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.

Occupy Has Nothing to Say? I Blame the Parents

 Socialism, or at least its 20^th Century version, collapsed for two main reasons: because it couldn’t find a political form which demonstrated at least much personal freedom and democracy as the Western liberal democracies it opposed, and because it failed to deliver economic progress at the same speed or to the same apparent degree of efficiency as capitalism. 

Like everyone else of a certain age I watched this collapse on prime time TV in the late 1980s and early 1990s. It had a profound effect on me. I was, after all, a card carrying Communist at the time – a historical materialist stranded on what appeared to be the wrong side of history.  

It very quickly became clear that there was no ‘easy intellectual retreat’, as it were, to social democracy. Generations of refugees from Marxist parties had made that journey before The Fall, comforting themselves they were still pursuing the aims of socialism but by defensible, democratic means.

Actually, a very large slice of the Marxist tradition had, by the 1980s, made a serious attempt to make this shift within its own intellectual framework anyway. Classical Trotskyism had its own (to me, always unconvincing) version of this which ran broadly along the lines of laying stake to the heritage of a purified and re-claimed ‘democratic’ Leninism; the libertarian Marxists had a more root and branch version, and my own tradition, that of Eurocommunism, somehow accepted the theoretical inapplicability of much of Leninist political theory in the West ( I mean, what else was all that bigging up of Gramsci about?) whilst still maintaining an institutional allegiance to the broad hope encapsulated in the ‘moment’ of 1917. All three, were, in their different ways, quite keen on refusing the supposed gap between ‘politics’ and ‘economics’ of course, and laying stress on the economic and workplace democratic element to a vision of socialism – something they held in common with ‘advanced’ social democracy, at least in Bennite/Livingstonian form. 

Yet none of these positions – not social democracy, not Trotskyism, not libertarian Marxism, not, most of all, Eurocommunism - survived the Fall in any meaningful sense. Sure, there are fragments of each of these traditions still knocking about the margins of the political scene - but the intellectual ‘oomph’ has gone from all of them. I don’t think this is because people looked at their political solutions to the evident lack of freedom in the Soviet bloc and rejected them.

I think this is down, in large part anyway, to none of them actually having a set of economic answers to the critique capitalism posed in 1989-1991: why aren’t you as rich as us ? It was the question that those glossy shop windows in West Berlin in 1989 shouted in the face of the newly arrived Ossi, still grasping the newly hewn piece of The Wall. It stubbornly remains as a question, even though most versions of leftism now have a critique of growth for its own sake and at least a Greenish tinge. The left lacks an economic policy, or even a vision of what a socialist economy might look like.

Given that the centrepiece of Marx’s own intellectual life was subtitled ‘a Critique of Political Economy’, there is a howling historical irony here. Capitalism is now in deep trouble – systemic trouble. So, to put it mildly, it is not immediately obvious to the average Greek that capitalism will make them richer - and fears of the same nature abound throughout the once triumphant West. But no one has any non capitalist economic language with which to discuss alternatives.

& that's down to my generation, not the predominantly young people who constitute the new foot soldiers of the Occupy movement. Good on 'em I say: they may not be practicing socialist politics as I understand it - in fact, it seems more like a usurping of the old religious tradition of 'bearing witness'. But they are practicing anti-capitalist politics, and perhaps such is the poverty of radical inheritance my generation of leftists have handed down to them that is all they can possibly do. But I'm very glad they're doing it.

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.

The Coming Cuts Chaos: A Small Case Study

Supporting People? It’s the best little government programme you’ve never heard of: according to the CLG’s own study its' £1.6bn of expenditure on preventative support services saves the nation- well, England in this case - a total of £3.4bn. Basically, it saves over £2 for every £1 spent on it. Think of it as the 'stitch in time..' programme.

How does it do this? Very largely by putting in places services which help divert people from more expensive services, or delay their entry into/speed their exit from such services. (We’re talking about how to keep people out of care homes, hospitals, prisons, emergency homelessness facilities and so forth here). Good stuff you might think - surely a priority even for this cost conscious government?

No. They're cutting it by 12% over the next 4 years.

You might feel that's not very much at all if you work in Higher Education which is facing 80% cuts in undergraduate funding, but the cuts themselves are only the most obvious part of the problem. The real problem is that the money is no longer going to be separately identified - it's going to be rolled up into something called Formula Grant paid to local authorities. This, we're told, is cutting down on bureaucracy and giving local councils 'unprecedented freedoms and flexibilities'.

