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.

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. 

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.

The Death of Fianna Fail in Two Quotes and a Headline

John Naughton reminds us of Eamon De Valera rebuking the Brits for criticising Ireland's neutrality in WW2:

"Mr. Churchill is justly proud of his nation’s perseverance against heavy odds. But we in this island are still prouder of our people’s perseverance for freedom through all the centuries. We, of our time, have played our part in the perseverance, and we have pledged our selves to the dead generations who have preserved intact for us this glorious heritage, that we, too, will strive to be faithful to the end, and pass on this tradition unblemished."


From the Guardian at 2.45pm:

"Irish bank shares fell again today 24 hours after the government announced restructuring was on the way and the governor of the central bank confirming the Irish banks are "for sale".

Shares in 36%-state owned Bank of Ireland fell 23% to 30c giving it a market capitalisation of around €1.77bn (£1.5bn), half what it was a month ago. Allied Irish Banks, whose government ownership will rise to around 95% after a planned rights issue, traded down 13% to 35c.

Irish Life & Permanent, the only Irish-owned bank to so far not have received any state aid, fell 4.5% to €0.80, following a 27% drop yesterday.

"The market is on its way to deciding there is no equity left in the banks," said Gary McCarthy, head of Quest, the quantitative research unit of broker Collins Stewart."

So, we have a government who announces it wants to sell its banks -and the market immediately tells them that they're worth sod all.

University Fees: Driving Down House Prices in the Long Term

Righty-ho: as widely prophesied, it has come to pass: the state isn’t simply cutting stuff, it’s withdrawing from whole areas. Specifically it is withdrawing from funding most undergraduate tertiary education.

Frankly, this is a surprise to me - in its' sequencing at least. I thought they’d first go for Social Care for the elderly. But the same three card trick is likely to be played in that field as well: first issue ominous but anonymised threats of financial Armageddon; then set up a commission or special study to look into creating opportunities for creating individual debt obligations to cover the gap; and then sit back and wait for the providers to conclude that their only hope is to persuade the ‘consumers’ that the only serious game in town is to take on additional financial risk personally. Bingo! You’ve re-defined the boundaries between the obligations of the state and the basic social finance requirements of individuals. Something similar happened in pensions and housing a generation ago.

& therein lies the problem. Well, therein lies the problem if, like me, you’re 52 year old father of two kids who’ll go to Uni in the next seven years and also the son of a 88 yr old in a registered care home. Oh, and did I mention that the mortgage doesn’t get paid off till I’m 63? Don't talk to me about the 'squeezed middle' matey, I got there some time ago...

I can pay my mortgage. I can make a contribution to Mum’s care home fees. I can even give the kids a bit towards their Uni costs (crossed fingers). But, fuck me, I’m going to struggle to do all three things. & I got an essentially free tertiary education, and Mum does qualify for quite a bit of public subsidy in that care home.

So how is it going to be for the next generation up - the people who’ll enter working life with huge debts from tertiary education, increasingly ageing parents (that’ll be me, I suppose) and the need to somehow acquire a mortgage and a home in their late twenties or early thirties? Not so wonderful I’d guess. In fact I really doubt that people in my position in 20 years time will be able to bear such a triple burden of debt. So they’ll box and cox, like we all do. They’ll not be willing to risk quite so much in any particular debt obligation.

So: who’s volunteering to tell the Daily Mail that this move to cut Higher Education funding is going to drive house prices down?

P.S. 'Course, if I were one of those bug-eyed Marxist wallahs,I might make some point about the way unproductive (aka finance) capital constantly seeks to re-order the world to create more opportunities for it to reproduce itself. But that would just be extremism of a most old fashioned stripe and hardly welcome in today's Big Society. I'll leave that to the entirely non Marxist Richard Murphy.

Spare Us the Restoration Comedy, There’s A ‘Live Rail’ Approaching..

