10 May 2010
Raphie de Santos (Left Banker)
The European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF) have put together a 750 Euro billion bail out package to try and avert what would be the second leg of the great financial crisis and a double dip recession which could lead to a depression world wide. The package was designed to stop a further meltdown in financial markets after a week of losses which have not been seen since the Lehman’s crash of September 2008.
At the root of the crisis are the mounting deficits being run up by the developed countries of the world while their economies remain weak. Particularly, affected are those economies which were most exposed to the property and financial bubble and have weak manufacturing bases. These economies hid their fundamental weakness by swelling public spending to create jobs based on borrowing money cheaply on the international bond markets by issuing government bonds. But as the credit crisis turned into a recession and government spent hundreds of million of dollars bailing out their financial system and trying to pull their economies out of recession by massive stimulus spending these deficits ballooned to unmanageable levels. These deficits continued to grow as the world entered its worst recession since the 1930s depression meaning that government revenues on collected taxes fell while spending on social benefits went up.
When countries within the European Currency union run into trouble either renewing these loans or asking for new loans to cover annual deficits they will be able to turn to this fund. But like Greece to gain access to this money they will have to agree to massive cuts in public spending, wage cuts and rises in taxes. These draconian measures will have to be imposed against the will of the majority of the population so the bailout will only work if people accept these austerity measures. This is the great unknown. Of course the money for this fund will have to come from somewhere and that is us. The major developed economies will have to borrow money itself to fund the bailout leading to ballooning deficits in Germany, France, the US and the UK. The UK will have to make a contribution through the European commission and the IMF, the US through the IMF while Germany and France will have to contribute through ECB EC and the IMF. We will have to foot the bill through interest repayments or further cuts in public spending and tax rises. All this will help keep the world economy stagnant for at least a decade. The table below shows the scope of these loans that are required over the next five years if the current levels of deficits are not reduced and why financial markets want the deficits reduced . You can see that the 750 billion would not guarantee the potential borrowing requirements of Spain, Portugal and Italy over the next five years.
Euro Billion Loans Required over Next 5 Years
Renew New % GDP
Spain 60 821.0 56.00%
Portugal 25 103.4 47.00%
Italy 110 556.0 26.50%
UK 90 880.0 55.00%
The UK will not be rescued by this package and they will have to turn to the IMF when they run into problems in renewing and creating new loans to fund their deficit and debt. That is why there is such pressure from the financial markets to create a “stable” UK government that will quickly implement the cuts and tax rises need to reduce the deficit. But the party numbers and political differences in the UK do not add up to being able to provide such a “stable” government for any significant length of time. That is why the UK’s own Greek crisis is months or a year away at most with a fresh election almost certain to have to take place to try and provide such a “stable” government.
Whether governments have to turn to such funds or not they will have to make massive attacks on peoples living standards across Europe. We have to turn the resistance to these attacks into demands for a sane economy under common control. We should demand:
A cancellation of all government loans;
That the banks be taken under common ownership and control;
A massive wealth redistribution from the rich and wealthy to the majority of the population; and
A huge spending programme to create jobs, services and products that meet the needs of society and not the needs of profit
Showing posts with label bail out. Show all posts
Showing posts with label bail out. Show all posts
Monday, 10 May 2010
Sunday, 11 October 2009
Cuts in Services, Jobs, Wages and Pensions to Pay for Their Crisis
by Raphie de Santos
Cuts: that’s what all the major parties - Labour, SNP, Conservatives and Liberal Democrats - are arguing about. But not if there is an alternative to the cuts but who would be the best at making the cuts. But let’s be clear we are bailing them out of the complete mismanagement of their economic and financial systems.
Bring on the Clowns
Governments led by Thatcher, Blair, Brown, McConnell and Salmond have supported the changes to the running of the financial and economic system that have led to the greatest crisis since the 1930s. They have overseen the deregulation of financial markets and institutions and the liberal use of interest rates that created a huge speculative bubble in every type of debt and a mountain of 700 trillion US dollars of unregulated derivatives. They bailed these systems out with hundreds of billions of pounds of borrowed money which they are asking us to pay back through cuts.