The problem here is that pesky word 'prevention' - it's very hard to give any specific legislative meaning to prevention that impacts on individual circumstances: prevention is not about measuring current need per se, but about stopping that need developing into something worse.If you're successful you've prevented a counter-factual situation developing. There are clever ways of measuring this at a prevalence level, but none that work at the level of the specific individual. So the vulnerable people who benefit from SP funded services have no legislative right to them.

On the other hand, councils do have a legislative duty to provide services for people who meet their increasingly stringent social care criteria, or the criteria which determine the eligibility of homeless people for social housing. So they have no choice but to fund services for these people.

So imagine you're a hard pressed local councillor or Chief Executive. You have to provide services for specific groups in priority need but not specific preventative services. There is nothing now to say you can't provide for those people defined as being in priority need by using monies originally intended for preventative services. & your core funding is going down by 7% a year. You join the dots.

Scaremongering? Not really. The Isle of Wight has led the way on this front and put through a massive SP cut last year. 8 months on, the results seem to be:

• That more tenancies are at risk
• Anti-social behaviour has generally increased
• The lack of support available has deterred some landlords from providing accommodation
• Accommodation placements are breaking down sooner
• There is evidence of increased homelessness, offending, self harm, substance misuse, increased health issues and financial problems
• Issues are becoming more difficult and long term to overcome and therefore more expensive.

Rabbits and Headlights and Old Fashioned Leftie Phraseology.

I see Mandelson's short-lived championing of a rehashed dirigisme seems unlikely to survive the immediate cuts - the new Govt is looking at ways of wriggling out of a promised £750m worth of subsidies to the car and nuclear industries. And, in truth, I personally wouldn't have chosen either of these industries to back if I was the one on whose shoulders the ghost of Harold Wilson's 'white hot heat of the technological revolution' had belatedly descended. I'd have gone with the Green or bio-tech industries of the future.

But I don't think that is the Coalition's plan. I think they're just doing a 'rabbit in the headlights' act in the face of the endless drumbeat of pressure from the markets. Someone needs to remind them of the wise - and not at all leftwing - words of Edward Hugh:

"Something strange seems to have happened to the discourse over the last three years, since a problem which originated in the financial sector has now metamorphised into a fiscal crisis for almost all modern democratic states. Indeed, such is the sense of panic being generated out there on this issue that I am already starting to see articles from investor circles asking whether or not democracy is compatible with fiscal rectitude. This is rather putting the cart before the horse, I feel.....we should not fail to notice the fact that another significant part of rising state indebtedness comes from having recently bailed out a significant chunk of the private sector. ...In fact, a rather weird circle has been created. The private sector (possibly as a result of the absence of adequate public vigilance) got itself into a huge mess of its own making. Governments all over the globe (understandably and correctly) rushed in to put the fire out, and in the process transferred the problem over to their own balance sheets. But what is most interesting to note about what happened next is how, given that the crisis itself means there are few positive investment outlets in the first world, the money generated by the bailouts is increasingly being used to encircle those very governments who initially made them. Basically a massive moral hazard conundrum has been created, as markets leverage a discourse which pressures governments for fiscal rectitude (which is contractionary - given the depth of the crisis - as far as aggregate demand is concerned), in the process creating the need for yet more bailouts, and so on (the possibility of ultimate Greek default being perhaps the clearest example here)."

What he's saying here, translated into archaic leftwing language, is that there is a need for a greater 'relative autonomy of the state'. & Coalition strategy is basically about decreasing that relative autonomy.

Strong and Stable Government?

Let’s go back to basics: nobody won the election. No one has a mandate to carry out their economic policy. So what to do?

The people have spoken but the elite can’t understand what they’ve said. So the elite have to ask another question in a different way.

It’s pretty bloody obvious: form a caretaker government for 6-12 months, don’t start on any serious cutbacks, tell the market they’ll have to wait and then hold another election. If you’re Lib Dem or (possibly) Labour you’ll want to hold this election under new rules (cue argument about voting systems, resolvable only via a referendum). Under this scenario, it wouldn’t matter over much who led the caretaker government.

What the phrase,” strong and stable government” actually means is 'give the Tories a four year term to carry out (the key parts of) their economic policy' despite them lacking a mandate. It’s the nearest thing I’ve ever seen in this country to the saga of the Hanging Chads in Florida. A active politically motivated government that attempts to rule as if it had a popular majority is heading for the rocks.

Now, if you believe there is an economic crisis based on an unsustainable deficit you will violently disagree with what I’ve just written. The key thing is get a set of grim faced apparatchiks in power and start slashing before the bond markets bankrupt us all. On this view, it is Democracy, not the bond markets, that will have to wait.

