The real Keynes

Book Review by Graham Turner

Keynes Betrayed, by Geoff Tily, Palgrave Macmillan, 2010

Palgrave Macmillan have republished Geoff Tily’s “Keynes Betrayed” in paperback.

This is an important book because it contradicts so much of the perceived wisdom over Keynes’s policy prescription. And it should be stressed, the errors of understanding Keynes are committed by economists on both sides of the spectrum – right and left – as well as a good chunk of those sitting in the middle.

Keynes was far more concerned about monetary issues than fiscal policy. Unfortunately, most cursory reading of Keynes simply focuses on the General Theory, which was written in 1936. Even then, too many readers of this important book fail to appreciate the chronology of policy advice Keynes was offering in the 1930s – monetary first, fiscal second.

Indeed, Keynes made an enormous – and positive contribution – to policy long before the General Theory was published, as Geoff Tily shows commendably in this book. "Keynes's central policy priority was a permanently reduced long-term rate of interest", Tily argues. Keynes was a leading proponent of central bank long-term asset purchases – today called quantitative easing (QE). Furthermore, he was quite clear about the problem within bond markets which made QE necessary, as shown by his liquidity preference theory. Keynes also understood the importance of targeting the yield rather than merely setting a nominal purchase target for QE.


In all these respects, Keynes had a much greater understanding of the bond market – including the critical role of expectations - than today’s central bankers. The current FOMC has been content to announce an extension of its own, somewhat flawed QE, announcing last November that it would buy a further US$600bn of US Treasuries. Since then, sniping from hawks on the FOMC, a (modest) uptick in economic growth and an unseemly rush to extend tax cuts has sparked a huge sell-off in US Treasuries. And that has occurred just as the S&P/Case Shiller index for house prices is poised to break down to new bear market lows. Federal Reserve chair Ben Bernanke has been forced to admit that the economic recovery in the US is slow. It may well stall, precisely because the Fed chair, and much of the economic establishment, including New York Times commentator Paul Krugman (not to mention the departed, discredited Lawrence Summers and Chrisina Romer) simply do not ‘get Keynes’.

One economist who clearly does is Geoff Tily. His book is based on a PhD thesis, supervised by Professor Victoria Chick at the University College of London. Professor Chick is one of a handful of economists who truly comprehends the importance of monetary affairs in Keynes’s work, and encouraged Geoff to write his thesis.

Geoff provides clear evidence of the role Keynes played in driving the shift towards QE in the early 1930s, long before the General Theory was published. He also dissects the manner in which Keynes’s legacy was traduced by economists, both on the right and soft left in the post-war era, after his untimely death in 1946.

This book is rigorous, and readers will be impressed by the comprehensive manner in which Geoff takes Keynes’s critics to task. It is not the sort of book that can be read in one quick swoop. It is a demanding read, because it is so thorough. It challenges many of the misconceptions over the policies pursued during the 1930s. For these reasons, this book helps to explain why the West has botched its response to the credit crunch.

The Credit Crunch – Who Pays?

Graham Turner

The sharp rally in stock markets since March has put a spring in the step of bankers. But unemployment continues to grind higher and the spectre of a full frontal assault on public sector workers looms. The question of who pays for the credit crunch now dominates the headlines.

In essence, all three major political parties believe that public sector workers should bear the price for a huge rise in the government's borrowing. The economy may have been stabilised, but the hit to the public purse has been unprecedented outside of war.

On current projections, the Chancellor may have been too optimistic when he rocked the House of Commons in April, announcing a projected deficit of £175 billion or 12.4% of GDP for the current financial year. The latest data for August show the moving annual total has already risen to £127.3bn. The public sector finances for July were particularly dire.

The best approach to evaluating the data is to consider the annual change in £ terms. July showed a rise in the deficit of £13.0 billion compared with a year earlier. The previous record decline was set in January this year, but that showed a comparatively modest increase in the deficit of £8.5bn on an annual basis.

The deterioration in July was significant because this is seasonally an important month for tax revenues. If the 15.8% y/y drop in tax revenues is repeated in January next year – another big month for the government coffers, the Treasury may be forced to revise its forecast for the deficit higher, to 13.0% or 14.0% of GDP.

