Traditional Forms of State Regulation of Banking - Worth Another Try?

Enough of this wimpy stuff about bonuses. Bonuses aren't the point. How a given individual's remuneration package is divided between base salary and add-ons is a detail. The point is how large the overall payment is, and what the payment is made for. & payments to senior staff in state owned banks should be made for benefiting society -say by increasing lending to small and medium sized enterprises -   not the remaining private  shareholders of the bank.

Bonuses are a particular application of the whole performance related pay idea, which, as Tom points out, is looking  increasingly  untenable even to ex-heads of the CBI. There is also an argument about 'aligning incentives' of senior managers with shareholders to , er, prevent them stealing a firm's assets as they are otherwise thought likely to do. This is known as the 'agency problem' in corporate governance theory.  But its never been an argument I've understood: if you think someone may steal from you why give them a job which allows them to do so and then pay them what amounts to protection money?

So I think it may be time to return to a more traditional form of motivational incentives for senior bank executives.  Michael Hudson points out that,

"....banks now browbeat governments – not by having ready cash but by threatening to go bust and drag the economy down with them if they are not given control of public tax policy, spending and planning. .....

Relations between banks and government used to be the reverse. In 1307, France’s Philip IV (“The Fair”) set the tone by seizing the Knights Templars’ wealth, arresting them and putting many to death – not on financial charges, but on the accusation of devil-worshipping and satanic sexual practices."

Worth a try?Just a Modest Proposal.

The Only Reason To Read This Post are the Links

Mind, they're bloody good links:

• Michael Hudson talks bitingly of the attempted Europe wide coup which constitute  the current 26 country plans for dealing with the Eurozone crisis.

• OCED finally joins the rest of us in acknowledging trickle down theory is a busted flush.

That is all.  Off you go now.

Pass The Parcel: Euro Edition

Gillian Tett and Paul Mason have written the two best popular books so far about the banking crisis of 2008. Perhaps significantly, neither initially started life as an economist: Tett did her doctorate in social anthropology and Mason trained as a music teacher and musical academic. With all due respect to Steph, Pesto and the starry array of proper economists @ the FT, I think these two are the best economic journos in the business.

Anyway, here they are having one of those slightly artificial discussions the Guardian likes to publish on a Saturday. Inevitably, the subject matter is the crisis in the Eurozone. The future’s cloudy and they present somewhat different emphases on lots of stuff, not least the likelihood of a breakup of the Eurozone or otherwise. That’s understandable. But where they’re absolutely as one is in their very direct answers to a simple question: the debt isn’t ever, ever going to be paid back.  It’s just a question as to whether the currently rich get to see their wealth inflated away – perhaps by being forced to buy government bonds issued at below inflation rates of interest - or whether there is a ‘slate-wiping system on systemic debt’. What they don't say, but which is implicit in the whole situation, is no one  is ready to accept that it is their current wealth that gets vaporised.

So it’s still pass the parcel time: when the music stops someone is going to have huge losses on their hands. The only thing that’s different from 2008 is that the bankers have engineered a situation where they’re not alone in the party ring, nor even necessarily in the front rank.  The explosive debt is now also being gingerly handled by whole countries and various bewilderingly-lettered orgs (ECB, IMF, and so on) which are, in essence, no more than the public faces of various layers of multi-national Finance Capital.

Part of this pass the parcel game is inflicting the losses on the bottom end and middle of society. States are needed to do this, but not necessarily democratically led ones - hence the overthrow of Berlusconi and Papendreou, sad parodies of democratic leaders though they were.

Yet this too is a gamble. States that act too far outside a certain range of norms can quickly lose their legitimacy in the eyes of their populations, and this can happened that much quicker in the absence of a government led by anyone with a  popular political mandate.  Greece, in particular, looks like a political tinderbox to my untutored eye, but little of the Mediterranean periphery of the EU can  be counted as truly 'stable' or immune to the attractions of a ‘slate-wiping system on systemic debt’, which for a small and/or deeply indebted country is a process most easily kicked off by unilateral  default. Indeed there are conceivable circumstances where  this economic  'nuclear option' might be almost the only area of economic autonomy left to such countries as the crisis develops.