As it happens, I do think there is an economic crisis – but its mainly a chronic problem, not acute. I think the deficit is a symptom, not the problem itself. The problem is basically that we in Britain – well, in the West generally, but especially in Britain and America – have lived on credit for a generation and half. We’ve built our economies around it – and now it’s not sustainable in the same way any more.

Credit and debt are a contract with the future: it’s about bringing forward - at a price (interest) - the ability to spend income you haven’t yet received. Now, fairly clearly, this depends on having a reasonably reliable sense of what the future is likely to bring - and of your ability to make an efficient enough use of the resources received in advance as to bring you a net benefit overall, despite having to pay interest. You can, if you like, discuss both of these matters in terms of ‘risk’.

& there’s the rub. There are two overwhelming problems here. Firstly, the financial wallahs built themselves neat little models which told them nothing could ever, ever go wrong in the future as long as they used the right set of complicated sums. They thought they had tamed future uncertainty in a Gaussian equation and proceeded to behave as if the vast sea of credit they surfed held no dangers, ever, for any one. They were wrong, and they almost broke the West – and would have done, if states hadn’t stepped in to assume their traditional responsibility of insuring against future uncertainty. There has been no reckoning with these people: the financial wallahs still rule the world.

But even Western states don’t have an unlimited ability to protect against risk- and especially not against the entirely predictable risk that, sometime in my life time, America stops being Top Nation At Everything. This will mean , at some point, we in the West are going to stop being able to use all that cheap credit to buy stuff that other people make or grow or extract from the ground at such absurdly advantageous prices. & this is going to be true even if the credit – the contract with the future – is guaranteed by states rather than Gaussian equations.

Already we see in Greece what happens when weak (financially weak) states try to guarantee debt beyond their means: they’re not believed. The much vaunted move by the Eurozone to shuffle closer to making itself something more like as state in order to face down the fiscal crisis of Mediterranean Europe is a response. It may or may not work - but, as Mason hints, even if it does it may be using the last bits of credibility left in the system in defence of a deflating World Order:

"In looking for a metaphor to describe the anti-crisis measures, I am thinking of tank armour. It consists of layer upon layer of complicated material - ceramics, metals, fabrics - which diffuse impact. When a sabot round goes through one layer it loses energy, then the next, then the next. If you are lucky it never penetrates the final layer and the crew survives. But take a look at the armour: it is destroyed, mangled, defabricated. It can never be used again."

All this is going to be a shock to the population of the West. They’re not going to like it and, for a long time, I don’t expect them to believe it. Why should they? Which politician has actually explained any of this to them? & who has ever asked them for a mandate to confront a problem they haven’t been told exists? Potlatch is good on this point:

"Fiscal policy is at the epicentre of modern democracy (I'm not sure the American revolution would have got off the ground with the slogan "no inflation without representation", for example). A fiscal crisis, as we now face, represents a political choice inviting political answers. It cannot be met simply with strength, and the promise of a 'robust regulatory environment' or strong property rights. But until the options are properly laid out, any democratic choice is arbitrary, and ambivalence ....is the most honest answer."

So I say to the political class come back and ask us for a ‘strong and stable government’ when you’ve told us something of the truth – and of a path to national economic renewal which gets us out of the grasp of the City and makes us believe we genuinely are all in this together.

We’re not taking your painful medicine till then.

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.

That Wire Analogy (Yet Again)

So I get back from whatever it is I've been doing to find the long shadow of my favourite TV show still bugging the blogosphere - and indeed mainstream journalism. Chris Grayling's comparison of inner city Britain to the version of Baltimore peddled in the Wire is the gift which just keeps on giving.

He's been given such a hell of a kicking on all this that I thought it might be fun to try to sketch out some ways he might, inadvertently, have stumbled on something. Not, obviously, in terms of crime. The local Manc paper dealt with that :

"[Baltimore], home to about 600,000, was blighted by 234 murders last year. That compares to 35 in Greater Manchester, which has a population of around 2.5m."

No, the real comparison is about how our lives - like the lives of The Wire's drug dealers, police, dockers, politicians, schoolkids and journos - are haunted by an imbalance between agency and structure. Or just by structure, actually.