With Gordon Brown's reputation for prudence in tatters, the door is wide open for the Conservatives – and the Liberals should they join in a coalition government – to launch savage cuts on public services far beyond those seen under Thatcher, or following the IMF bailout of 1976.

The public sector deficit is unquestionably out of control. But the right wing media and its political allies have been very successful in convincing the wider electorate that public spending is the culprit.

An objective assessment of the data suggests otherwise. During the first five months of the current financial year, tax receipts have fallen by an average of 11.4% y/y (in £ terms). That is significantly worse than the 6.5% y/y decline expected by the Treasury for the full year, set out in the April budget.

By contrast government spending is rising by less than expected. So far, its has climbed by an average of 5.3% y/y (again, in £ terms) compared with a Treasury forecast of 7.7% y/y for the full year.

And it is hard to equate this increase in spending with the media image of waste and profligacy in the public sector. In real terms, it represents a rise of 3.3% y/y, a remarkably low increase given the inevitable pressures on social security payments, in response to rising unemployment.

Indeed, it is quite possible that the ratio of public spending to GDP will be less than the 43.1% projected by the Treasury, and may only be a touch above the 42.3% recorded under Thatcher, during the early 1980s' recession.

Furthermore, it is worth comparing the Tory years from 1979 onwards, with the record under New Labour. The ratio of public spending to GDP has been exactly the same - 37.1%, even with the Treasury's forecast for a rise to 43.1% included.

Much of the onslaught on public sector workers reflects a belief among the right wing press that the UK has become a high tax country. Again, the hard evidence suggests otherwise. Between 1979 and 1997, the ratio of tax revenues to GDP averaged 40.2%. Since then, it has averaged 37.5%.

Unequivocally, the Tories are the party of high taxes. Indeed, the Treasury’s projected tax revenues for this year - just 35.1% of GDP - will be lower than under any year between 1979 and 1997. Furthermore, if the data for the first five months is any guide, the final figure could be around 33.4%. The credit crunch will have indeed turned the UK into a low tax economy.

But we should not expect the public sector deficit to fall quickly even if the economy were to recover. The collapse of corporation tax receipts in particular is not a one-off or a temporary response to the credit crunch. The ability of banks and companies to roll forward their losses implies there may be a structural gap in tax revenues that persists for many years.

US investment bank Merrill Lynch provided a rare insight into this problem in August last year, before it was subsumed by Bank of America in the panic that followed the collapse of Lehman Brothers. In a regulatory filing last year, it admitted that $29bn of losses sustained on subprime mortgages in the US were being routed through its London office. According to the Financial Times, the bank was therefore "unlikely to pay corporation tax for 60 years" - even if it returned to profit levels reached at the height of the boom.

It is clear from any objective assessment of the data that new sources of tax revenue need to be found to fill the gaping hole in the public sector accounts spawned by the credit crunch. Higher income taxes are not the only answer. Companies need to be taxed if they want to do business in the UK. They can try and relocate their headquarters to Ireland, Switzerland or the Cayman Islands. But they cannot physically remove their entire operations. So they need to be taxed on the level of business or turnover. Companies need access to the UK market to sell their goods, and they should not be allowed to operate here if they are not prepared to pay their way. Economically and morally, it is wrong for public sector workers to pick up the tab for a crisis they did not create.

* Graham Turner's new book No Way To Run An Economy, published by Pluto Press is available from Bookmarks Book Shop, price £12.99

Brown presents the bill

A year and a day ago the Federal Reserve, the US central bank, took the decision to instruct Lehman Brothers to file for bankruptcy after 158 years of trading. It was a case of too big to fail and too big to save. Within days, the world economy fell off a cliff and has never recovered.

With its roots in barter, exchanging manufactured goods for raw cotton, Lehman’s history is inextricably a part of the history of capitalism. The company began its diversification into financial services in the 1880s (around the time of Marx’s death). In the 20th century, Lehman was instrumental in enabling the explosive growth of profitable commodity production and exchange, notably through finding the capital for retail giants like Woolworths, then television and later computer manufacture. It also helped finance Halliburton, the oil company at the heart of the Bush administration’s war on Iraq.

At its pinnacle it was among the elite of the world’s financial services companies, actively spinning the web of debt that enmeshed the world. As the credit crunch took hold in August 2007, it closed its sub-prime mortgage lender with the loss of 1,200 jobs.

