Socialist Economics

Written earlier this year….

The origins of the world economic crisis which we have not yet begun to solve date back to the potential collapse of banks and financial institutions such as Northern Rock in the UK and Lehman Brothers in the USA. It has been acknowledged widely that the national leader who led the charge to bail them out was Gordon Brown who seized the opportunity to alleviate his own domestic troubles. It is ironic that a socialist prime minister who had tried as Chancellor of the Exchequer to redistribute incomes should be the one to open the flood gates to wholesale intervention in the capitalist system to help the richest people retain their wealth. It is perhaps in the nature of socialism to intervene and attempt to plan to obstruct market forces. Gordon Brown was reputed to be a tinkerer and deviser of complicated schemes which he would then defend against all rational argument. This was perhaps one of these times. Pausing for thought might have suggested to him that here was a golden opportunity to devise a new order of world finance by quarantining the banks as one would a computer virus allowing the rest of the system to recover and heal the wound.
The Second World War spawned the Beveridge Report, something substantial out of disaster. In economic terms the current crisis is as cataclysmic as a world war but so far no great game changing movement has emerged. The Beveridge Report changed Society for ever. There was never any chance of reverting to the old order. There is yet time for something as fundamental to surface from the present economic turmoil but even the so called Socialist parties have until now been more inclined to maintain the status quo than to grasp the opportunity to re-align our society.
In the West there are many intractable problems which politicians have campaigned on for many elections without actually changing anything. An ageing population, an increasing gap between rich and poor, growing youth unemployment, increasing drug and alcohol related contamination are not as intractable as many would have us believe. What is lacking is the real political will and the application of great minds dedicated to finding solutions.

Bull by the Horns

I am amazed that Sheila Bair’s book, Bull by the Horns, telling the story of her part in the global financial crisis of 2007-11 has not become a best-selling sensation. It is more a thriller than a financial tome although for the financially literate amongst us the fine detail is all there. While no doubt just her side of the story it does lay bare the double dealing, chicanerie and downright dishonesty of so many of the major players. It does reveal that in the main the crisis was handled in such a way as to preserve the personal fortunes of the mega-rich and that all the talk of global melt-down actually equated to the bankruptcy of many of them rather than the collapse of society as a whole. The notion that some banks were too big to fail was nothing more than pernicious propaganda. Almost as a footnote she highlights the fact that the European banking system is so weak that even today there is billions of dollars of toxic sovereign debt still to be dealt with. Recently RBS has admitted its own share of that debt. Current talk of recovery is masking the fragility of the Eurozone and the UK economy. It is noteworthy that in the land of free enterprise, the USA, regulation of the financial sector was more rigorous than in Europe and is even more so post the recession. Bailouts of insolvent banks is now forbidden along with a system for disposing of bankrupt banks, sacking their managements and depriving them of the prior two years’ compensation. The shareholders and investors take the losses and not the taxpayer. Insured depositors are safeguarded. According to Bair it was the Germans and French who opposed higher capital requirements for international banks under the Basel III agreement in spite of the huge problems of the Eurozone. She makes clear that the people with the “Get out of Jail Free” card were those in the financial sector who caused the problems in the first place. Huge pay packets and astronomic bonuses were largely protected by the various US agencies while thousands lost their homes and jobs. She believes that instead of bailouts the failing financial institutions should have been allowed to go under and that if that had been the case the world economy would now be in much better shape. If the banks that funded Southern Europe’s extravagances had sunk under the weight of debt Greece, Spain and Portugal would be no worse off today and the mess could have been quickly cleared up. As it is the mess is still there and probably getting worse. Greece gets European taxpayer money by way of a bailout which goes to service the debt in one European bank or another but also pays that bank’s dividends and bonuses whereas it should be the bank owners that take the haircut.