The whole series could have been written by Talcott Parsons or Louis Althusser: no one, or almost no one, escapes their circumstances for any length of time. Structures call forth successions of individuals - Avon, Stringer, Marlo - to fulfill essentially the same roles. People change in all-to-predictable ways: just as Daniels, who makes Commissioner, has a guilty secret from his time on Narcotics, so Carver, originally a kind of joke, puts his days of petty corruption behind him and rises up the ranks as a reliable officer. But you just know he won't leave his past behind, any more than Daniels manages too. Individual initiative is, ultimately, crushed, be it Bunny's Hamsterdam or Carcetti's new broom in City Hall. Even the great symbol of individualism - Omar - loses, and I reckon we see in Michael's trajectory a proto Omar in the making, so even the individualism at the heart of the American Dream is structurally produced.

Yeah, that strikes me as being quite like Britain today - even before one gets into in business of 'public service reform', performance targets and the near universal 'gaming' of these things. There is no real social mobility, no real opportunity for individualism. Chris Grayling is right, inadvertently.

The Metaphor At Platform 10 Will Be Departing in 2 Minutes..

It’s a Bulletin train adapted to British conditions. They call it the Javelin. Neat, isn’t it? Sleek, stylish, modern and all ready to whisk people from Kings Cross/St.Pancras to the 2012 Olympics in 7 minutes.

That would be the Olympics at Stratford, built on a site which used to make locomotives when the Olympics were last here in 1948 according to Jonathan Glancey.

Glancey implies that we don't make trains any more so these ones were imported from Japan*. Never mind, I'm sure someone in the City of London arranged the financing deal, insured it and offset the risk with some clever derivative instrument.

But now the City's buggered, might it just be an idea to have an industrial policy which worked to turn that situation around, so we could build more stuff like this? Or even, somewhat more to the point, stuff like Vestas wind turbines? Go look at the Vestas 2008 order book at the bottom of this page: not one order from Britain. 240 wind turbines ordered by China.

P.S. I see the workers occupying Vestas on the Isle of Wight now have their own blog. (via). Is it too late to organise a write in campaign to get this in the top ten political blogs?

*I'm told this is not so - see comments from John B

Balance Sheet Recessions

Via, I learn of the concept of 'balance sheet recessions' at Vox. These, apparently, aren't like normal recessions. Oh no: in a normal, 'textbook', recession capital and labour gradually trickle our of unprofitable sectors of enterprise and reassemble in new areas of endeavour where profits can once again be made. Not so in a balance sheet recession:

The financial crisis has put much of the banking system on the edge – or beyond -- of insolvency. Large segments of the business sector are saddled with much short-term debt that is difficult or impossible to roll over in the current market....

The holes that have opened up in the balance sheets of the private sector are very large and still growing. A recent estimate by Jan Hatzius and Andrew Tilton of Goldman Sachs totes up capital losses of $2.1 trillion; Nouriel Roubini thinks the total is likely to be $3 trillion. About half of these losses belong to financial institutions which means that more banks are insolvent – or nearly so – than has been publicly recognised so far.

So the private sector as a whole is bent on reducing debt. Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes. The cash flows supporting the servicing of debts are dwindling. This is a destabilising process but one that works relatively slowly. The efforts by financial firms to deleverage are the more dangerous because they can trigger a rapid avalanche of defaults...deficit spending will be absorbed into the financial sinkholes in private sector balance sheets and will not become effective until those holes have been filled. During the years that national income fails to respond, tax receipts will be lower so that the national debt is likely to end up larger than if the banking sector’s losses had been “nationalised” at the outset."

In other words, those people piously worrying about public sector economic stimuli 'crowding out' private sector investment are in cloud cookoo land. & even if he asks nicely Alistair Darling is unlikely to get the banks to move very much on lending to the 'real' economy: their first priority is to get back all the money they've lost and they'll do that by absorbing public spending onto their balance sheets until they're looking healthy again. Which took absolutely years in Japan.

This, I believe, is sometimes called rewarding successful risk management in line with market conditions. Me, I'm a simple minded soul, and I call it old fashioned class struggle. But with only one side fighting.

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."

.

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.

Total Bankers

Fictitious capital: that’s what Marx called "money that is thrown into circulation as capital without any material basis in commodities or productive activity” (the quote is from David Harvey). You can’t knock ol’ Karl’s gift for phrase making, can you? Even now, I’d hazard a guess that the label – if not the content of Marx’s idea - conjures up something very important about popular understanding, or lack of it, of the financial markets. Many of us think they’re just playing silly games with pretend money.

