Thursday, 12 February 2009

From Recession to Depression: the U K Experience

Facilitated by the SSP co-convenor,
Frances Curran

Speakers—Raphie de Santos, Bill Newman.


It is at last dawning on even the most deluded of our MPs and MSPs that the recession (two quarters of negative growth) is not a temporary phenomenon and respected media commentators are not just crying wolf when they talk of years of economic pain. We are just at the commencement of a long depression (a recession lasting years) and it is apparent that governments have no cohesive plan for dealing with this, nor even an understanding that this is a crisis in the very nature of capitalism which requires radical socialist solutions. Indeed, the vacuous dialogues at the Davos forum meeting this year confirmed a global lack of meaningful policies.

The crisis was initiated by those bankers who thought that they could avoid the laws of capitalist economics and procede for ever to enrich themselves at everyone else's expense, and the tacit endorsement of politicians too ignorant, lazy or complacent to control this arrogant greed. It's worth recapping in overall terms the culpable stupidity of senior bankers in recent years:

- The naked greed of bank traders, bank executives and bank boards. This greed rewarded short-term speculative gains with obscene cash rewards. Bank risk analysts, where they had the courage to point out dangers, were ignored or even shown the door. Traders, often with little technical understanding of the instruments with which they were trading, could afford to ignore long-term problems given the massive short-term payments they were receiving. Likewise, chief executives and board chairmen were blinkered enough to believe that they could ignore longer-term risks. It is worth recalling that none of the former chairmen and chief executives of Royal Bank of Scotland and HBoS hauled before the UK Parliamentary Treasury Committeee on 10 February had any banking qualifications. Established politicians overtly claimed that 'greed is good', a mantra now castigated by the media without an acknowledgement that greed is an essential ingredient of capitalism.

-Profligate lending. The progressive loosening of prudential controls on the granting of credit led to the ludicrous self certification of borrowers whereby the word of borrowers as to their financial status was accepted without checks. This was compounded, for example, by the granting of mortgages in excess of 100% of the value of the property in question, presumably on the incredible belief that property prices would rise for ever and interest rates remain at historically low levels.

-Bankers as salespersons. All bank customers know that staff at their local branches were there to sell their products rather than cater for their mundane banking needs. Indeed, as every bank clerk knows, performance assessment and the rewards arising there from depended heavily on their ability to sell products and extend credit to bank customers.

- Weak banking regulation. Tight supervision of banks through inspection and financial parameters has been steadily eroded, through the deliberate embrace of the extension of the free market, an embrace, despite evidence to the contrary, that still controls the philosophy of the UK government. It is instructive that where bank regulation has remained tighter, as in Spain, bank crises have been lesser.

-The extension of derivative trading. Derivatives are in essence merely contracts whose values depend on something else. These can be useful and in their simpler form have been around almost as long as banking. The example which used to be used in basic banking instruction was that of the farmer who sold his crop in advance of harvest to a miller at a fixed price for future delivery, removing the element of future financial uncertainty to farmer and miller. In the last two decades or so different types of derivatives have become much more complex and varied. Many, such as credit derivative contracts, although they look like insurance contracts, provide considerable scope for profit when they are traded, not least when the value of contracts is leveraged. They also provide vast opportunities for loss when economic circumstances deteriorate. An indication of the scale of derivative trading and the overhang of contracts in the market is shown by the Bank for International Settlements (BIS) which valued derivatives outstanding on the market in June 2008 at $684 trillion. It is clear that senior executives seem not to have either understood the nature of the complex derivatives which their banks were trading, nor the risks involved.

-The crazy belief that as a result of the miracle-working Gordon Brown there would be no more boom and bust. Such a belief defies all economic laws. You haven't got to understand Karl Marx (though it helps!) to understand the cyclical nature of capitalism. If Gordon Brown had never read Marx, he should at least have known a little of Maynard Keynes, or even Adam Smith.

It is certainly true that the whole world is involved in what is indeed a global recession, compounded by the onward rush towards economic globalisation, but the recession is due to bite harded in the U K than elsewhere. Thus the International Monetary Fund (IMF) has forecast that the U K economy will shrink by 2.8% this year, compared with a deline of 2.0% in the Eurozone and 1.6% in the USA (see appended table 8). Why is the U K performing worse than other developed nations? There is a myth, which seemed to gain credibility in the media and even among opposition MPs that Prudence Brown was a sound, pragmatic chancellor. In practice, he was far from prudent as even a cursory look at his economic stewardeship shows.

Astonishingly, very few in the Westminster Parliament or the media seemed willing or able to expose Brown and the dangerous overheating of the U K economy, though, to be fair, Vince Cable did raise some warnings. Indeed, it seems to have been deemed to be unpatriotic to disclose the deterioration in economic performance.

Just look at performance of the U K's payments balance with the rest of the world (table 1). The U K's trade in goods has moved from a deficet of £12.5 billion in 1995 to a colossal £93.2 billion last year. In the company of astonished European MPs I heard a Goverment economic advisor claim many years ago that the reduction in British goods production and exports was of no consequence as what the U K was good at was the overseas sale of financial services. Well, at the very least, as Table 1 shows, our earnings balance on services by no means compensated for the growing goods trade deficit. And should we expect overseas financial earnings to be sustained this year? How, then, has the U K's growing current account payments deficit been financed? Net investment in the U K has shrunk and in 2007 recorded a substantial net outflow (Table 2) with valatile short-term borrowing meeting the gap.

Moreover, the gains from North Sea oil production have been frittered away and Britain's trade in oil has now moved from a solid surplus a decade ago to a deficit (Table 3). To compound this reverse, coal production, which could have helped meet energy needs, has been deliberately destroyed, first by the Tories, but, as Table 4 shows, New Labour has tamely followed the Tories policy so that the U K now imports more than twice as much coal as it produces, the largest supplier being Russia.

Nor can Gordon Brown claim prudence in managing Government finances. In the early years of New Labour, debt did indeed shrink, but, as Table 7 shows, Government deficits have emerged and grown to pump up economic growth, limiting the Government's room for manoeuvre in the current recession.

It is clear, then, that Gordon Brown's stewardship was far from prudent and was rather associated with a steady deterioration in the U K's economic performance. Nor can it be said that, despite the grandiloquent bluster, that he has shown a grasp of the depth of the financial and economic catastophies facing the U K. Measures such as the pointless reduction in VAT and the reliance on inadequate and inappropriate support for the banking sector hardly augur well for the radical restructuring required. Both he and his tame chancellor, Alastair Darling, seem terrified lest they are accused taking of socialist measures. Even with banks now owned by the state, there is still a reluctance to declare banks nationalised and to take control. It has been explicitly stated that the banks are best left in the hands of those with the necessary expertise, quite regardless of the fact that it is these overpaid "experts" who carry a large amount of the responsibility for getting us into this fine mess.

A totally new and socialist response is urgently needed and none of our established parties will provide this in Scotland or elsewhere. It is more important than ever that people are made aware that capitalism has failed and a different world is possible, and that world must no longer rely on capitalist "solutions".

Click on table for bigger image:

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