There are a few more rounds to play of pass the parcel in Europe, and especially in Italy I think. More schemes to try, further complex euphemisms to emerge from the alphabet soup of  High Financial shenanigans. I'm not promising it will all turn out OK in the end, but certainly a repressive stabilisation in favour of the currently wealthy is not beyond the realms of possibility  across Europe. Yet the more the powers-that-be press this explosive parcel of debt into the unwilling hands of those who are already losing, the more attractive a  very dangerous 'mutual ruin of the contending classes' option of unilateral default might come to seem across the Mediterranean basin.

Osborne, Disciple of '60s Childcare Guru

Young Gideon Osborne was on the Today programme this morning, doing a fair imitation of a politico with the wind in his sails. Others will deconstruct his appalling budget better than I, but I was struck by his sheer chutzpah on one matter: having announced yesterday that all non protected public service departments are facing a 25% cut when the figures are sorted out in the autumn, he backtracked a little and seemed to say that if larger 'savings' can be found in the benefits budget then cuts to services need not be quite so severe.

Now where have I heard this sort of thing before? Oh yes: Dr Spock, the childcare guru of choice for your average concerned parent in the 1960s and 1970s, so quite possibly someone Gideon's own mater and pater encouraged their nanny to read.

You may recall the good Doctor's advice on how to encourage a toddler to eat properly - give them a closed option in the form of a choice: "Are you going to eat your greens up before or after you eat the meat?"& it worked, as a whole generation of people who are now grandparents will testify.

Well, mainly it worked. There is also the case of my friend Andy. A couple of weeks into this new Spock inspired regime 3 yr old Andrew was eating his greens - but then he turned round and asked, "Dad - are you going to buy me an ice cream before you take me to the park or after you take me to the park?" .

Which does seem to me to be precisely the place for opposition to this lot to start from.

More on PIGS & the Election

Not Peppa this time, I'm talking about Portugal, Ireland, Spain and, most relevantly today, Greece. The countries in the Eurozone with the largest debt overhangs. The countries which - let's be frank - have the capacity to destroy the Euro. Or rather to reduce the Euro to the currency of the old 'core' countries of the original Common Market- quite possibly excluding Italy if things get really out of hand. There is a definite limit to how far the German, French and Dutch electorates will allow their governments to bail out these poorer countries. & if that point is reached, the Euro gets totally redefined as basically a Franco-German-Benelux currency alone.

We're not there yet. There's undoubtedly going to be a lot of yabba-yabba today on the technical complexities of what's going on in Greece and the bond markets from well informed economic commentators. For what it is worth, my inexpert guess is that the Germans and the IMF will, in all probability, stabilise the Greek situation and quieten the bond markets for a while. But they'll face further attacks on one or other of the PIGS and have to re-consider their response all over again. & , in all likelihood, again and again.

So what does this mean for us?

Certainly, in the very short term, siren voices from the right will hardly resist the temptation to coin some quip alone the lines of New Labour 'having made a PIGS ear of our economy', and push for a definite Tory victory to reassure the bond markets that vicious cuts really will come very quickly after the election. But everything I've been reading suggests the City is actually quite sanguine about the idea of a coalition, and may even welcome it, so I'm not sure that this line will gather much long term traction. Though it might make it more difficult for Gordo to play what I'm sure he reckons is his trump card of having stabilised the economy in a crisis in tomorrow's economic debate.

In a deeper sense, however, a crisis for the Euro would inevitably mean a crisis for the wider European 'project' and it is the LibDems who are most closely associated with that particular political meme. At minimum it would give a very definite warning that there are limits to how far one can pursue economic integration without a corresponding political union. So this would damage the image of the LibDems, but also the long term strategic aims of large swathes of Big Capital. So if the LibDems do have some participation in or influence over the next government their honeymoon in the polls might come to a very rapid end very shortly afterwards.

Massive cuts are coming. Even if a coalition government is spatchcocked together to apparently represent a majority of votes the legitimacy and popularity of that government is going to vanish like early morning mist under the heat of the sun.

PMQs: What the Apolitical Saw and What They Weren't Told

Cameron came out on all the old Tory favourite dog whistle issues: helicopters in Afghanistan, taxing pension funds, NI contributions as a 'jobs tax' but most of all the 'business leaders agree with us not you' line. He sounded up for it, quite slick and very confident. But it was definitely a 'Alpha male' type confidence, which can so easily rebound if the country should decide that, no, actually, it doesn't want a Rugby captain as PM.