But it was all too late. A year later, its liabilities exceeded its assets to such an extent that not even the American government could bail Lehman Brothers out and it went to the wall. Today, like much of the global capitalist economy, Lehman Brothers is bankrupt but still trading. So many dead men walking.

As the world was considering the significance of the passing of Lehman yesterday, prime minister Gordon Brown was opening a new chapter in the rapidly worsening global economic crisis that went hand-in-hand with the decline of banking and finance. Brown was a key figure in ensuring the subordination of the British economy to financial interests, announcing a new “golden age” for the City just weeks before it all went pear shaped. Now he’d come to present the bill for the damage, not to the bankers, but to the assembled ranks of the representatives of the organised working class at the TUC in Liverpool. They listened with protest messages raised while for the first time he talked of public spending cuts to come after the next election.

Attempts to restore the flow of credit have failed. Global stimulus packages have concentrated on eliminating huge swathes of the global car industry, dumping hundreds of thousands of workers on the streets. Unemployment is soaring. Tens of millions around the world are already without work, soon to be homeless if they aren’t already, without healthcare or pensions. And now Brown talks of cuts.

Politicians of all parties are competing to prepare voters for the devastation to come, the price to be paid for keeping the capitalist system in existence. This bidding process finds parties competing for the right to inflict the impact of the crisis on the majority of the world’s population, forcibly if necessary.

Commentators may delude themselves with good news, but the majority will see no sign or possibility of a “recovery”. They will not benefit from an illusory “return to growth” that is in essence the prelude to a further lurch towards outright slump. Lehman Brothers was broken by fantasy financing that in the form of debt fuelled the economic boom.

And there are mountains of debt still out there with claims on real assets and future earnings. In the absence of a recovery, these assets – in the shape of jobs, pensions and homes – are likely to be wiped out by capitalist bankers and corporations.

So this is no time to be caught up in discussions about ending “unbridled free market capitalism”, nor speculating on “a realignment of world capitalism”, nor even pushing for the kind of change that would “renew capitalism in a fairer form”. These are mere palliatives that leave the basic cause untouched and untreated.

What we must now do is to acquire the power to switch from a credit-dependent system of for-profit production based on legalised exploitation of labour to production for need guided by democratic decisions based on collective ownership. That’s how to fight the cuts as well as create a sustainable future.

Gerry Gold
Economics editor
A World to Win
reposted from http://www.aworldtowin.net/

The Credit Crunch – Causes And Resolutions

A lot of ink has been spilt analysing the causes of the Credit Crunch. Much of the discussion has understandably focussed on the culpability of financial institutions, regulators and even central banks.

There is no question all three must take their share of the blame for bringing the world economy to the brink of depression. Financial institutions were reckless, regulators asleep at the wheel, while central banks were at best naive, at worst, complicit in the creation of grotesque credit bubbles.

And in one respect, Prime Minister Brown is right when he claims this crisis is global.

Based on IMF data, there are over a hundred countries which have seen private sector borrowing rise faster than the UK since the millennium. Many have seen increases that are multiples of the rise in UK debt. Top of the poll goes to Ukraine, where private sector debt has jumped by an astonishing 5671% since the turn of this decade.

From the Baltics, down to the Balkans and across to Kazakhstan, eleven countries are in more trouble than Thailand during 1997, in the midst of the infamous SE Asian crisis.

Another nine countries are on the critical list. Eastern Europe is the fault line of a global capitalism that is badly ruptured.

And one Eastern European economy has already slipped into depression. The accepted benchmark for a depression is a contraction in real GDP of 10%. Latvia passed that unwelcome benchmark in the fourth quarter of 2008. Many more will follow.

They will be quickly matched by the major manufacturing exporters. Japan is likely to report a decline in GDP of 10% or more from its 2008 peak, when it publishes first quarter data for 2009. The collapse in exports – down 45.7% in January from a year earlier - has been astonishing. The February report on manufacturing production is expected - by the government – to show a decline of 37% from a year ago.

These rates of decline are easily comparable to the Great Depression. Indeed, in the worst year of the US slump, manufacturing output fell 21.0%. From peak to trough, it shrank 47.9%. That was over three years, between 1929 and 1932. In Japan, we have seen a large proportion of that decline in just one year.