At school, I have a hazy memory of the Restoration being presented as being all about the reopening of theatres, unleashing pent up demand for maypoles and the sweeping to Jordan-like fame of buxom orange girls. Wikipedia tells me different:

"In 1661,Oliver Cromwell's body was exhumed from Westminster Abbey, and was subjected to the ritual of a posthumous execution,..... Symbolically, this took place on 30 January; the same date that Charles I had been executed. His body was hanged in chains at Tyburn. Finally, his disinterred body was thrown into a pit, while his severed head was displayed on a pole outside Westminster Hall until 1685."

What brings this to mind? Duh, the amazing discovery that Labour did some things the Tories Don't Like in their last few days in office. Digging up a corpse and giving it a kicking to establish one's own legitimacy has a long pedigree. Hopi needn't over worry about oiling the wheels of a rapid rebuttal unit, this is a very old trick. It will only convince the already converted.

In other news, Gideon and his sidekick Laws have announced a significant move towards taxation without representation in the form of an Office for Budgetary Responsibility. And the Times are leading on the plan to move forwards towards the sunny uplands of political and democratic renewal by ...er, creating 160+ new unelected peers. My, isn't last year's crisis of political legitimacy over MPs expenses paying dividends now for those who need to insulate their next moves from any kind of democratic accountability? My gut feeling is that these moves will prove ephemeral: I agree with Potlatch when he says a fiscal crisis, as we now face, represents a political choice inviting political answers.

Meanwhile, amongst the grownups, Merkel has acknowledged that the Eurozone bailout isn't a permanent fix. George Magnus (that calm, hyper-intelligent guy from UBS with a Keynes-like 'tache that Mason often interviews on Newsnight) agrees. He seems to be saying he does not think the European Union's Greek rescue will be enough to resolve the situation or stop it from spiralling into a structural crisis for all large debtor nations in the industrialised world - unless somehow the EU becomes a fully political union. Indeed, at points, his carefully technical language gets even scarier: he seems to suggest that more or less the entire Western World is moving into a 'debt trap': no plausible growth rates are going to be sufficiently high to offset the rising cost of borrowing for Govts.

I'm no economist but I think this means he's saying we're going to have to pay more tax for less services and it's still not going to be enough to stabilise the situation. If things get really bad, there seem to be two ways out of this currently being kicked about in technical economic discussion:

1. As George Magnus suggests, the Eurozone might have to move to complete political union – the much discussed 'United States of Europe'. I regard this as utterly unfeasible, but things change quickly under this sort of pressure.

2. For the weaker members of the Eurozone to leave and re-establish their own currencies. But no one has the faintest idea of how to do this and if it happened it would be a crushing blow, not only to the political 'project' of the EU but also to trade within the EU, which represents a high proportion of all world trade.

Either eventuality would certainly mean that quite a bit of British held Greek/Portuguese/Spanish and, especially, Irish debt would be 'restructured': the preferred financial euphemism for 'you can whistle for it matey, I'm not paying'.

Europe is famously the 'live rail' of Tory party politics- just think how much more electricity that rail is carrying now they're in coalition with a pro-European Party....

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.

Total Bankers Redux

Dunc wanted to know where all the anger's gone a couple of days ago.

Look Duncan, the anger's over here, waving and shouting "coooee" at us:

"...Goldman last year, after it converted to bank holding company status, announced that it was “taking steps to reduce leverage.” But what’s happened since then is that Goldman has actually been emboldened by all its state backing to borrow more and gamble more than ever. This is the equivalent of a regular casino gambler who hears that the house has doubled down on his credit line and decides to stay up at the tables all night, instead of going home and sobering up. Just look at Goldman’s VaR, or Value at Risk, which measures the amount of money the bank puts at risk on any given day: it’s soared since last year.

Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funneling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behavior for anyone. And it doesn’t matter who knows it.

There are going to be some people who say that some of this stuff isn’t government subsidy so much as ordinary government contracting. After all, do we criticize Boeing for making airplanes or Electric Boat for making submarines during a war? If we don’t do that, then why should we be pissed about Goldman making a profit underwriting TARP repayment stock issuances, or Treasuries?