Brown came back with too much detail - and a very slight semi-stutter which makes him sound as if he's hiding a fear - but basically said, " Ya boo sucks, we sorted out Northern Rock and you funked it". Which is true, but electorally uninspiring I suspect. He tried to turn Cameron's anti-Blair jibe - "He was the future once" - back on the Tory Leader, but I don't think it worked. But he did a fairly good job in turning Clegg's attempt to blame the big boys for failing to reform party funding into an anti-Ashcroft diatribe. As we went down the batting order he seemed better and better, swatting away questions from other MPs with his 'I'm a Scottish bank manager and can quote lots of figures' act. Is he John Major with a Presbyterian backbone?

But I think he is genuinely frightened by Cameron and this may yet be the key factor which wounds him in the eyes of the apolitical majority. It's one thing not wanting a Alpha Male to take risks with your livelihood, it's another to trust a man who sounds scared of the challenge.

Meanwhile Paul Mason cuts to the chase: the difference between the - equally unconvincing to him it would seem - Labour and Tory plans to deal with the deficit:

"...what the Conservative proposal does is alter the ratio between spending cuts and tax rises from about 66:33 to 80:20 by the end of the parliament."

Zombie Ideas

John Quiggin, a social democratically inclined Aussie academic economist, is writing a book including a chapter on the Efficient Market Hypothesis (and other 'zombie' idea): he's trying out rough drafts of bits of the chapter over at Crooked Timber. It's all worth a read, but I like this bit:

"Once the EMH is accepted, there is no need to worry about imbalances in savings and consumption. International capital movements can be seen as the aggregate of a large number of transactions between ‘consenting adults’, buying and selling financial assets in markets which, according to the EMH, have already taken into account all available information about future risks. If a national government has better information, the appropriate response is not to act on it, but to release the information to the markets.

On the traditional, income-based view, by contrast, asset-based arguments are misleading and dangerous. By the time sentiment shifts in asset markets, the opportunity for an orderly adjustment will already have been lost. Advocates of the traditional view pointed to episodes of contagious panic in financial markets..."

Well, quite.

A Question of Theory?

I'm working my way through this book; it's not a great choice for a non economist like me, and some of it is a bit above my head. Moreover, some professionals seem to confirm my inexpert feeling that it's a bit of a curate's egg as well. But given the title I thought I had to give it a go. Well, the title plus the fact he wrote a couple of smashing Spokesman pamphlets thirty years ago: Socialism and Parliamentary Democracy and Trotsky and Fatalistic Marxism. Both of those influenced me a lot as a teenager...but he's changed his view of the world it seems to me, though I'm cautious about judging the theoretical development of people whose theories I don't fully understand.

What I will take away from the book, however, is this rather striking set of phrases:

The...standard core of utility theory is non falsifiable. ...Boland (1981) asks if any conceivable evidence would refute the standard assumption of maximising behaviour. He shows that such an attempt at falsification could never work. Any claim that a person was is not maximising anything can always be countered by the response that the person is in fact maximising something else. Given that we can never in principle demonstrate that 'something else' is not being maximised, the theory is invulnerable to empirical attack...

The problem with the maximisation argument are doubly severe when it assumes utility is being maximised. There is no experimental or other phenomenon that cannot in principle be 'explained' within a utility maximising framework...No evidence can, in principle, falsify the assumption that behaviour results from individuals or households maximising their utility.....by encompassing all possible arrangements and interconnections, the important relationships and connections are lost in a sea of universal possibilities. Accordingly, the universality of a theory does not necessarily mean it is useful or informative...

A chapter of carefully phrased caveats and examples follow. But my interest remains with this broad opening claim. Does it imply that the model of 'rational' behaviour which underpins mainstream economics is actually unprovable? & isn't this the very complaint that Popper raised against Marxism all those years ago?

Why Are They So Happy?

The Labour blogosphere is jumping with joy (yes, Duncan, Paul and Hopi, I do mean you) that Stumbling and Mumbling has called the end of the recession, albeit very tentatively. Who knows if he’s right or wrong? Not me. You have to have a degree of expertise in econometrics to even enter the debate. JKA certainly disagrees, and, to be fair, Chris himself is much less definitive than his cheerleaders.

But let’s say Chris Dillow is right. What would it mean? Let me suggest two broad themes for thought.