Other big manufacturers are suffering too. Taiwan, South Korea, Germany and Sweden have all seen a collapse in exports, and will soon be in depression.

But it is wrong for Mr Brown to take comfort in the travails of Britain’s partners. The global credit bubble was a manifestation of economic policies he espoused. And Adair Turner and Hector Sants, respectively chair and chief executive of the Financial Services Authority, have come closer than most to recognising an important truth: politicians were ultimately responsible for allowing banks to lend freely.

However, even they are reluctant to admit to an even deeper and politically more uncomfortable explanation. As we argued last year in our book The Credit Crunch, the growth in lending was a necessary antidote to the pernicious effects of globalisation.

Shipping jobs abroad to cheaper locations, from China, to Eastern Europe to Turkey and India, has been a fallacy. The median wage has been relentlessly squeezed, not just in the UK, but in the US and other European countries too. If there had been no credit boom, GDP growth would have been almost negligible after the collapse of the dotcom bubble. Deflation would have become entrenched.

Led by their obsession with free trade, politicians in the West were happy to preside over the resulting housing bubbles, believing that low inflation would sustain the extreme house prices. For a while, it did.

But it is perhaps ironic, that when inflation did eventually accelerate, it was never likely to last precisely because of globalisation. Wages were being squeezed even during the boom, and as oil prices rose, there was not the slightest chance that inflation pressures would become embedded, as seen in the 1970s and 1980s. Tragically, central banks in the West could not see that. They kept interest rates too high for too long. They misjudged, because they did not understand the forces of globalisation that gave rise to the credit bubble in the first place.

Indeed, it is quite possible to show that a more timely response on interest rates, particularly in the US, but also in the UK and in Euroland, would have alleviated much of the distress we are now seeing.

But that is for the history books. What matters now is the response of central banks and governments to a looming depression.

The Bank of England’s decision to embrace quantitative easing should be welcomed on one level. This in essence involves a central bank targeting long term interest rates. The base rate may be 0.5%, but it is only one borrowing cost. There are many more interest rates, and the most important of these is the long term rate on government debt. This underpins all other credit costs. If a central bank drives the long term rate down, it can have a demonstrable impact on other borrowing costs.

This policy has many critics, but the recovery in the US from 1932 would never have happened without quantitative easing. Indeed, had the Federal Reserve in particular followed this policy more aggressively, the recovery would have been more robust.

Unemployment would have come down more quickly. It is beyond dispute that quantitative easing is a powerful monetary weapon.

There are however, several problems. The Bank of England cannot reflate in isolation. The Swiss Central Bank has joined the along with the Federal Reserve. But it remains to be seen how far the Fed, the most important central bank of all, is prepared to push this policy. It may yet fail if not used radically enough.

And it should not be seen as an excuse for profligate fiscal policies. Quantitative easing does make it easier for a government to expand its budget deficit to support an economy.

But the funds should still be used judiciously. The debt still has to be paid back.

Japan’s experience illustrates the pitfalls. Eleven emergency government budgets stretching over ten years pushed the public debt burden up from 64% to 175% by 2005. Quantitative easing has pinned down the long term interest rate – it has not been above 2% this decade, and is currently languishing close to 1%. But the sheer scale of the rise in the government debt means that 46% of tax receipts will be used to cover interest payments this year.

In this respect, we have to be alarmed that the UK budget deficit has raced towards 10% without the increased funding being put to more effective use. A bigger budget deficit tied towards an industrial strategy based around alternative energy, green technology, biotechnology and new growth sectors, would represent a sound investment in a UK recovery.

Instead, the deficit is being driven higher in part by the cost of bank bailouts. The government claims that banks have to be rescued otherwise the credit lifeline to companies would be severed, and many more would default pushing unemployment up even faster.

But the banks should have been nationalised from the outset. The government may still have needed to recapitalise the stricken financial institutions. But once nationalised, the banks could have been turned into utilities. Instead, they are being driven on commercial grounds to increase margins, to repay their loans to the taxpayer.

This way spells disaster. Loan rates need to be lowered, not maximised. Bankruptcies need to be minimised. With banks under full public control, they can be used as an extension of monetary policy, ensuring credit flows on terms that ensure companies stay afloat.