Now this isn’t quite right of course. & every now and again one of the Masters of the Universe will descend from Mt. Olympus to haughtily explain to us that it isn’t like that at all, it’s about the most efficient allocation of capital and of risk which is A Very Complex Matter, & Probably Beyond The Ken Of We Mere Mortals. But Gillian Tett ends the very readable Fool’s Gold with this observation,

“In many ways the craft of finance is not so very different from that of the water industry: both exist in order to push a commodity around the economy for the benefit of others. If those pipes are wildly inefficient, leaky or costly, then everyone suffers.”

In any case, a rather basic question does suggest itself: efficient allocation of capital and risk for what? On this subject, it seems to me, theorists of financial markets are very largely silent. Or they just snort with derision at such a silly question. Risk is the risk of gaining or losing money. Efficient allocation of capital is making sure that that risk ends up in the hands of those most prepared to entertain the possibility extremes of winning or losing. Or so the theory has it.

But that’s not reality. Those with wealth but the wrong balance of capital ‘risk’ may sometimes lose on the market, but those without substantial capital assets, or whose few capital assets have effective ownership rights exercised by others of a different class (cf most pension funds), always lose in comparative terms. That's why inequality has been been growing at such a rate for the last generation.

And what if, actually, inequality made us ill? Or more likely to go mad? Or less likely to trust each other? Or just simply fucked up our kids? Would that suggest that capital wasn't being 'efficiently' allocated?

Marx spoke of 'fictitious' capital. But, having read Tett, what I'm left with is a sense the cleverest people in the the financial markets have developed a range of 'fictitious' risk avoidance techniques, akin to the image I've illustrated this post with (note the small text at the bottom). Yes, CDOs and all the rest of the architecture can, if not used to extreme, moderate the risk of losing money. Yes, those who argue in favour of 'financial innovation' and 'not throwing the baby out with the bathwater' have a (slender) point.

But this is not the issue. The issue is capital is being used to fuck most of us up, most of the time. It's got to stop. That 'risk' has to be controlled for. Let's start with with bankers 'wages'.

To be Candide about it, perhaps it is time we should shoot some of them to encourage the others. Failing that, if it is status they're worried about, can we organise a national laugh-in at these overgrown Pru salesmen? Can we just make it seem ridiculous that people who ensure a continual supply of water, and guard against the risk of water failure, get normal wages whilst bankers get paid fortunes?

The San Andreas Default?

The State of California is paying people with IOUs, because it is broke. Well, perhaps not broke (Willem Buiter points out its debt levels are comparatively trivial) but stuck with a broken political system. Like a lot of US States it lives under a formal constitutional requirement of having to balance the budget. But since its' political representatives can neither agree the formal definition of a balanced budget nor, especially, agree a budget which requires a 2/3rds majority in each of their two State houses, it is paying people with what Buiter calls 'funny money'.

Paul Solman summarises the impasse:

"California is desperate. Like so many of us, it lived beyond its means, or taxed below its spending, or both. Three classes are now resisting the reckoning: those who "spent" the money and owe the shortfall (taxpayers); those on whom the money was spent (employees, vendors, other recipients of state funds); and those who loaned the state money (bondholders). Understandably, no class wants to take the hit, or take the hit first. For political reasons at least, the Obama administration is reluctant to come to the rescue...."

Buiter reckons the only way out is direct rule from Washington, though the comment on his blog suggests he has a bit of a tin ear for American constitutional niceties and, ahem, 'States Rights' to coin an unfortunate phrase. (Which doesn't mean he can't still be right on this point). He says,

"When the banks stop accepting the IOUs except possibly at massive discounts, which will happen soon unless an early resolution of the budgetary stalemate is achieved, the state of California will close down for business. Municipalities and counties dependent on state funds will follow suit. Before long the teachers won’t teach, the fire fighters won’t fight fires, the police won’t maintain law and order and neither garbage nor taxes will get collected. It will be a grand Hobbesian experiment."

Hence his expectation of federal intervention.

But the really interesting question, at least for a saddo like me, is whether these IOUs constitute money. Mark Thoma discusses this point, and the comments on his post educate this Brit on one of the less well known passages of the US Constitution,

"Article I, Section 10 of the US Constitution:

Powers prohibited of States

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit*; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility." (my emphasis)

So, on one reading, there's no need to wait for Willem Buiter's 'grand Hobbesian experiment': California has already declared Independence and it's time for Obama to send in the troops and restore the Union.

But British Capital Is Pants!

I’ve been silent on the blogging front for a couple of weeks simply because I have had nothing to say. Or nothing even I found interesting anyway.

But I see Rick over at Flip Chart Fairy Tales has waded into a discussion of that James Heartfield piece that so impressed me, and this has sparked a number of thoughts.