Having all cheered from the sidelines patting each other on the back for their wonderful creation they now blame everyone but themselves for the mess and are asking us to pick up the bill for their reckless folly.
Bailouts
The shortfall in money has come from a bailout of the crisis ridden financial system and a deep UK recession caused by the resultant collapse of consumer credit. So far the government has spent about £150 billion (bn) bailing out the banks and another £150bn on quantitative easing (QE) – where they print money and buy back government and other debt from financial institutions. They are going to spend another £25bn on QE and are prepared to underwrite another £700bn of the banks bad debts. Practically none of the money spent so far has found its way into the real economy - about £2bn has gone into mortgage lending helping to temporarily stop the fall in house prices. Most of the bailout money is being horded by the banks to pay off losses and to have for any future potential losses. So far the money spent amounts to 25% of what we produce (gross domestic product) annually.
At the same time central government revenues are falling because of the recession they have caused. Rising unemployment has a double edged sword of reducing tax revenues and increasing benefits payments for central and local government. In August of this year there was a £17bn deficit in the UK budget from this trend.
One way to pay for the shortfalls is borrow money on the international financial markets through issuing UK government debt – called gilts. Then pay it back over several years with increased revenues from a growing economy. The average that was raised in the five years prior to 2009 by the UK government in this way was £47 bn per year. In 2009 the estimate is £146bn and in 2010 the forecast is £180bn. The problem with this model is two fold: one the economy will not recover (if at all) sufficiently to create extra tax revenue to make these payments; second the UK economy is so fundamentally weak that Bank of England interest rates will have to remain at very low levels which means a weak currency and therefore nobody – domestic or international – will want to buy these UK government bonds.
That is why all the plans put forward to make cuts by the major parties are so vague: nobody knows how much will have to be cut to cover the unknown developing black hole in the UK’s finances. That is why there is a general message of we are all going to have “bear the pain over several years” to sort out their mess.
But if we are correct about the prospects for the UK economy – years of stagnation or decline – then the cuts will be on a massive scale year after year with the dire social consequences that will bring for the majority of the working class.
The SNP
These cuts will affect central and local spending. Local spending by councils is financed by a block grant from central government making up about 75% of the local budget – the rest comes from council tax. Similarly the Scottish government receives a block payment from central government to finance services such as heath and education. The SNP minority government are in effect administering the cuts from London whether Tory or Labour. They have made matters worse for local councils by freezing council tax and refusing to implement a progressive local or national income tax. Even if such a proposal was defeated by the other parties in Holyrood it would have the effect of galvanising a campaign amongst Scottish voters for a commitment for such future tax changes from the next Holyrood election. It would also have strengthened the argument for independence for Scotland.
But the SNP did not want to rock capitalism’s boat and instead be quite happy to implement the cuts and makes some noises that it is all London’s fault.
Alternative
There is an alternative to the bank bailouts and cuts.
• take all the banks under full ownership and control turning their toxic loans into social rents and social projects and cancelling their destructive derivative contracts;
• a redistributive tax – a one off greed tax would repair the damage already done to our public services and a permanent progressive tax could generate an extra 33% to the total Scottish budget; and
• scrap the expenditure on nuclear weapons, withdraw from the wars in Afghanistan and Iraq and reduce our armed forces to one for defence not invasion.
This is the alternative the Scottish Socialist Party is fighting for in the Glasgow North-East by election and the forthcoming UK and Scottish elections. It is the rationale alternatives to what the major parties are offering us - that we pay for their crisis. It is the start of the building of a society that operates in the interests of the majority instead of the few.
Cuts: that’s what all the major parties - Labour, SNP, Conservatives and Liberal Democrats - are arguing about. But not if there is an alternative to the cuts but who would be the best at making the cuts. But let’s be clear we are bailing them out of the complete mismanagement of their economic and financial systems.
Bring on the Clowns
Governments led by Thatcher, Blair, Brown, McConnell and Salmond have supported the changes to the running of the financial and economic system that have led to the greatest crisis since the 1930s. They have overseen the deregulation of financial markets and institutions and the liberal use of interest rates that created a huge speculative bubble in every type of debt and a mountain of 700 trillion US dollars of unregulated derivatives. They bailed these systems out with hundreds of billions of pounds of borrowed money which they are asking us to pay back through cuts.