1. First it wouldn’t mean it is necessarily the pain is all over. The recovery may just be the initial upswing of the ‘W’ shaped recession predicted by some – and in that event there’s no necessary reason why the second downswing shouldn’t be at least as bad as the first. (There is an entertaining range of alternatively shaped recessions to choose from as well- who says capitalism doesn’t give you consumer choice?). Secondly of course it most certainly wouldn’t mean that unemployment stops rising: unemployment is a ‘lagging indicator’ and so the number of jobless is likely to continue to go up for some time. & thirdly it wouldn’t say anything at all about the effects of any public spending cuts or tax rises which might be necessary to deal with the after effects of the government’s counter cyclical spending and rescue of the banks. So in human terms it wouldn’t mean ‘we’re through the worst of it. Let’s remind ourselves that, in general, it is human experience which has directly political consequences, not the econometric data per se. So there’s no guarantee that an economic improvement will result in any Labour polling improvement in a crude economic determinist manner.


2. It would raise quite big questions about how our economy now works. If the international financial system really did come within days of simply jamming up – and no one seems to question that is what almost happened last autumn – yet we can return to growth within months, might that not mean that the basic thesis of ‘the Great Moderation’ is correct in outline at least, and just needs to be ‘tweaked’ to account for the possibility of the odd Black Swan moment? Which might suggest a policy of steering a political path back to the economic status quo ante with some risk management/regulatory bells and whistles added. Or is it a sign that the key boffins in HM Treasury really had read their Minsky, and have had their Minsky moment of triumph ? Which would imply an aggressive future policy of bank regulation, even bank direction and long term and active ownership of key financial institutions. Or perhaps it might even mean we should all suddenly convert to Boffy’s unorthodox Trotskyite view that this a sign of the amazing strength of the underlying Long Wave upswing, based on new technologies and new sets of productive relations, and that the time is now ripe for a massive expansion of workers co-operatives. Whatever: I’m no economist and I don’t know. But I do know that all three of these perspectives might gain some traction in different parts of the Labour movement – and all three lead to very different, and clashing, economic programmes. I think even a recovery might mean Labour is sunk by internal policy differences which, in the grand scheme of things, would be considerably more important that the sort of personality driven, Mafioso-lite failed coup we saw last week.

I like reading Duncan, Paul and Hopi. They’re bright and self aware, even if I don’t always agree with any of them. But I think they’re clutching at straws here.

Addendum: In any event, Anne Pettifor makes the case for believing the recession isn't over.

New Tune Needed

Steph and Pesto are both carrying reports of Osbourne's recent speech which, if they are to be believed, would place the Tory post election economic policy a couple of notches to the left of Labour's. A end to bankers bonuses, tax breaks for equity not debt, priority given to long term investment, that sort of thing. Nothing desperately radical you understand - I think Steph is over-egging the pudding by drawing in Will Hutton as a comparator - but certainly a break from 'the pro-financial markets at all costs' approach which characterised the Brown/Darling policy line before the crash, and very distinct from their emergency programme of recapitalising the banks since. This might just be opportunism on the Tories part of course. Or it might reflect that, as an opposition, they're not totally tied up with dealing with the crisis and/or an interparty faction fight and can afford to think in the slightly longer term.

So Labour will have to respond. How? Mandelson might want to attempt to re-run the sixties dirgisme with the state perhaps not quite 'picking' winners a la Concorde, but certainly hot housing them - think of his general line as a kind of remixed Motown Chartbusters Vol 3 of economic policy. Others - Darling? Brown? - might go along with this to some degree, but still wish to re-establish the City in something like its status quo ante form, if only to reestablish a decent corporate tax base (not that the 'old' City actually paid that much tax compared to what it earned). Think of this as the economic equivalent of, say, a SpiceGirls comeback: it was huge once, but everyone doubts it can ever happen again in quite the same way.

As for the Left of the Party - and indeed the wider Left - it does rather now behove them to broaden out from particular tactical fights - like opposing Post Office privatisation - important as these are, to seeking a coherent economic vision of the future. They need a new tune as well.

I Can’t Do Instant Commentary, but I Can Wonder What Age We’re Living In...

Those bloggers who, quite unlike me, don't have to take their socks off to count up to 20, are fast coming into the fray with instant budget commentary. I marvel at their ability to absorb and assess so much stuff so quickly. Duncan the Labour Fund Manager delivers a 'on the right lines but could do better' sort of end of term report, and then moves into a pragmatic defence of the 50% tax rate. Meanwhile Richard Murphy is moving from initially positive coverage to a series of critical, detailed notes on taxes, anti-tax avoidance measures and the limitations of the 'greenspray' Darling has slapped onto his plans.