The difference is that Boeing and Electric Boat didn’t start the war. But these guys on Wall Street causesd this crisis, and now they’re raking in money on the infrastructure their buddies in government have devised to bail them out. It’s a self-fulfilling cycle — beautiful, in a way, but at the same time sort of uniquely disgusting. That they’re going to get away with it is bad enough — that they’re getting praised for it, for being such smart guys, is damn near intolerable."

.

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.

A Nation of Coarse Fundamentalists?

"...economies in which wealth transfer predominates over wealth creation are destined for poverty, because ‘real’ wealth – food, medicine, bricks and mortar, high and low technology goods – is consumed or decays and has to be renewed. Exchange on its own, however vigorous, is unable to do this renewing. A farm or a factory producing electronic parts is more desirable than a casino, even if they all put resources and people to work. It’s a coarse fundamentalist view of economies..."

Actually it's a extract from Jeremy Harding's article on Islamic finance in the new LRB. He seems to be presenting* a ' straw man view' of Islamic takes on the consequences of usury and derivatives, as if no one could possible believe such a thing to be true...

But here's the thing: it's more or less what I believe, give or take the odd minor caveat. & I suspect it's close to what the vast majority of folk in Britain think as well.

Meanwhile, John Ross spends an inordinate amount of time demonstrating what surely should be obvious: the more a country actually invests in real things the richer it gets. Well, knock me down with a Credit Default Swap contract, who'd have thought it, eh? But then I'm a coarse fundamentalist, just not an Islamic one. Except on financial matters.

Where is the strategy for confronting this hole in the British political economy? Where is the vision- which might have to be one of 'blood, sweat and toil' - for our conversion into a economy of reality and sustainability ?

Just asking, like. Do take your time answering....

*The whole article is worth reading though - it's intelligent and informative. I'm just picking up on a loose paragraph.

From Gilts to Class Struggle in Five Easy Quotes

1. What's a gilt when it's at home then? Over to Paul :

"...gilts are IOUs issued by the government over periods of 5, 10, 30, and 50 years and bring a guaranteed interest payment for the buyer, paid every six months. Two thirds are held by pension funds, as they supply a ready and predictable source of income. Once issued gilts can be traded, so their price can go up or down compared to the interest rate guaranteed. Out of this relationship you get a yield - which is a bit like a "real" interest rate. If the price of gilts goes down, because there's not enough demand, the yield goes up - and the government effectively ends up paying a higher interest rate on its debt."

2. Sorry, I'm struggling to say awake here - why does that matter? Alice reckons it matters because:

"Even under the best case scenario, New Labour has bequeathed this country a decade of historically unprecedented fiscal problems. In the worst-case scenario, the UK could be slipping towards a fiscal crisis, where financial markets question the long run solvency of the UK government and refuse to finance this profligacy."

3. Blimey, that sounds scary - is it likely? Chris doesn't think so:

"The most important number about today’s Budget is $12.5 trillion. That’s the amount of money the private sector is likely to save around the world this year. This means that the government can raise the £220bn it plans to borrow in the gilt market merely by attracting 2.5 pence for every pound saved**. This is smaller than the share of the UK in the global economy..... the world has a shortage of safe liquid assets. Issuing gilts therefore meets global savers’ needs. This is why the UK - and governments of developed countries generally - has enjoyed very low borrowing costs as debt has soared."

4. Phew, so I can rest easy then? I mean, the FT says we're so safe we're rated AAA:

"As Moody’s says in its overview of sovereign ratings:The probability of default for a government depends on both the ability and willingness to pay.

Countries with long-term, firm financial systems that lock them firmly into the global economy are, of course, much more “willing” to pay than those without them.

Or to flip all this seeming optimism around: the UK won’t lose it’s triple-A rating because Moody’s knows the government would rather cut public spending to the bone first."(My emphasis)

5. Ah. I think the penny's beginning to drop here. So that's what Willem Buiter was on above when he said,

"The long-term pain of higher taxes and lower public spending is not the result of public debt and deficits incurred because of a war fought by a united nation against a hated external enemy. It is the result of an economic civil war, a massive systemic peacetime economic failure, with a large domestic component. It is therefore not clear that the necessary social and political cohesion - readiness to accept joint fiscal burden-sharing - will be present. If the necessary fiscal tightening is not forthcoming because different groups and vested interests are engaged in a war of attrition aimed at shifting the fiscal burden to the other guy, markets could easily panic and Britain could face..... the rest of the world withholding financing from its public and private sectors."