Having all cheered from the sidelines patting each other on the back for their wonderful creation they now blame everyone but themselves for the mess and are asking us to pick up the bill for their reckless folly.
Bailouts
The shortfall in money has come from a bailout of the crisis ridden financial system and a deep UK recession caused by the resultant collapse of consumer credit. So far the government has spent about £150 billion (bn) bailing out the banks and another £150bn on quantitative easing (QE) – where they print money and buy back government and other debt from financial institutions. They are going to spend another £25bn on QE and are prepared to underwrite another £700bn of the banks bad debts. Practically none of the money spent so far has found its way into the real economy - about £2bn has gone into mortgage lending helping to temporarily stop the fall in house prices. Most of the bailout money is being horded by the banks to pay off losses and to have for any future potential losses. So far the money spent amounts to 25% of what we produce (gross domestic product) annually.
At the same time central government revenues are falling because of the recession they have caused. Rising unemployment has a double edged sword of reducing tax revenues and increasing benefits payments for central and local government. In August of this year there was a £17bn deficit in the UK budget from this trend.
One way to pay for the shortfalls is borrow money on the international financial markets through issuing UK government debt – called gilts. Then pay it back over several years with increased revenues from a growing economy. The average that was raised in the five years prior to 2009 by the UK government in this way was £47 bn per year. In 2009 the estimate is £146bn and in 2010 the forecast is £180bn. The problem with this model is two fold: one the economy will not recover (if at all) sufficiently to create extra tax revenue to make these payments; second the UK economy is so fundamentally weak that Bank of England interest rates will have to remain at very low levels which means a weak currency and therefore nobody – domestic or international – will want to buy these UK government bonds.
That is why all the plans put forward to make cuts by the major parties are so vague: nobody knows how much will have to be cut to cover the unknown developing black hole in the UK’s finances. That is why there is a general message of we are all going to have “bear the pain over several years” to sort out their mess.
But if we are correct about the prospects for the UK economy – years of stagnation or decline – then the cuts will be on a massive scale year after year with the dire social consequences that will bring for the majority of the working class.
The SNP
These cuts will affect central and local spending. Local spending by councils is financed by a block grant from central government making up about 75% of the local budget – the rest comes from council tax. Similarly the Scottish government receives a block payment from central government to finance services such as heath and education. The SNP minority government are in effect administering the cuts from London whether Tory or Labour. They have made matters worse for local councils by freezing council tax and refusing to implement a progressive local or national income tax. Even if such a proposal was defeated by the other parties in Holyrood it would have the effect of galvanising a campaign amongst Scottish voters for a commitment for such future tax changes from the next Holyrood election. It would also have strengthened the argument for independence for Scotland.
But the SNP did not want to rock capitalism’s boat and instead be quite happy to implement the cuts and makes some noises that it is all London’s fault.
Alternative
There is an alternative to the bank bailouts and cuts.
• take all the banks under full ownership and control turning their toxic loans into social rents and social projects and cancelling their destructive derivative contracts;
• a redistributive tax – a one off greed tax would repair the damage already done to our public services and a permanent progressive tax could generate an extra 33% to the total Scottish budget; and
• scrap the expenditure on nuclear weapons, withdraw from the wars in Afghanistan and Iraq and reduce our armed forces to one for defence not invasion.
This is the alternative the Scottish Socialist Party is fighting for in the Glasgow North-East by election and the forthcoming UK and Scottish elections. It is the rationale alternatives to what the major parties are offering us - that we pay for their crisis. It is the start of the building of a society that operates in the interests of the majority instead of the few.
Friday, 3 October 2008
This Greed Was Beyond Irresponsible
by Campsie Branch member, Bill Newman
Bill Newman spent most of his working life in banking, latterly as head of economics and then as Assistant General Manager of a City of London bank. For some 15 years he was also editor of and wrote for a journal on international monetary economics.