Over on the right-hand side end of the playground, Alice tells us we're all doomed because of the size of the gap between tax take and spending; Chris Dillow says there's loads of money sloshing round the globe wanting to buy gilts to cover that gap; from the Left AVPS breaks into uncharacteristic purple prose to tell us that the ,"...twitching corpse of neoliberalism has been stitched together with the cadaverous remains of disinterred Keynesianism" with the aim of making the working class pay for the crisis.

I respect all of these bloggers a lot, but I can't help thinking that these are responses 'prepared earlier', like a half built Blue Peter project pulled from under the presenters table. But - hey, what do I know? I've still got both my socks on, after all...

But even as an economic ignoramus I have a hunch that two things are true, one to do with low down politics and one with our perceptions of the Age itself.

Firstly, this is a pre-election budget so it is voter friendly as it is possible to make it in the circumstances.(Just because the rest of us think the prospect of a Labour victory at the polls is vanishingly small doesn't mean that Darling and Brown have accepted the fact). So whoever wins the next election is going to introduce a more severe budget shortly after they move into Downing St.

Well, at least they will if we really are living through a crisis. From the unorthodox left, Boffy argues that not all of us actually are, and the effects of the credit crunch might be quite short lived, though severe in those age and geographical sectors most affected. But there's another view: the Keynesian Left have rediscovered both long waves and Schumpeter, now joyfully reunited by Carlota Perez,

"...growth in the world economy takes place by successive surges of about half a century, each driven by a technological revolution. The massive changes that this brings each time around... involve great behavioural upheavals in the economy and society. For that reason, the difficult process of unlearning the old and absorbing the new takes twenty or thirty turbulent years of "creative destruction." It is after the massive paradigm shift has been basically achieved, that the fruits of the new technologies in higher productivity and widespread innovation can be reaped and socially shared.

Historically, the first half of each surge -the Installation Period- has been the time when financial capital shapes the economy, while the ideology of laissez faire shapes the behaviour of governments. It is a grand experiment when unrestrained finance can override the power of the old production giants and fund the new entrepreneurs in testing the vast new potential. Finance then helps the new giants emerge, enables the modernization of the old industries with the new techno-economic paradigm and facilitates the necessary overinvestment in the new infrastructures (so coverage is enough for widespread usage). Thus the extreme "free market" ideology has a role to play in the early decades of each surge.

The Installation period has led each time to a major bubble followed by a major crash (canal and railway manias ending in panics, the roaring twenties ending in the crash of 1929). The collapse reveals the need for regulation to restrain financial excesses and to favour the real economy, usually under political pressure for reversing the income polarization and other negative consequences of the bubble times. If adequate policies are put in place to facilitate and develop the conditions for healthy market operation and social fairness, what follows is a Golden Age -the Deployment Period- when production (rather than finance) leads the expansion, the benefits of the new technological potential are fully realized across the economy and its social benefits better spread (the
Victorian Boom, the Belle Epoque, the Post War Golden Age)."

Fascinating – but shot through with technological determinism, if the quote above is typical. Schumpeter himself had a rather brilliant protégé who would have dismissed this with a snort: Paul Sweezy. He might, plausibly, have accepted a lot of Perez's analysis, but he would have insisted on the importance of the relations of production as well as the forces of production. & it is Sweezy's own protégés who, to my mind at least, have produced the most interesting analysis of the crisis from the Marxist Left so far. They say there is a systematic crisis, and that socialism is the answer- but Perez's analysis points to the possibility of a kinder, gentler capitalism. So what is the nature of this crisis, and of the Age we're living through?

Disrupting the City?

Two snippets from the Today programme this morning brought the craziness of the current impasse into sharp focus for me.

First, we had the 'anarchists-are-coming-to-get-us-better-dress-down-and-hide-under-bushes' story about City fears of violence next Wednesday on the G20 protest. Rick exhibits a healthy dose of skepticism about whether this will prove anything more than an opportunity for the corporate security staff and police to play soldiers. No doubt some folk in black ski masks may smash a few windows for the cameras though....and the cameras will then depart allowing the police to, ahem, robustly restore order. Cue shocked Daily Mail headlines. (Not about police brutality)

Secondly, we heard that Barclay's shares have soared on news that it won't have to seek financial aid from government. Cue 'green shoots of recovery' headlines in the press no doubt.