"The ambition to bring British infrastructure back up to the level it achieved at the end of the 19th century has been postponed"

Y'know, the thing about Willem Buiter is that he is a professor of political economy, not 'just' an economist. Economics, we all know, is the so called 'dismal science'. Political economy is quite different:

Alistair Darling is a good chancellor of the exchequer. He has presented a Budget that does  essentially nothing - a good budget, given the dreadful economic circumstances. ....Mr Darling is doing his best to clean up the mess left by his predecessor, Gordon Brown. .... the global financial regulatory race to the bottom have left the UK .... in its worst fiscal shape ever in peacetime ...... It has a bloated financial sector, including a banking sector that is too large to save unless state support is restricted to the UK high street banking bits of UK-based global banking groups....Under the best possible scenario, taxes will have to be raised and/or public spending cut on a permanent basis by between 5 and 6 per cent of GDP to regain fiscal sustainability. The necessary permanent fiscal tightening could easily be larger. The pain will be widely felt. The ambition to bring British infrastructure back up to the level it achieved at the end of the 19th century has been postponed by another quarter-century. Education and health will suffer....If the necessary fiscal tightening is not forthcoming because different groups and vested interests are engaged in a war of attrition aimed at shifting the fiscal burden to the other guy, markets could easily panic and Britain could face an emerging market-style “sudden stop”, with the rest of the world withholding financing from its public and private sectors.....I would consider the case for a government of national unity. It would help if Mr Brown - responsible more than any one for this debacle - were to resign.

In my unacademic, vulgar leftist way I think he's saying (a) British capitalism's basic 'national business model' just went down the Swannee; (b) there will be an upsurge of class struggle after the election to play 'pass the pass' with the consequences of this; (c) but this risks the 'mutual ruin of the contending classes' if the international markets decide not to finance the country's debt.

P.S. Hopi is quite right to boast about the quality of economic debate on his site. Duncan in particular has crystallised something for me by doing a quick back of the envelope calculation which suggests that the gap between tax yields and spending is about 12% GDP - equivalent to either 25% of all public spending, or a general tax increase of 30%. Neither of these things is going to happen in their entirety of course - but neither is any possible combination of them without massive struggles....which Buiter says the international money markets have the capacity to simply call time on by taking their money away.

The Great Financial Crisis: A Review

30 years ago, academic sociology took two things seriously: the idea that as a discipline it was, as my non-Marxist professor told me in the first week of my undergraduate degree, 'nothing more than a century long conversation with the ghost of Marx' and the concept that it was the last redoubt of the idea of 'political economy' as conceived of by the pre-Marginal Revolution classical economists. Whether either of these propositions were ever true is a matter I'll leave to those who specialise in the archeology of academic pedagogy. But I have a very definite sense that they soon stopped being true as the postmodernists swept through sociology departments throughout the land in the 1980s.

But what it did mean was that the spotty faced young Charlie got to read, if not always understand, a number of left wing economic texts, notably Monopoly Capital (1966) by the Americans, Paul Baran and Paul Sweezy. (Sweezy has some claim to be American Marxism's only authentic native genius, a claim I'll leave others to debate). It was a conscious attempt to describe and analyse the political economy of the United States in the post war 'Golden Age', and to meld together Marxist and (left) Keynesian economic theory.

The key idea of Monopoly Capital was that capitalism creates huge surpluses for a small oligarchical group which led to economic stagnation, a term which is to be understood technically as meaning the economy functions well below its capacity with inherent unused productive capacity and significant unemployment and underemployment. (Stagnation in this sense is quite compatible with most people feeling richer over time, which clearly has happened in both North America and throughout the West). There are countervailing tendencies of course - notably military spending, a massive sales effort ( cf 'the rise of Madison Avenue') and the stimulus of new innovations - but these are intermittent and not always successful, whilst the tendency towards stagnation is permanent and structural. In retrospect it can be seen as the perfect theoretical lens for a left wing economist who grew to maturity during the Great Depression to use to look at the Keynesian Golden Age: it didn't deny things had changed since the 1930s, but questioned how long this could last.