Firstly, just to clear some ground, let me say I simply didn’t know that Heartfield was an ex-RCP/Institute of Ideas/Furedi groupie/Astroturf merchant type when I first read the piece. Generally, I find their analysis a bit ...well, silly, in its single minded downplaying of climate change risks and bigging up of technological ‘progress’ as an unqualified good. But even if, as a commentator on my initial post said, it is just a case of a stopped clock being right twice a day I did find lots to agree with in his post. In particular it exposed the whole ‘public sector bad private sector good’ type arguments for what they are: ideology. A large part of the British public sector spending is actually a form of outdoor relief for the private sector, and quite a lot of the New Labour programme of public sector ‘modernisation’ (consumer ‘choice’ , contestability, marketisation and so forth)has actually been a way of shifting resources from delivery to people – however well or poorly done - into propping up this system of private sector relief.

One part of Heartfield’s explanation for this is, essentially, that British Capital is basically pants. It has lost the will to innovate. It expresses all its strategies in terms of risk, and especially risk minimisation – a language borrowed, in essence, from finance. The bastard off spring of actuaries who price the ‘lifespan’ of profit now rule the roost. The hero-innovators of Marx’s day – those who constantly remade the world - are long gone; their great grandchildren need the succour of a State which appears ever less separate from their own interests. They’ve lost their will to do big things, so they need the rest of the world to be remade in their own image by statutory decree.

Rick sees things differently. But then, to be fair, he’s a manager, not a politico, so he would. He sees the problem as one of public sector managers being more hidebound than their private sector counterparts, and much more trapped in rule bound systems of employee relations. So the public sector needs to call in the private sector for help. I think he just means that unions are stronger in the public than the private sector – though, of course, they’re pale shadows of what they were when Rick and I were growing up.

Of course there are difficult employees. But you can’t change the world on the basis that all employees are difficult. You have to give the people you work for and with something to believe in. And this is where a purely managerial perspective will never penetrate. The greatest weapon – at an operational managerial level – that social democracy ever had was the idea of public service, which grew out of the political ideas of community and mutuality and solidarity. What we’ve got in its place, in my view, bears a passing resemblance to the ‘Old Corruption’ of the eighteenth century : endless initiatives and restructurings and cost cutting done by ‘consultants’, a euphemism, in general, for large multinational firms. A teat which constantly feeds the private sector. No wonder there is workforce resistance.

& now the establishment call for cuts to be made – and to an extent they’re right, even if they exaggerate the immediacy of the necessary decisions, ignore the potential for offsetting tax rises and embellish the potential for ‘protecting frontline services’ whilst doing so. But nowhere, or almost nowhere, is there an alternative vision. If I had to generalise, I'd say it is this blindness which the public sector has imported from the private sector, not 'efficiency'.

A Non-Economist Asks...

Anne Pettifor says bank money is not a commodity.

....most assume that credit = savings, and that only by mobilising savings or surpluses (generated by production of one sort or another) is it possible for banks or financial institutions to lend money to finance economic activity. In other words, that money (deposits/savings/credit) exists only as the result of economic activity; and those deposits/savings/credit then create economic activity.

On the contrary: it is bank money/credit that creates economic activity - and only then are deposits, surpluses and savings generated. And not the other way around.....

.....we do not have to beg powerful barons - or even rich country taxpayers - to hand over a portion of their savings. We simply have to “use the computer to mark up the size of the account” held by that poor country.

This is what banks were doing for their favoured private clients, and for the less-favoured sub-primers - with the active support of that great credit bubble-blower, Governor Alan Greenspan of the Federal Reserve. It explains why effortless and effectively costless credit creation has to be so carefully regulated. So that it is directed towards productive economic activity - not the kind of lazy, rentier ponzi finance capitalism of this past era when bankers lifted not a single productive finger but effortlessly grew richer and richer by the hour….

When you understand how easily credit/bank money is created, you realize that, unlike oil, or gold or Dutch Tulips, bank money is not a commodity.

Its a human construct, and all it requires to make a loan is for a man or woman to enter a number into a ledger/computer, and to check the loan against collateral and a potential repayment stream. As such there need never be any limit to the creation of bank money/credit."

