalescing before our eyes. 

Or we do if this new Treaty actually materialises and gets anywhere close to being implemented. This seems rather more important - and rather more of an open question - than the initial UK coverage is allowing for.

To recap: several European nations are, in effect, broke or teetering on the edge of insolvency (this is sometimes dressed up as 'experiencing severe liquidity problems'). For some of them this is primarily  a result of decisions to support failing banks, for others it is perhaps more about failing to establish any kind of effective tax regime.  They mainly owe the money to French and German banks - including, Peston says, increasing quantities to the Bundesbank itself.  This money is denominated in Euros. Let's put it politely: there are very reasonable grounds for suspecting these debts will not be paid or even serviced by the payment of interest. This might yet break the Euro and cause a disorderly return to national currencies - an event that could plunge the world into depression.

So the new Treaty is about imposing a unified fiscal regime on all the signatures subject to qualified majority voting. In other words, a very, very significant slice of national economic policy will be subject to ultimate control by 'Brussels' (understood as a Franco-German hegemony), not national parliaments. Since everyone pays at least lip service to the idea that the way out of the problem is growth ( because debts are easier to pay off out of a growing pot) the question becomes what policies should be pursued to achieve growth - and Brussels will get the final say on what those policies should be. & they really won't include deficit spending on Keynesian stimulus lines:

" Eurozone states' budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of gross domestic product.
• Such a rule will also be introduced in eurozone member states' own national legal systems; they must report national debt issuance plans in advance.
• As soon as a eurozone member state is in breach of the 3% deficit ceiling, there will be automatic consequences, including possible sanctions, unless a qualified majority of eurozone states is opposed."

 In short, this is a recipe for a Treaty which cuts living standards and the social wage across Europe by over-riding democratic mechanisms. Now Cameron et al have no objection to that per se - how could they, given their domestic policy ? - their beef is with the idea that the City of London might end up being regulated by Brussels rather than (un)regulated by Whitehall or the Bank of England. & it is the City of London and other bourses which have done so much to create this web of unsupportable credit in the first place. So the likes of Richard Murphy find themselves 'strangely conflicted' between a passed up opportunity to control the banksters and sighing with relief at escaping diktat by bureaucrat.

But let's leave that aside for a moment. Let's ask another question - are the plans for this new Treaty actually plausible? Will the peoples of Europe accept them? Or will various European governments, under pressure from their electorates,  find themselves increasingly looking for 'workarounds' just as they did over Maastricht and Lisbon? The 'optics' of this proposed new Treaty are all wrong - its an elite deal stitched up without reference to anyone. It's going to be be terribly politically fragile even if it does manage to stagger through to an actual signing.

The real two speed Europe we should be talking about is not Britain v (most of) The Rest - its about how the politics and the economics of this crisis are working at such different paces from each other, and have to work at such different paces or have governments face the loss of democratic legitimacy. This new Treaty seems an attempt to subsume the political  dynamic to the economic one, defined purely as the economics of financial markets.

The gut feeling of this non economist is that it ain't going to work. 

Addendum

Mason observes:
...by enshrining in national and international law the need for balanced budgets and near-zero structural deficits, the eurozone has outlawed expansionary fiscal policy.

It has done what the US Republicans would like to do - and if you think about it, it has made what Gordon Brown did, and what Barack Obama (and indeed Wen Jia-bao) is doing illegal.

What's more no one yet even certain if it will convince the markets. 

Haircuts All Round?

A GUBU Day if ever there was one, I'd say : little Ireland threatens to crash the Euro simply by not rolling over immediately to the idea that they should all go back to potato farming and emigration. It's that pesky democracy thing getting in the way of sensible business decisions again. Cowan is surely done for, his reputation as well as career in tatters, surely now seen as little more than a pet Quisling of the IMF/ECB.