Stagnation occurs because owners of capital must have something to invest in in order to further accumulate, but this depends on there being sufficient demand. But as industries mature they require less investment; not all new technologies need huge sums of investment in the manner , say, the switch from railways to cars did; growing inequality can limit demand in mass markets; and, in any event, the process of capitalist monopolisation reduces competitive pressures and allows the build up of larger and larger surpluses.

Baran and Sweezy did mention the growth of debt as a further possible countervailing tendency to stagnation but didn't accord it any great priority. Sweezy came to see this was a mistake, and did quite a lot of work later in life on the growing financialisation of US capitalism. Now his ideological heirs, two American scholars associated with the independent Marxist journal Sweezy founded, The Monthly Review, have published a series of essays of great interest - The Great Financial Crisis, Causes and Consequences by John Bellamy Foster and Fred Magdoff.

They quote Sweezy himself on the changes since the 1960s:

"...By the end [of the 1980s] the old structure of the economy, consisting of a production system served by a modest financial adjunct, had given way to a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system."

In the 1960s, manufacturing was the source of 50% of all the profits in the USA, and the financial sector only produced 15%; by 2005 the position had almost reversed with only 15% of profits coming from manufacturing and around 40% from financial activities. The vast surpluses have been invested in FIRE (finance, insurance and real estate) activities; consumption and therefore demand have been buoyed by increasingly sophisticated instruments of debt, which allowed even a population on stagnant wage levels to live beyond their means. But - and this is crucial for understanding the power of Bellamy Foster's and Magdoff's argument - it isn't just a question of household debt alone. The more the growth in the productive economy slowed, the more capital sought to leverage its way out of problems by expanding debt and gaining speculative profits. So by 2007, when US GDP was around $13.8 trillion dollars, total national debt amounted to no less than $47.7 trillion - of which $13.8 trillion was specifically household debt, but a further $16 trillion was held by financial firms and $10.6 trillion by non financial business. (table 6.1, page 121).

So this financialisation of capital is not just a question of 'irresponsible' families taking on mortgages they couldn't possibly afford - it's a systematic change. The crisis might have come in the sub prime mortgage market but this was merely 'the straw that broke the camel's back': it wouldn't have mattered have so much if the whole system wasn't now orientated towards endless financial speculation. A new term for this system is now required: Monopoly Finance Capital. It is inherently unstable, requiring a constant stream of speculative bubbles to keep the show on the road. Minsky is much referred too.

Is there a way out of this nightmare? Bellamy Foster and Magdoff quote Sweezy again, on the desirability of a redistribution of income and wealth on a massive scale, and/or a massive expansion of civilian state spending. But they doubt the feasibility of a conventional Keynesian expansion (aka 'Obamanomics') because of resistance from the financial markets (aka 'class struggle from above'). So they end on a rising polemical note of rhetoric calling for 'labor to rise from its ashes' and the population to seize control of its political economy. Which does rather remind me of a line from the Billy Bragg song, North Sea Bubble :

"My American friends know what to do - but they'll wait a long time for a Beverly Hills Coup"

But it would be unfair to end on this note. This is a clearly written and very accessible collection of essays which deserves a wide readership on both sides of the Atlantic. It demonstrates the possibility of linking left Keynesian and Marxist theory in a powerful way, and indeed of the continued relevance of a specifically Marxist economic framework. What it doesn't do, ultimately, is convince me as a work of political economy because it doesn't link its' economic analysis to a strategy for change, however sketchily identified. This is not just a question of its vagueness on the subject of agency referred to above, but also its lack of engagement with the global aspects of financialisation, especially the degree to which Chinese, Japanese and Middle Eastern money now prop up the American economy. Nonetheless, it's hard to imagine any comprehensive explanation of the current crisis which doesn't engage with the Monthly Review analysis.