State supervised banks can also provide the support needed to allow many companies to restructure towards the new products that will help to combat climate change. The alternative technology already exists to generate a new wave of green industries.

The proposed rescue of LDV, the troubled van maker, is an acid test of the government’s willingness to marry the preservation of jobs with its carbon emission targets. It is unconscionable that LDV is on the verge of default for want of such a small capital injection, jeopardising the company’s plans for an expansion in battery powered vans.

The Bank of England's recent shift to quantitative easing will not be enough. Now is the time for an industrial strategy to reverse the huge job losses in manufacturing, which have disproportionately hit Wales, the Midlands and the North East. The 138,400 increase in the claimant count for January may have come as a shock to some. However, this could be a long way from the peak.

The Government must use its control of banks to support industry, otherwise vital skills and manufacturing capacity needed to sustain any recovery, will be lost.

The Government needs also to take proper, effective and accountable control of banks, to arrest the wave of business foreclosures. Banks need to be run as utilities and not on the basis of profit maximization, otherwise soaring defaults will entail huge social costs.

The UK is danger of following the US into mass unemployment. The wider measure of US unemployment - the so-called U6 rate - has already soared to 14.8%. This includes those who have given up looking for work and thus do not count in the official rate, and it also includes involuntary part-time workers, many of whom may lose their job. The U6 rate is heading for 20% by year-end, and could top 25% next year. It is a warning to New Labour. If it does not intervene to support industry, unemployment will soar here too, topping 4.0 million by next year.

Graham Turner is an Economist and Author of The Credit Crunch, from Pluto Press. Available from Bookmarks The Socialist BookShop, for £10 plus postage and packaging. Phone 020 7637 1848. Or www.bookmarksbookshop.co.uk

Time to Nationalise the Banks Now

Government policy on banks branded "failure" . . . Bank of England "dithering"

The Government's policy towards the banks has been branded "a failure" today as more bad economic news floods the media - from falling stock markets to rising repossessions.

John McDonnell MP, LEAP Chair, said:

"Despite all Government attempts to stimulate the economy, all the evidence points to failure. The billions in bailouts have done little to increase lending, and we are witnessing a startling rise in home repossessions.

"The Government now needs to be more forthright and move towards the full nationalisation of the banking sector to be run in the interests of the British people.

"We can't afford any more dithering by the Bank of England. We need an immediate and substantial cut in interest rates. It is now time for the Government to take back control from the dithering Bank of England."

-Ends-

NAPO calls for ASBOs for reckless bankers

Bankers who helped spark the credit crunch should be given anti-social behaviour orders to stop them being "reckless" in the future, a trade union leader has said.

Speculators who acted "irresponsibly" could be banned from working just like teenage yobs are banned from loitering, it was suggested.

Harry Fletcher, deputy general secretary of Napo, the probation officers union, said guilty bankers could also be given "acceptable behaviour contracts" like errant children to make them promise not to do the same in the future.

And he said the Government could look to extract financial penalties from people whose "negligence" had in part forced a taxpayer bail-out of banks.

He said: "The Probation Service deals with over 240,000 offenders every year who have behaved recklessly and caused damage and harm to innocent victims.

"The behaviour of dealers and traders is exactly the same: some of them have caused alarm and distress and have behaved in a reckless way."

"The Government must therefore investigate whether there has been any wrongdoing under current laws and if not should consider as a matter of urgency new laws."

He said innocent people had lost their homes and jobs as a result of the crunch and bankers should not be given "impunity".

He called for financial regulators, the Financial Services Authority, or the Home Office to launch an urgent inquiry into what new measures were needed.

Brown's Bankers Bailout: Questions and answers

Gordon Brown is being feted as the “master of the universe”. Stock markets yesterday were delirious with joy, making record-breaking, stratospheric leaps yesterday as governments around the world bailed out the banks. Right-wing Tory newspapers joined in unalloyed praise for the bankers’ government.

Q. Is the financial storm over then?

Er, no actually.

So far, sums approaching £2,000 billion (= £2 trillion) of taxpayers’ money has been committed by the governments of America, the UK and Europe to the bankers’ bail-out. Central banks are pouring “unlimited” amounts of US dollars into the global financial system in what will prove yet another failed attempt to prevent the mother of all meltdowns.