Now in what sense is this true? Even bank money has a use value and an exchange value (interest rate), or so it seems to me. Help me out here people...and whilst you're doing so perhaps you might link your explanation into Willem Buiter's formidably technical exposition of the precise mechanisms by which the European Central Bank is propping up the big banks of the Eurozone. He appears - at least to my untrained eye - to be saying the banks have captured the 'State' (if the Eurozone can be thought of as a State which it isn't, quite) and that the 'human construct' of credit is simply being used to prop up the system as exists, at the expense of the people who live in it:

"...ECB’s enhanced credit support is mainly a slow and inefficient mechanism for recapitalising the banks - the ECB recently estimated short-term capital needs in the banking system of the Euro Area at about €280bn - without giving the taxpayers and other citizens of the Eurozone a claim on the banks in exchange, it turns the ECB into an agent of the banks (or more precisely of those in control of the banks and of the banks’ unsecured creditors) rather than of the 340 million citizens of the Euro Area."

On That Matter of The Coming Cuts

No one should be allowed an opinion on ' state functions we can do without' (TM), or, indeed, what we should protect, until they have read and thoroughly digested James Heartfield on the background:

Is the State being privatised in Britain, or is it taking over the private sector? The answer is that both are true, and neither. What we have is not a new private sector boom, but a growing state-dependent economy of concessions. Companies like Qinetiq and Capita only exist because of the way the state contracts out its services. Government's loss of faith in its own ability to organise production leads to an astonishing abandonment of its authority to chaotic and destructive shell companies...

All the time the established boundary between ‘state' and ‘civil society', between ‘public goods and private benefits', is being redrawn, or broken down altogether. What emerges is neither an enhanced private sector, nor coherent state provision, but rather a hybrid, dependent on public finances to survive, and increasingly operating according to a mixture of political, administrative and business models that makes little sense.

What's My Line?

A comment in the post below has just reminded me that the single most convincing outline of an alternative 'what-to-do-about-the-banks' policy was provided by Richard Murphy, back in October but no one, absolutely no one as far as I can see, ever took up the idea and ran with it. &, on the net, last October might as well be neolithic times, as we've all got the attention span of goldfish. So go read it now and see what you think.

It's not a strategy for socialism tomorrow. But it is a strategy for structural reform, for breaking the hold of Big Finance on our economy. It is, to use that well worn phrase, a 'modernization' strategy of the Left. (Remember when the Left used to think it knew how to surf the wave of the future? Ah, such memories....)

Now, think about it, what is the Left without a vision of a future? It is a group of people who fight, and quite often lose, defensive battles. Battles to stop things changing for the worse rather than battles to make things change for the better. & I've had a lifetime of it and I'm feeling really, really sick at the prospect of doing it over again when the cuts come after the election.

So let's have Richard's network banking; let's have Boffy's and Chris' self managed organisations (which are more productive anyway); let's have an industrial programme of arms conversion; let's have a Greening of the economy; let's have a different way of looking at public service value In short: let's have some reason to live through the economic pain. Let's have a future.

It is true that the Tories and their allies are trying to log roll the country into the default assumption that cuts must come, and must come quickly and severely after the election whoever wins it. No doubt all those Keynesians are right to say we should wait till the upswing to cut, but the gilt markets might turn at any point and give us very little choice. & whilst I agree with Duncan's newly discovered Texan Post Keynesian that it's about income and wealth equality in the long run, I detect no enthusiasm for an equality of national decline.

It ain't enough for the Left to say 'it-was-the-rich-wot-broke-it-so-they-should-fix-it'. We need a programme. A new AES.

Banks : Too Big Too Ignore

Willem Buiter doesn't like the idea of big banks:

"In banking and most highly leveraged finance, size is a social bad. Fortunately, there is quite a list of effective instruments for cutting leveraged finance down to size.

• Legally and institutionally, unbundle narrow banking and investment banking (Glass Steagall-on-steroids).
• Legally and institutionally prevent all banks (narrow banks and investment banks) from engaging in activities that present manifest potential conflicts of interest. This means no more universal banks and similar financial supermarkets.
• Limit the size of all banks by making regulatory capital ratios an increasing function of bank size.
• Enforce competition policy aggressively in the banking sector, by breaking up banks if necessary.
• Require any remaining systemically important banks to produce a detailed annual bankruptcy contingency plan.
• Only permit limited liability for narrow banks/public utility banks.
• Create a highly efficient special resolution regime for all systemically important financial institutions. This SRR will permit an omnipotent Conservator/Administrator to financially restructure the failing institutions (by writing down the claims of the unsecured creditors or mandatorily converting them into equity), without interfering materially with new lending, investment and funding operations.

The Geithner plan for restructuring US regulation is silent on the too big to fail problem. That alone is sufficient to ensure that it will fail to result in a more stable and safer US banking and financial system.