Fintan O'Toole is calling for a caretaker administrative coalition and a Italian 'Mani Pulite' ('Clean Hands') style re-founding of the State. Remarkably, he is calling for this to kick off with a national-popular show of strength based round the Trades Unions:

".... the people of Donegal South West have to refuse to vote for Fianna Fáil – at all. They can deliver a clear message that this Government has no mandate to conclude any deal.

.... hundreds of thousands of people have to get out on the streets for the Irish Congress of Trade Unions demonstration on Saturday. Forget what you think about the unions – this is the one chance citizens have to demand a choice. Whether you agree with Ictu’s alternative plan or not, the idea that there should be a coherent alternative is crucial to the survival of our democracy. Without it, an election will be an empty ritual.

.... I intend to put up on my website (fintanotoole.ie) by the end of the week a list of 10 basic demands for changing our political culture and system.

If people agree, they will be able to put their names to the demands, which include a €100,000 salary cap for public officials, a change in the electoral system, a shrinking and overhaul of the Dáil, and measures to kill the toxic three Cs: clientelism, cronyism and corruption.

What matters most is that we cease to be an invisible people. That our government is irrelevant is their fault.

That the people are irrelevant is ours.

Sovereignty belongs, not to the State, or the government, but to the people. We have outsourced it for too long to an incompetent, amoral and self-serving elite. Now we face the starkest of choices: use it or lose it." (my emphasis-CMcM)

Now, see these stirring words in the light of the news from Moody's, the rating agency; The FT is reporting that they now think that some European infrastructure and utilities companies are more creditworthy than their parent States because they are less likely to default.

The 'rescue package' being forced on Ireland is one that brings the country to the very brink of default - and much of the money is actually simply passing through the hands of the Irish State and the (predominantly state-owned) Irish banks to flow back to their foreign creditors in London and Frankfurt. Much of the discussion in the British left blogosphere - even at sensible places like Duncan's and Chris'- seems to ignore this dimension. A lot of that £7bn Osborne is coughing up 'for a neighbour in need' is actually going to end up in RBS and Lloyds.

&, yes, just in case you think I'm being simple minded here, I do understand money circulates: but it circulates under very precisely defined relationships of power- and the money is being provided to tighten those relationships in a way that erodes the democratic freedoms of the Irish people and maintain, at all costs, the capital of the European and City bond markets that made so many dodgy investments across the Irish Sea.

Whatever happens - poverty, mass emigration, the destruction of a State - these City Institutions must never, ever have a 'haircut' as their slang has it. (A haircut being the prospect of them losing money.) Whole economies must crash and burn before that happens.

I say: it's time for the Irish people - the people of all Europe - to pick up the scissors and advance towards the barbers chair. But not to ask if the bankers need 'anything for the weekend': democracy or bankocracy is the question.

`Addendum:& the inevitable xtranormal comment

Every Picture Tells A Story

The green postbox tells you the picture has been taken in Ireland. We have the Guardian's word for it that the bloke on the left is the deputy director of the European department of the IMF. All in all, I think that bloke begging is going to have to get a bigger cup....

Let's be clear about what's going on today. A small country has attempted to take on the debts of a disproportionately sized banking sector and has been unable to support those debts. It is teetering on the edge of sovereign insolvency. That can't be allowed to happen as, by absorbing the debts of the Irish banks, the Republic finds itself owing huge amounts of money to the British and German banks, and to banks across Europe. Once all the arcane jargon of high finance is stripped away the basic reality is that Ireland cannot possibly pay this money back. It's gone. Kaput.

So the High Priests of European and now World finance are arriving to attempt to avert the crisis whereby rich institutions in rich countries might have to suffer losses. Expectations on this front are lowering: even the editorial in the FT is saying that the centre cannot hold and that its time for those institutions to bear a slice of the pain. But so will Ireland, so will Ireland....

Addendum, from the Irish Times:

SAD NEWS just in from Our Lady of the Eurozone Hospital: After a sudden worsening in her condition, the Irish Patient, formerly known as the Irish Republic, has been moved into intensive care and put on artificial ventilation. While a hospital spokesman, Jean-Claude Trichet, tried to sound upbeat, there is no prospect that the Patient will recover.