Q. How can we be so sure?

Yes, £2 trillion sounds a lot, but the collecting bucket is effectively bottomless. This unimaginably large sum of money is dwarfed by a series of other giant hot-air balloons of fantasy finance queuing to burst in the background whilst Brown’s Punch to the bankers’ Judy struts temporarily in the foreground.

Among the balloons is the market in credit default swaps (CDS), a way of trading in risk. It began life in the mid-1990s and, largely because it has always been unregulated, and appeared to offer the possibility of reducing, or at least sharing risk, it attracted a great deal of interest.

The simple version of the story goes that a swap enables an organisation making a loan to a customer to insure against the customer defaulting on payments by establishing a private contract with a third party, paying a kind of insurance premium. It can’t be called “insurance” because that would make it liable to regulation. You wouldn’t want to call it “protection” either. People might think you’re a gangster.

The market grew very fast. Most major organisations are now caught up with each other in a lacework of interconnected contracts.

Q. Ok, so how much are we talking about?

It’s difficult to be precise, because all the trading is in unregulated contracts hidden from public view. Nobody really knows. Data from the International Swaps and Derivatives Association (!) show that at the end of June, the CDS market had a notional value of $54 trillion. That's the same as the planet's 2007 GDP and nearly four times the value of all shares traded on the New York Stock Exchange. Other estimates puts the figure nearer $65 trillion.

Q. So what is the chance of this particular balloon bursting?

It already did. On Friday, Moneyweek put it like this:

"When one side of a trade defaults, it starts a chain reaction that raises the risk of others losing money. That's called 'counterparty risk', and is partly what has spooked investors into selling off assets and lenders into curbing credit. The collapse of Lehman Brothers has had a particularly big impact. Lehman wrote more than $700bn-worth of CDS. Now it's gone bust, investors who had taken out these CDS have been left without the insurance, so they're having to buy more, even though prices are now rising because of the general turmoil."

Initial results of the auction to determine the value of CDS on Lehman Brothers showed banks, hedge funds and other sellers of protection facing losses in the area of 90.25% of the insurance they sold.

The CDS market is only 10% of the global derivatives market, which covers all contracts taken out to minimise risk. This is the mysterious, unregulated world of futures, forwards, options and swaps. According to the Bank for International Settlements, the notional amounts outstanding at the end of 2007 totalled about $550 trillion on contracts privately traded between parties. As the global recession deepens, the number of parties unable to fulfil contracts will grow rapidly.

Q. Is the storm over?

It’s only just beginning to blow!

adapted and reposted from www.aworldtowin.net

LEAP Summit: Who Pays for the Credit Crunch?

'Who Pays for the Credit Crunch?'

Monday 13th October 08
7.30pm
Committee Room 10, House of Commons

Chair: John McDonnell MP

Speakers include: Brian Caton (POA), Jeremy Dear (NUJ), Kelvin Hopkins MP, Mark Serwotka (PCS), Prem Sikka (Prof. of Accountancy, University of Essex), Graham Turner (author of 'The Credit Crunch') plus others


John McDonnell, LEAP Chair, said

"My view is clear – the key question is who should pay for this crisis? Pouring taxpayers money into bailing out the banks by recapitalisation without nationalisation will mean that ordinary taxpayers pay for the crisis caused by the mistakes and greed of the bankers. Nationalisation to control the banks, prevent repossessions and halt company closures is the only way to provide the security needed."

See A People's Programme for the Crisis by LEAP - and have your say.

People's Programme underestimates crisis

The People’s Programme for the Crisis, distributed in the name of LEAP as the world’s stock markets went into free-fall, is in danger of underestimating the nature of the unprecedented economic, social and political conditions we are living through. The fear of outright financial collapse and economic slump is evident in every newspaper. Ruling political elites on both sides of the Atlantic are preparing for the worst while in public hoping for the best.

There were persistent reports that members of the House of Representatives were warned that failure to pass the $700 billion bail-out package could lead to martial law and the deployment of troops on the streets. In Germany, mindful of the consequences of economic collapse from history, the government legalised the domestic military operations of the Bundeswehr while it tried to rescue Hypo Real and other banks. In Britain, the consensus growing around New Labour smacks of coalition government.