To fully understand the relationship here, I advise a careful reading of Willem Buiter's blisteringly angry article on moral hazard which touches on the Barclay's tax memo debacle amongst other issues. You may particularly wish to note his view that,

"Financial nonfeasance, misfeasance and malfeasance thrive on opaqueness, complexity and lack of transparency.....banks ... may be reluctant to accept the state as a major shareholder [because of] the more intense scrutiny of what the bank has on its balance sheet that this is likely to imply."

He goes further:

"What we have seen and continue to see in much of the border-crossing financial sector, however, is a ... literal form of moral hazard: a lack of morals in some key participants in the financial system dance causing major hazards to the financial well-being of millions of powerless victims. Corrupted morality putting at risk genuine, wealth-creating financial intermediation, innovation and risk-taking. This is moral hazard strong..... It makes me sick to see an entire branch of human endeavour brought into disrepute by the actions of a relatively small (but still far too large) number of masters of the universe. There will have to be a reckoning, and not just in the court of history."

Unlike Naomi Klein et al I have nothing against Starbucks per se. I've never really understood why they always get their windows stove in. I don't own a dog on a string and I've no idea how to make a petrol bomb. On the four or five occasions I've ever been in the middle of a demo which turned into a riot I've always beaten a hasty and cowardly retreat.

But I think I know who the real enemy is. & it's not the Class War Buffoons.

Where's My Pitchfork ?

Tom over at Labour and Capital doggedly works his way through the smoke and mirrors provided by the financial sector to justify its own behaviour. His patient unravelling of their arguments about executive pay and 'agency' theory are a model of intellectual engagement and sheer hard graft. Despite once describing himself as a 'weedy social democrat' in my comments box, but I think what he does is more useful than almost all the stirring denunciations of the evil bankers and the rule of capital from the Marxist blogosphere.

Well , mainly I do. But every so often one come across something like this on Bloomberg's about Hedge Fund pay levels:

"The industry’s top earners last year were James Simons of Renaissance Technologies Corp., who took home $2.5 billion; John Paulson of Paulson & Co., $2 billion; John Arnold of Centaurus Energy LP, $1.5 billion, and George Soros of Soros Fund Management LLC, $1.1 billion, according to a survey published in the April issue of Institutional Investor’s Alpha magazine.

Average pay at hedge funds was $794,000 in 2008, down from $940,000 a year earlier, Alpha magazine reported. ....Chief executive officers earned an average of $2 million last year, while chief investment officers made $1.4 million, according to Alpha’s survey. Senior portfolio managers took home $1.1 million and senior traders were paid $790,000."

This is a quote from an article about hedge fund pay falling by 25%.

At times like this Tom's social democratic patience is the furthest thing from my mind. I want a pitchfork, a burning brand and the rest of the peasantry to join me in in a Jacquerie. I really mean it. These levels of remuneration are beyond comprehension.

But even breaking a few windows seems a horrible crime of unpardonable magnitude according to the Press.

I Think too Small Sometimes

Willem Buiter examines why the European Central Bank can't easily do Quantitative Easing, the anti-deflationary move de jour. It's a hugely technical article that I'm not going to pretend I fully understood (Any of my fellow non bankers care to explain a seigniorage Laffer curve without consulting Google? Thought not). But the idea at the heart of it seems simple enough to me: a central bank can only properly function as such if it has the backing of a tax raising state.

In normal times, a lot of effort is put into making this backing as ambiguous as possible to reassure markets that they are free from direct political control - hence the so called independence of the Bank of England. But the BoE is 100% owned by HM Treasury. The ECB is owned by 27 national central banks, each with their own constitution and particular relationship to their home state.

Buiter indicates that the markets are pricing in the possibility of default by some Eurozone national governments - particularly Ireland, Greece, Portugal, Italy and Spain (in that order of risk). So,

".... it is reasonable for the EBC/Eurosystem to insist on a joint and several guarantee by all 16 Eurozone governments for any Eurozone government debt acquired by the ECB...... Such a joint and several guarantee does not exist at the moment - a reflection of the absence of a fiscal Europe and a fiscal Eurozone...The ECB has no fiscal back-up. There is no guarantee, insurance or indemnity for any private credit risk it assumes. "

So it can't easily do Quantitative Easing. Which would seem to suggest either clever folk like Buiter convince them to sort out some 'held-together-with-string' temporary fix (which he doesn't think will work given the Fortis experience), something big has got to change in the democratic architecture of Europe or, simply, deflation beckons across the Eurozone.