It will be remembered that, after a lengthy period of poverty following her acrimonious divorce from her English partner, in the 1990s Ireland succeeded in turning her life around, educating herself, and holding down a steady job. Although her increasingly riotous lifestyle over the last decade had raised some concerns, the Irish Patient’s fate was sealed by a botched emergency intervention on September 29th, 2008 followed by repeated misdiagnoses of the ensuing complications.

With the Irish Patient now clinically dead, her grieving European relatives face the melancholy task of deciding when to remove her from life support, and how to deal with the extraordinary debts she ran up in the last months of her life . . .

QE2: Pass the Parcel Redux

Blimey: Mason has explained it in a way even I can understand. Hard to believe he was originally a musical academic.

My precis: basically the Western financial system remains sitting on a time bomb of unacknowledged (i.e. unwritten off) debt. Quantitative Easing is a potential path - actually, the only potential path - out of this. But with that comes the real possibility of other bad stuff. Not inflation - suddenly, that's not the Big Bad Wolf any more (well, not for the moment) - but stagflation and, as seems to be already starting, a currency war. Oh, and no one can explain why QE might work.

But QE isn't enough on its own:

"There needs to be a defibrillating moment where ... large amounts of bad debt are written off in the private sector - above all in the housing market. Then consumers suddenly get access to credit again and then the big cash mountains of the private sector get thrown into the economy in the form of investment.

But for that to happen somebody has to take losses who has not already taken them. That means the banks: they have to take the big hit on mortgages and commercial property they have refused to take; that in turn hits the government, which in the US and UK has "guaranteed the losses" on hundreds of billions of bad debt for the cost of a few tens of billions.....

On top of that, once the final cathartic moment is over, the central banks then have to get out of money printing in an orderly way, allowing quite a bit of inflation to avoid choking off the recovery. One way to do this would be to temporarily abandon inflation targeting - to say: we will keep printing money whatever happens to inflation, until growth reaches a set target and stays there. Bernanke has toyed with this, and it will be interesting to see if he keeps the idea alive.....

QE2 will buy time. But in that time the governments have to act at micro-level to restructure the finance system so that it starts working again."

I think he's saying its time for another round of pass the parcel: when the music stops, someone is going to have huge losses in their hands. Mason says it has to be the bankers if this QE thing is to work - but this government seems to want it to be everybody else.

On Anniversaries

The last fortnight or so has been a time of anniversaries: the outbreak of WW2, 9/11, the collapse of Lehman Brothers. All of them lovingly covered in depth in the Press and on TV. After all, it's easy copy. You don't have to do the spadework of a real news story, just gently remind everyone of what happened in Event X, list the plans to commemorate it and get a few talking heads to intone on Event X's significance. Happily for our media friends you can usually rely on a new someone or other each year to come forward with a different perspective. So this year we've had 'WW2 -The Polish Version' in the mainstream media. (I'm as one with B& T on that one by the way).

Except the Credit Crunch/Financial Crash of course. We haven't even agreed what to call that, much less decided what it means. Peter Clarke expands on this point in the Guardian today with the help of a variety of the allegedly Great and Good: Skidelsky, Keynes biographer, says Keynes is back; Peston admits he thought things would change faster; David Hare wants to know why no politician has thought all this through as yet; Fay Weldon gives us a plug for her new book. And so on. Meanwhile Wiliem Buiter in the FT says, almost in the style of Manuel from Fawlty Towers, that he knows noooothing, albeit in a very erudite way. Krugman in the NYT says the whole economics profession got blindsided - but other economists seem to believe that their profession didn't pay enough attention to their own nostrums. The Crash is certainly a Great Event, worthy of an anniversary - but no one has a convinicing narrative, there is not yet an established Myth to reinforce or to attempt to knock down.