The recall of Peter Mandelson, a key advocate and exponent of the neo-liberal agenda, and the inclusion of financier Paul Myners as minister for the City as part of the economic “war cabinet” strengthens the capitalist outlook of New Labour. One cabinet minister reportedly said: “British business will be thinking, actually, Peter Mandelson's a good person to be in charge of our interests in government."

For those in the labour movement who seriously want to confront the issues, the global credit crisis provides unparalleled opportunities to expose not just the failure of capitalism as an economic and financial system but also to expose New Labour. Ordinary people in financial difficulties as a result of losing their jobs, rising loan charges or lack of credit are left to their own devices. They are at the mercy of the very same banks that are being lined up for a massive government hand-out. Increasing numbers of people’s homes are being repossessed while the bankers form a queue for state aid.

The financial meltdown thus has the merit of clearing the air in a political sense. Who can deny now that the New Labour government is a corporate and bankers’ regime, which is deploying the power and resources of the capitalist state to try and save the system from itself? Where are the differences in outlook between New Labour and other capitalist parties like the Tories or Liberal Democrats? You can use a microscope if you want, but you won’t discover anything significant.

In these circumstances, there is absolutely no point in focusing protest and pressure on the New Labour government in the hope that it may somehow, in some miraculous, semi-religious fashion, undergo a conversion and become anti-capitalist. New Labour is what it is and has been since the Blair/Brown/Mandelson counter-revolution that began in the early 1990s.

Under these conditions, LEAP’s appeal to the New Labour government “to act urgently to protect the British people against the economic turmoil that was not of their making” is at best even-handedly misguided, and is in danger of lending credibility to the government at a time when it is rapidly losing the plot.

The policy proposals are themselves somewhat unrealistic, irrespective of who they are addressed to. Nationalising the banks is a challenging prospect given that Barclays PLC for example, ranked as the 25th largest company in the world, is a major global financial services provider operating in Europe, North America, the Middle East, Latin America, Australia, Asia and Africa.

Cutting interest rates can have little effect on the global crisis and risks a further inflationary surge to add to the close to 50% hike in electricity bills, and 15+% rise in grocery bills already experienced this year. Reducing the influence of the Bank of England is advocated at a time when it has already been greatly diminished by the globalisation of the financial system. Converting repossessions to social rentals is progressive but leaves the majority trapped into repaying vastly inflated mortgage debt. Strengthening rights and representation at work will not answer mass unemployment as long as the system of private ownership of global corporations is left in place.

A new line of attack is required. LEAP should seize the chance created by the crisis to campaign in the labour and trade union movement against the government, in the spirit that workers fought the Callaghan government in 1978-9, whose policies opened the door for Thatcherism (and later, Blairism).

Such a campaign could easily show how the crash of 2008 arises from a system based on the ruthless pursuit of profit and that alternatives are urgently needed from a practical point of view. Policies developed in opposition to a bankers’ bail-out would raise the possibility of reorganising the economy along not-for-profit lines. This could best be done by revisiting some well-established principles in the light of conditions transformed by corporate-driven globalisation.

They could, for example, incorporate new forms of democratic power. Democracy could and should be extended through co-operative forms of ownership and workplace control of major corporations, enterprises and services. Restoring the right to strike and freedom for trade unions along with new social rights in areas such as housing, education, transport and care would be essential. LEAP should use its connections to seize the initiative and urge supportive trade union leaders to adopt this strategy and mobilise their members around a programme of action.

As to who is to implement such a democratic socialist programme – given that New Labour can’t and won’t - this question of questions will need to be raised, discussed, debated and resolved in the course of building an independent movement to defend jobs and living standards at the expense of capitalism itself.

A People's Programme for the Crisis

The Government needs to act urgently to protect the British people against the economic turmoil that was not of their making, but is now resulting in them losing their jobs, and struggling to pay their rent or mortgage, and fuel bills. There should be no blank cheques to bail out the banks that contributed to this crisis.