Back in December I wrote,

"That hoary old Marxist chestnut of a question, the relative autonomy of the State, may rear its head again. A thousand undergraduate essays ...... will be dusted down and regurgitated. But the old essays may be missing the point. It may be that the thing to explain in 2009 is not the 'gap' between direct class power and State action which Miliband and Poulantzas tried to theorise, but the speed and nature at which this gap decreases."

But I was talking about the UK, not the EU. I think too small sometimes.

A Shrinking City?

So the experts who translate these things for us mere mortals are giving Lord Turner's report on financial regulation a decidedly muted reception. Indeed, the idea that there can even be apolitical regulation is coming in for a bit of a bashing more generally. As far as I can make out, Turner's report is an attempt to put Humpty-Dumpty together again, to restore the City of London to a position where it can feasibly reclaim its role as a major - and hugely profitable - world financial centre.

But never mind whether Lord Turner's proposals will help achieve this - is it actually even a plausible long term aim?

One aspect of the current situation is that it is a crisis of international economic power relations: America - and the West more generally - have been living off the surpluses generated by the BRIC countries and oil producers. World trading arrangements and currency dealings have been calibrated to facilitate this. (If I was still a young hot head I'd start muttering about financial imperialism at this point in the argument, but I'll spare you the purple prose). These have broken down to an extent, and the BRIC countries, most especially China, need to be given a greater voice in how the system works. This must imply that, if and when a more stable system is successfully put together again (that might take some time), these countries will get more out of the new status quo than they got out of what went before. So, in relative terms at least, The US and its epigones - like the UK, above all - will get less.

In the light of this, what are we to make of Robert Peston's warning not to throw out the baby with the bathwater? He says,

"We can perhaps all agree that the UK became too dependent on growth generated from the City.During the past few years, when 10% of economic output, a third of growth and many tens of billions in tax revenues were generated by financial services, we did have far too many of our eggs in one basket.Many would say our dependence on the City was the culmination of decades of failure to broaden the base of our economy: an indictment of the industrial policies of successive governments.But to say that the City became relatively too big and important does not mean we should shrink it to nothing.That would be a fast route, almost certainly, to penury."

At one level this is true: over-night change in our basic national economic structure is simply not plausibly. But we can't go back to where we were before. This isn't simply an emotional spasm of leftism in response to the amoral and anti-social behaviour of the financial world (though I'm with Richard on that one).

No: its about a hard-headed sense of what's happening in the world. If the financial system via which savings transfers from East to West is broken, and the East wants more power in any revised system, then our comparative advantage as a nation in these issues will begin to seep away. Not instantly, of course - and perhaps not even without a few false dawns of temporary upswings along the way. But the probable line of development is clear.

So quite apart from the important and necessary debate on what else this country should do, we also need to be clear about what we want to do with the City - a smaller, more humble City sure, but still a financial centre.

Here's a idea: let's have a system of finance with a three fold purpose, enshrined in statute:

• To direct capital to productive, innovative, employment creating enterprises;
• To ensure a adequate return on the pension funds of millions of people
• To provide mortgages at a safe and sensible level.

& a system of regulation which made judgments on these grounds and these grounds alone.

Of General & Special Cases

John Bellamy Foster talks the history of 20th Century economic thought, and explains how today's Keynesians have implicitly accepted that they're making a special case, not a general one. But their master thought it was the other way round:

"In referring to his analysis as “the general theory” Keynes distinguished this from orthodox neoclassical theory, which he referred to as a “special case,” the characteristics of which “happen not to be those of the economic society in which we actually live,” and which therefore led to results which were “misleading and disastrous....

Today figures like Krugman are seen as partly challenging these conclusions, and as representing the return of Keynesian economics. But this is not a return to Keynes in the sense of his general theoretical critique of capitalism’s fundamental flaws. Rather it is a return to Keynesianism as a “special case” of “depression economics,” where monetary policy is ineffective and expansive fiscal policy needs to be given priority. The ascendancy of neoclassical economics, which bastardized and subordinated Keynes’s mildly critical view of capitalism, is not itself challenged."