It is, in short, as yet a Phoney War that no one quite knows how to characterise at the moment - because it isn't finished and may yet have barely begun. Who knows if we're about to bounce, 'V' style, into a sunny upland future of a new Long Wave upswing or be seduced by a false dawn ? What will come to be seen as the defining moments of the financial crisis have yet to occur. Sure, unemployment has risen. Sure, some familiar firms have got belly up. Nonetheless, we're told that on all sides that the formal conditions that indicate a technical end to Depression are looming on the horizon. Perhaps. The real story - the anniversary signifier, the thing our children will remember it for, the Dunkirk, Barbarossa, Kursk and D-Day of this economic crisis as it were - lies ahead.

I can't help but believe that this story, when it emerges, will focus on the three re-negotiations of power:

• The inevitable one that will occur in my lifetime between the 'West' as we have traditionally understood it and the BRIC countries, especially China. People who make things aren't going to put up with not getting anything but a fraction of the fruits of their labour for ever and a day;
• The renegotiation of power we need and which I hope for, but which may never materialise - the one between the merchants of relentless growth, and the planet. This can only be done through re-distribution - because, as Chris points out, just stopping economic development per se kills babies. But more babies - and toddlers, and other children, and adults - will die unless we act to stop the potential for runaway climate change. So redistribution is key;
• The renegotiation between state and civil society and the organised power of Capital. This is the most complex of all in some ways - and perhaps even less likely to happen than a coherent response to climate change. But we need such a renegotiation if all this is not to happen again.

Happy anniversary.

Of Fool's Gold, Belatedly

I've only just finished the book: and it is what everyone says it is, a sparkling good read. It is beautifully written with a clarity which most financial commentators can only aspire to. At a personal level I found her authorial 'voice' deeply humane. But it is told as a morality tale of small group psychology: the unstated implication throughout is that if only everyone was as sensible as the JP Morgan gang she foregrounds then things wouldn't have gone so wrong. History only make an appearance in the book in the form of hallowed company traditions; power structures are only 'the regulators'. Despite her clear understanding of the way in which the selling and reselling of increasingly complex derivatives let to a chain of unquantifiable risk linking the big institutions and national economies together she doesn't really present capitalist finance as a system. The best short assessment I've come across is a review by a commentator called Brigg57 on the Red Pepper discussion boards of all places.

I suspect the book is good enough to become the default 'popular' (i.e. used by the non specialist media) account of the origins of the credit crunch, a sort of Galbraith's Great Crash of 1929 in miniature. But it's not a critical account in any structural sense whereas Galbraith's book drips with contempt for the main players of 1929 and their methods. Which might be why Donald McKenzie in the LRB found so much in the Tett book to agree with.

So we still await an influential view on the current crisis which might politically resonate with the the deep if often inchoate unease at what the financial sector has actually done to our economy, society and state finances.

Austerity

Will Hutton puts it as graphically as anyone:

"... 5% of Britain's GDP has disappeared forever. ...This means that the path to sustainable public finances is going to be astonishingly painful. We can live with national debt doubling, but it cannot double again... The problem is that so much economic capacity has permanently disappeared, along with those parts of the economy that used to deliver rich tax revenues; the post-recession economy will only reduce the deficit by a quarter. The rest has got to be found by tax increases or reductions in planned spending....

Britain is going to feel very different in the years ahead. .... the pound has suffered a devaluation since 2007 that is bigger than those in 1931, 1949 or 1967. The British economy, in dollar and euro terms, is now emphatically smaller than those of France or Germany, and our new peers are Italy and Spain. ..... Like the empires of Venice, Spain, the Netherlands and Austria before us, Britain no longer has an economy large enough to finance our ambitions and overseas commitments.

The next government, of whatever hue, will surely raise the basic rate of income tax; 22 pence is certain, 25 pence likely. Public sector pay and pension benefits will be frozen or cut. The state pension will not be indexed to earnings growth. The national ID card scheme is dead. We will need a network of public infrastructure banks to finance capital investment, otherwise it will be goodbye to CrossRail and a modernised rail system and any hopes of improving our housing stock. But all this will still be insufficient.