He has an interest in African matters, having been responsible for economic and political reporting on sub-Saharan Africa for Westminster Bank and writing for some years for the Europa Yearbook on Somalia and Ethiopia.
He was also on the Executive Committee and the Management Committee of the Banking, Insurance and Finance Union (BIFU) and a delegate to the TUC.
He has an interest in African matters, having been responsible for economic and political reporting on sub-Saharan Africa for Westminster Bank and writing for some years for the Europa Yearbook on Somalia and Ethiopia.
He was also on the Executive Committee and the Management Committee of the Banking, Insurance and Finance Union (BIFU) and a delegate to the TUC.
No. The headline above was not from the Morning Star, but was from that house newspaper for the rich and powerful, the Financial Times of 18 September. And how about these headlines from the Herald: Capitalism has proven Karl Marx right again and Bailing out banks is socialism for the rich. All this is true and reflects the intrinsic truth about capitalism, but you won't hear any MPs or MSPs accepting this or recognising that this profound crisis merely reflects the inevitable effect of uncontrolled capitalism, nor will they acknowledge that socialism is the answer to these periodic catastrophes. The press and politicians fulminate about the greed of financial traders and bankers and fail to recognise that it is this greed which is the rationale for capitalism. Without greed and exploitation, the whole structure of capitalism would collapse.
It may seem strange that apparently intelligent men could bring mighty financial edifices to their knees, but if you are earning stratospheric sums trading bits of paper to other overpaid traders, why worry that these pieces of paper might represent worthless or, at the very least, suspect commodities. Did no-one not bother to consider that sub-prime mortgages, for example, were, by their very nature highly risky loans and that by the time they had been packaged up with other dubious products, it was virtually impossible, once they had been traded time and time again on the financial merry-go-round, to tell what underlying value they represented. Some years ago when I worked in banking, I queried with the Bank's chief trader what the quantifiable risks in the derivatives he traded were. In reply he pointed out that the Bank made substantial profits from such trade and that all banks of any consequence were also engaged in this paper chase. In consequence, I raised my fears with the Bank's Board only to receive the same answer. In essence, the boom in these dubious trades was a classic case of pyramid selling, not unlike the South Sea Bubble, and only the greed of bankers blinded them to the escalating risks of these increasingly complex markets.
But do the travails of overpaid bankers affect the average citizen? Unfortunately they do and the coming months will show a massive decline in all economic activity as banks try to rebuild their balance sheets, refuse to extend credit and shed staff. It is impossible to believe, for example, the reassuring noises that Santander makes on employment in their subsidiaries in Britain. If Abbey, Alliance and Leicester and Bradford and Bingley are owned by the same company, is it credible to believe that these banks and their staff will not suffer from consolidation? Without access to credit, what is left of our manufacturing industry will shrink at an escalating rate, unemployment will soar and house price collapse will leave many with unsustainable negative equity.
So what is the response of our politicians? Inevitably, the bail-outs envisaged are bail-outs for the very people who got us into this fine mess, a fact that the American public has been quick to realise. Nor will the enormous sums involved remedy the sickness in the world economy. It is not surprising that our leading politicians seem to have no knowledge of Karl Marx who , as Ian Bell in the Herald pointed out, defined with precision the inevitable economic crises at the heart of capitalism. It is rather more surprising that they seem to have forgotten, if they ever knew, the lessons taught by Lord Keynes, so besotted have they become by the simplistic notions of the free market as propagated by American economists of the so-called Chicago School. It should surprise no-one, not even politicians, that the only UK bank to be trusted by the public at the moment is the only nationalised bank, Northern Rock; so successful that the Bank's deposit services have been curtailed! The lesson, which our politicians will not learn, is that publicly owned banks are secure and privately-owned banks are not. At the very least, it would help if the Government greatly expanded public expenditure, but the very reverse seems to be happening.
The answer to the pending economic crash, is socialism, and now should be an ideal opportunity to get this message across. Given the control of the media and the absence of sympathetic politicians, this will not be easy, but the public will be looking for real solutions and will not be fooled for ever by sticking plaster measures of Western governments. The Scottish Socialist Party offers a principled and practical solution to our economic ills and it is crucial that we get our message across.
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