In the UK, the otherwise enlightened head of the FSA, Adair Turner, does not see a problem with banks of huge size and with a staggering range of unrelated or conflicted activities. Of all the parties that matter, only the Governor of the Bank of England, Mervyn King, is clear that ‘too big to fail’ is at the heart of the financial crisis we are trying to exit and will be at the heart of the next financial crisis that we are preparing so assiduously."

Stumbling goes further: we need smaller banks not just because big ones will drag us all down if they fail, but because otherwise we have no chance of influencing their behaviour and making them invest in firms, not households. But government policy is just to fatten 'em up and flog 'em back to the market to carry on as before, or so he very plausibly speculates.

So we have the outlines of three broad, overlapping but distinguishable, political economy worldviews:

1. The official position of both Tories and Labour: flog the banks back to the public sector once their balance sheets look a little less seasick, reduce the burden on public finances as soon as and as much as possible and twiddle the regulatory frameworks a bit at the edges. Those memories of the Great Moderation are so sweet that it seems impossible not to recreate that Arcadia, though perhaps we need a few more Black Swan management techniques.

2. The position of the 'guardian-priests' of the international financial system like Buiter, and, possibly, King: twiddling the regulations ain't going to work, though it is no doubt very necessary. We have to save the system from itself by radically redefining the power relationships between its component parts. We've had our Minsky Moment and we don't want another one. If that means governments - and tax payers - have to fore go some temporary relief, then so be it. We're playing for big stakes here and we can't afford to lose. Banks can't be so big as to potentially ruin us all. Interestingly, Vince Cable sometimes sounds like he's in this camp.

3. The position of the unbelievers: it's not just that our international banking - and shadow banking system - has proved so unstable, it's also how it operated before hand. Great inequalities were amplified and massive transfers channelled from poor to rich across the globe. Furthermore, in the heartlands, innovation and new enterprise was radically unattractive because it was so much less profitable to fund than consumption items, like housing, or simple speculation itself. We need to change this, perhaps for reasons of simple national competitiveness, perhaps for reasons to do with the need to green our economy or fry at some point before the end of the century. The banks should work for the rest of us, not the other way round.

What's interesting to me is that the debate around the wisdom or otherwise of stretching out or curtailing the current neo Keynesian demand stimulation policies - that whole 'Austerity v Growth' schtick - can be had within each of these perspectives*. So you get people who actually want very different things apparently agreeing with each other.

*2 hours later I discover Mervyn King has stepped forward to prove my point on this one. To Duncan's very great annoyance.

King's Men Discuss Egg Restoration Options

So Obama announces a new system of banking regulation which the FT editorial describes as structurally 'inelegant' but politically feasible - easier to get through Congress that a complete system re-design - and quite substantial in terms of content. Meanwhile the Governor of the Bank of England makes a public bid for more regulatory influence whilst the Chancellor remains apparently convinced that all is for the best in the best of all possible worlds of regulation. What are those of us outside the rarefied world of banking to make of all this ?

Basically these are 'All the King's Horses and All the King's Men' arguing about how best to put Humpty-Dumpty together again. Larry Elliot is scathing:

"...[after the] most serious financial meltdown in living memory. .....the government is planning no more than a slap on the wrist for the discredited bankers. The message from London – and from the Obama administration in Washington today – is that the chance for radical overhaul has been ducked."

Mervyn King's position is interesting because, on the surface, it appears more radical than that of either Darling or Obama. He wants to insure against systemic risks. He says its not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure. But his answer is:

"Either those guarantees to retail depositors should be limited to banks that make a narrower range of investments, or banks which pose greater risks to taxpayers and the economy in the event of failure should face higher capital requirements. Or we must develop resolution powers such that large and complex financial institutions can be wound down in an orderly manner. Or, perhaps, an element of all three. Privately owned and managed institutions that are too big to fail sit oddly with a market economy."(My emphasis)

There is nothing here, on either side of the apparent argument, which questions the dominance of our banking sector over other bits of the economy. There is just a technical argument about how best to get the system working again in the long term and how to technically prevent another lash-up of the scale of last autumn. Nothing about breaking the banks up into manageable proportions. Nothing about holding on to some bits of the current nationalised banks as regional or industrial development finance agencies, nor even anything on the scale of Glass Seagall.

This, of course is a reflection of the big difference between now and the post 1929 period. Then the problem for Obama, Darling and King's predecessors wasn't simply an apparent systemic failure but the existence of systemic alternatives in the form of the still young Soviet Revolution and Fascist Germany. No such alternative exists today and it is very, very striking how little progress the Left has made in building any support for such an alternative despite the depth of the crisis.