There is no way that Britain's defence, overseas aid and foreign commitments can survive the next decade without swingeing cuts. Trident, the Eurofighter and the planned aircraft carriers must go. A review will cut the defence budget by a third, the aid budget by a similar proportion. Embassies will be shared or sold. Our permanent seat on the UN Security Council will become indefensible. The special relationship will be a joke; Britain will not have the capacity to invade anybody. Suddenly, the European Union will seem a more attractive way of retaining influence.

An urgent debate will begin about how to grow, because unemployment is going to rise by at least another one and half million by 2012 and fall only very slowly thereafter. The Faustian deal New Labour struck with the City cannot be repeated."

Duncan is patiently explaining to the Labour loyalists the reality of this. I'm not sure this Labour Party will be able to take that much reality - look, even the very clever Hopi resorts immediately to attack dog mode. I think the next election will be fought on the basis of lies, more or less consciously. Neither the Tories nor New Labour will quite be able to admit to this sort of prospect. Who would vote for either of them if they did?

The trick for the much derided and usually invisible Left though is rather different. It's time to move from almost ritualised denunciations of bankers , or even denunciations of capitalism in general, and find a way that a meaningful austerity programme can be re-packaged as sustainability. Sadly, I'm not holding my breathe.

"Who's this 'we', Paleface...."

"I used to believe this state capture [by the finance sector] took the form of cognitive capture, rather than financial capture. I still believe this to be the case for many, perhaps even most of the policy makers and officials involved, but it is becoming increasingly hard to deny the possibility that the extraordinary reluctance of our governments to force the unsecured creditors (and any remaining non-government shareholders) of the zombie banks to absorb the losses made by these banks, may be due to rather more primal forms of state capture."

Willem Buiter - Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions - enters the 'relative autonomy' of the state debate. It's contracting, according to him it seems.

We're still playing pass the parcel with the unimaginable levels of debt, and the governments of the world are primed to pass them onto - well, not to those who created them, but the rest of us:

"For political expediency reasons, cuts in public spending are likely to fall first on maintenance, public sector capital formation and other forms of productive public expenditure, including spending on education, health and research. Welfare spending in cash or in kind is likely to be the last to be cut"

You don't have to expert in socialist theories of the state to understand this point. Try this analogy: every time a economist on TV uses the word 'us' or 'we' remember the old Lone Ranger joke.

He and his faithful Native American companion Tonto find themselves surround by a Sioux war band, and the masked man asks, "What are we going to do now Tonto?""Who's this 'we', Paleface...." comes the response.

So it is with the banking bailouts.
.

How Low Can You Go?

Via here, via here but really from here. So there we have it: only 1929 has been worse in percentage terms and, if John Ross is right, that record might not last either...

But Dave Osler very reasonably asks: and the alternative is? The answers aren't pouring in at this point, but you never know.

Public Sector: the Battle to Come

OK: so everyone is discussing the Audit Commission's warning of massive public sector cuts to come and Matthew Taylor's call for early contingency planning by senior managers. Stumbling says there's no chance of them not being divisive, because the public sector lacks a coherent incentive structure; FlipChart tends to agree that it's going to be bloody, if only because intelligent public sector reform is just so difficult.

JKA, in a post I'd advise all non economists like me to read, makes crystal clear the sheer scale of problem we face sustaining the banks. Weighted for risk, our national exposure via effective ownership of the three semi-nationalised banks assets roughly equates to a full year's GDP. The level of risk these banks face seems terrifying, even now. We're betting the national mortgage on being able to sustain these institutions so there surely won't be much left over to pay for emptying out bins, healing the sick or buying new school books...

But Paul Mason is looking at things from a different angle in the light of today's announcement of quantitative easing aka printing money. He acknowledges the real possibility of the global economy collapsing into competing trade blocks and, by implication, Depression. But he also does something which few other commentators seem willing to do at the moment: he asks what if the measures being currently taken actually work?

"Well we'll be in a highly state-ised economy, with government holding everything from stakes in car companies, train operating companies, builders; a massively expanded public sector and hopefully a better developed green tech sector; and a lot more public and social housing." (my emphasis). So there might, just possibly, be more to play for than the Audit Commission can currently discern.

This view is of a piece with Comrade Mason's long term opinion that we're in a Minsky Moment, when capitalism has to reform itself to survive. He even quotes Minksy on how this might work at one point:

"As socialisation of the towering heights is fully compatible with a large, growing and prosperous private sector, this high-consumption synthesis might well be conducive to greater freedom for entrepreneurial daring than is our present structure". (Minsky, HP John Maynard Keynes, New York 2008, p164-5)"

Now all this sounds very, very like an updated version of the old Alternative Economic Strategy (AES), minus the import controls and with the additional of an international dimension and a green perspective.

For younger readers I should explain that the AES was the Horror From Which Mrs. Thatcher Saved Us - the road which wasn't taken out of the collapsing Keynesian corporatism of the 1970s. The road which I as a young man thought we should have taken. Left social democracy, possibly as a bridge to something more.

I so want Mason to be right. But there's a missing ingredient: popular engagement. We used to talk about this in terms of planning agreements and workplace democracy. I think Stumbling's worrying away at different version of the same issue when he constantly returns to the question of ownership and co-operatives. I think his comments about incentives in the public sector need to be understood in this light. You can't fundamentally restructure an economy and society solely from the 'top-down' - you need a critical mass of people to feel a sense of ownership in the change. Finding ways of unlocking that potential is the key to a coherent Left response to this crisis.

Even in Mason's best case scenario, the country is going to have to invest more and consume less. Imports, especially perhaps from the Far East, will be more expensive. The word 'austerity' hovers uncomfortably in the background when I think about this. People won't put up with this without a quid pro quo, some sense we're all in this together. Which is one reason why, however difficult it might be, that we do need a show trial or two: just to demonstrate things really have changed. Fred Goodwin's pension and a cap on bankers salaries suggest themselves as possible candidates for such a demonstration effect.....cuts in front line services do not.

The Economic Crisis: Getting A Sense of Scale

The economic commentators are always full of doom and gloom. The very strength of the adjectives they use make it difficult for non-economists to get a real sense of the sheer scale of current crisis. Because, without a doubt, part of the commentariat's shock at what is happening is simply the breaking of a spell: the illusion that 'boom and bust' was over, and the 'Great Moderation' had tamed the business cycle, had been very widespread. So some of this rhetoric may be simply a reaction to the previously prevailing orthodoxy, not a reliable guide to the severity of the problem.

Richard Parker in the NYRB, however, gives be a comparison I can understand:

"By mid-February, the Federal Reserve's once-gargantuan $29 billion rescue of Bear Stearns had been dwarfed not just by the government's hotly debated $700 billion "bailout bill" last fall, or even President Obama's nearly $800 billion stimulus package, but far more stunningly by the $7.6 trillion the Fed and Treasury had by the beginning of 2009 already pledged to contain the ever-widening collapse of the economy, and the additional sum of up to $2 trillion that the new administration said it would raise from public and private sources to rescue banks. Governments from London to Beijing have meanwhile rushed to provide vast sums to their own capital markets. These figures are mind-numbing to voters—and to sophisticated investors and economists as well, and for good reason: fifty years ago the United States spent what in today's dollars would amount to only $115 billion on the Marshall Plan to reconstruct all of Western Europe; the 1980s savings and loans bailout—at the time the largest financial rescue operation since the Great Depression—cost taxpayers a mere $130 billion." (my emphases)

The other issue is how long is this likely to go on for. Will this recession be 'V' shaped (painful decline, but followed by a very swift recovery)? Will it be 'U' shaped ( painful decline, followed by a period of flatlining before the recovery) ? Or will it be 'L' shaped, like in Japan ( drop off cliff and stay at the bottom of the economic canyon for ages...) ? John Ross points out 27th Febrauary was the 352th day since the Dow Jones hit it's peak, and that overall stock prices have so far declined by 50%. He goes on:

"The only fundamental difference between the current decline and that of 1929, so far, is the duration of the fall. After 1929 it took the Dow Jones 713 trading days to reach its bottom – the trough being on 8 July 1932 by which time the Dow it had lost 89.2% of its value. It remains to be seen for how long the current decline will continue. However although the duration of the drop is at least as yet not as great as after 1929 is as rapid."

OK: so we don't know what shape this recession will be because we're still falling off the cliff, despite throwing money at the problem on a scale which dwarfs the post-war recovery package for an entire continent.

Nationalise, Rationalise, Sanitise, Privatise ?

JKA says the Swedish strategy is working for RBS:
"So... toxic assets cleansed, cyclicals insured, all this and an 84% government shareholding. Nationalise, Rationalise, Sanitise, Privatise."

This is a useful corrective to 'chicken little' type press coverage responses which simple go 'Oh-ah - the Sky is falling in' at the scale of the losses. But I'm not convinced, not yet.

Saving RBS isn't at all the same as restoring the status quo ante. The banks may be re-floatable - although we have to see how far government support can possibly stretch in the final analysis - but that doesn't mean that it is sensible to patch them up and set them off doing what they used to do, but 'more prudently' this time.

A 'Keynesianism of the bankers' isn't at all the same as a 'Keynesianism of the people'. It's quite possible to imagine a finance sector flourishing once again - on the basis of not loaning (as much) money to small firms or wannabe home-owners as once they did. In fact, that's the 'economically rational' thing to do. Politics in the coming period is going to be about challenging that 'rationality'. I don't just mean left wing politics - I also mean the politics of people like Rob, who wants to rebuild his version of Britain. It ain't possible on the basis of the status quo ante. Harder decisions have to be taken about long term investment, and about tax rates.

The banks may, in four or five years, all be re-privatised: there is no current political imperative to do otherwise - although, if the 'Icelandic moment' spreads from the periphery to the centre, that might change. Let's not give up hope completely, even if there is no sign, as yet, of a 're-birth of the left'.

But even if we're only concerned about the future of our particular country - a national-popular moment, as Gramsci would have it - we can''t afford to let the banks let loose to simply do the same thing all over again. Tougher regulation, at minimium, surely has to be part of the deal.

Bad Banks: Bad for Whom ?

Everywhere there seems to be talk of setting up one or more bad bank. Will Hutton is a long time advocate and last week Willem Buiter devoted his FT column to explaining how to do it. As I understand it the basic idea is to split the assets of the existing banks into 'good' and 'bad' tranches, and hive off the toxic debts into a separate organisation which can then be either allowed to go belly up or, according to taste, taken into public ownership and nursed back to health in an explicitly 'Swedish' style. The resulting 'good' banks will then, it is claimed, be better able to start lending again - or, if you accept that they are already lending, to fill the gap left by all those exploding Icelandic and Irish banks which no longer operate on any scale in the UK. That is the purpose of government's re-capitalising them.

All this sounds very technical to the non economist. But Willem Buiter gives the clue as to why it is not:

"The senior debt of many of the institutions that are likely to turn out to be bad banks is often held by institutional investors like pension funds and insurance companies. If and when the old bad banks default on that debt, the holders of the debt obviously get hurt. While that is regrettable, it is surely better that the burden of the losses incurred as a result of past bad lending and investment decisions fall on those who made these decisions rather than on the tax payer."

So, it seems, the pension funds take the hit. But this is not politically plausible - or at least it wouldn't be if enough people understood the politics of this proposal, which I doubt they do. It's a kind of three card trick: the toxic debts of the banks and financial sector get off set against our futures. It's doesn't seem immensely different from the proposal to take a levy on pensions which has recently brought Ireland to boiling point.

Government intervention should be designed to protect people's mortgages and pensions as well as stimulating the economy. It shouldn't be designed to restore the status quo ante for the financial markets. Or at least that's what I thought Labour governments were suppose to be about...but perhaps that's dreadfully old-fashioned of me.

Robin Blackburn has some imaginative ideas for a 'bail out from below' in which the pension funds play a key role. But this can't work if they're stuck with the toxic stock of 'zombie' banks. It's high time these technical solutions to the crisis were discussed more politically.

Well, sort of

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Via Sunny at Liberal Conspiracy.

Beguiling video...and yet not quite enough to convince me. Why did this system develop in the first place? I still hold to the view I posted here:

"Around 1970-75 the rate of return on industrial capital began to decline in the USA and across the West - this resulted, first, in a renewed emphasis on cutting back the share of national income that went to wages and salaries (cf here) and, second, the development of a huge and sophisticated system of credit driven finance capital. It is this unprecedented credit system which has created globalisation, not any allegedly 'game changing' technologies such as computers. It allowed big capital to lend money to vast numbers of people whose static or declining real wages would otherwise have prevented them from acquiring assets such as housing."

Reykjavík on the Liffey ?

100,000 marched in Dublin against a cut in the social wage - a pension levy in this case. Roughly speaking that's equivalent to getting something like 1.25 million Brits out on the street. The TU's are condemning the governing elite and the bankers as 'economic traitors' to the nation. This sounds very like Iceland.

I couldn't help picking up via a discussion at the Cedar Lounge Revolution that there is one little remarked on difference between Iceland and Ireland: Ireland has an army. & its generals are determined to do their duty if there are widespread strikes. But the solders 'staff association' - the wonderfully named Permanent Defence Forces Other Ranks Representative Association (Pdforra) - were on the demo. So were reps from both the Garda associations.

If I were Brian Cowen I'd be thinking very carefully about how best to casually drop this point into discussions with the ECB and the IMF - it might help him get better terms for a country hovering a little too close to sovereign default for comfort.

Stray Thoughts on the Political Sociology of Ageing

When I was 20 – in the late seventies - people who were my age now (50ish) had lived through a period of remarkable change. They had come to adulthood at the end of WW2 or under the Attlee government, seen the setting up of the NHS and birth of the Beveridge State – but also lived through an undeniable fading away of Britain’s Great Power status. The politics of national decline was a constant theme in current affairs commentary and learned academic articles. It gave a prism through which to see all other debates, be they about membership of what was then called the ‘Common Market’, the correctness or otherwise of Britain’s nuclear deterrent or the unstable industrial relations of the times. For most 20 year olds it was unbelievably dreary, hence...

Those once 50 yr olds are 80ish now, if they’re still around. & you don’t often hear the issue of ‘national decline’ being bandied about as an organising political theme. Mrs.Thatcher changed that. She smashed the Unions and created the conditions for what we used to call a ‘regressive modernisation’: a break from the past, an orientation to the new ‘shape’ of the global economy based on a fully marketised society. What this meant in practice for the UK economy was a strong shift away from mass scale manufacturing and towards high finance, business services and armaments. New Labour accepted this basic re-shaping of economic and political life, just as the Tories of the 1950s had, in very large part, accepted the Attlee/Beveridge/Keynesian political economy they found themselves managing. So the 50 year olds of today have accepted the ‘normality’ of this marketised society. (Well, apart from a few lefty oddballs like me....).

But what of today’s 20 year olds ? If the current credit crunch actually represents a ‘tipping point’ in the viability of the Thatcherite settlement then might their generation, as it ages, gradually rediscover the language of ‘national decline’ ? That debate might be pushed down either right or left channels obviously. So this is both my best hope for a re-development of an active left and my worst nightmare.