We are calling upon the Government to implement a people's programme to protect our people from the crisis not just the bankers, including:

1) nationalising the banks and establishing democratic control over banking decisions, ensuring democratic representation on boards, ending the bonus binges, controlling executive pay and share holder rewards;

2) Cutting interest rates significantly and immediately, restoring democratic control over key economic decisionmaking by not only widening the remit of the Bank of England beyond ensuring price stability to advising on the wider economic health of the country but also reverting the bank's role to being one voice amongst many others to be taken into account;

3) Securing people a home by converting repossessions to social rentals so that people have a 'right to stay' in their homes and embarking on a massive council house-building programme;

4) Enhancing security in employment by ensuring people have a say over the future of the companies by strengthening rights and representation at work;

5) Bring fuel bills under control with price controls on the consumer price of gas and electricity, so that people are not being forced to choose between heating and eating this winter, with the threat of nationalisation if needed.

We call on all people to support these measures and to campaign to the Government for their implementation.

If you would like a speaker from LEAP at your union or CLP meeting, please email LEAP.

Nationalisation - in whose interest?

Gregor Gall
(A version of this article first appeared in the Morning Star)

State intervention and nationalisation are both back with an incredible bang. Suddenly, TINA – there is no alternative – to the free market looks as hollow as Brown's promise to end the cycle of boom and bust. Indeed, state intervention has been used to back up the so-called free market. Taxpayers', not private, money has been ploughed into doing this.

It just goes to show that in this age of globalisation and neo-liberalism the state and market regulation are still very important to capitalism, particularly when it is facing financial and economic meltdown.

The downright annoying aspect is that the bailouts we've seen here and in the United States are nationalisations by the right and for the bosses. If they were carried out at the behest of the left and for the workers, taxpayers and citizens, they would look entirely different.

So sure the senior management was changed when Northern Rock was nationalised but one set of capitalist managers was replaced by another set. The same will be true of Bradford and Bingley. The nationalisations were not to safeguard jobs or workers' conditions or people's savings but the financial system in Britain upon which capitalism and profits heavily depend.

If the left is to make headway right now, we must start getting our ideas about public and social ownership out into the media, into union members' heads and onto people's radar screens.

We need to start off with what public and social ownership are not. We're not calling for a return to the age of nationalisation, where civil servants ran the industries in undemocratic and unaccountable ways. Jobs were not safeguarded and services were often poor. We're also not calling for a situation of a command economy where the centre dictated what was produced without consulting the consumers and the localities.

The lessons we've learnt are that whilst coordination and planning are needed, we should have decentralised structures that allow participation and that the process is one of bottom up democracy not top down diktat.

One model of social ownership, for say, public transport (buses, railways, ferries) would be that the boards of management consists of a third of seats allocated to representatives from the travelling public, a third from the workforce and a third from the local authorities. Here there would be a balance between producer and consumer interests.

The issues to be resolved here would include whether the unions would be the only representatives of the workforce, whether businesses would be entitled to seats and whether local authorities are closely connected enough to be the genuine representatives of the public at large.

Another model would be that all members of the board of management would be elected directly by citizens and those wishing to be board members stand on platforms of representing workers', business and passengers' interests and so on.

These are all issues which we can explore in more depth later once we have won the debate on the need for public or social ownership. The key thing here is that the primary purpose of these services (including financial services) being in public ownership would be that they are run on the basis of social need and not private profit.

What this means is that the constitution or articles of association of these organisations would be changed from the objective of pursuing private shareholder interests to providing services. The organisations would not then have to be concerned with chasing profits, market value, market share or being taken over by a rival.

The banks would then operate under this system by creating social justice and social inclusion by keeping open wide branch networks (with one in each community), practice safe lending, work by the principles of ethical investment and return surplus back into their operations to increase service provision.

The way in which the left can do this is by questioning each and every action of the government by saying 'Whose interests are being served by this?', 'Whose money is being used for this?' and 'If public money is being used, where is the public control?'

There is a role for left MPs in laying bills before Parliament to put organisations into social ownership instead of allowing this Labour government to remain the bankers' friend by doling out hand-outs to them.

The unions need to use their influence inside and outside Parliament to support these moves. Rather than being overly fixated on windfall taxes and curbing bonuses, they could tackle the underlying causes – rather than just the symptoms – by supporting social ownership. The odd call for public ownership of the utilities needs to be made writ large.

In New Zealand, after a period of brutal Thatcherism in the 1990s, the left-leaning coalition government has made moves to start to bring back some services (rail, air) and sectors (banking) of the economy back into state control. This may not be exactly what we are after but it does show that our calls are not going to be silent cries in the dark if we pitch them in the right way and loudly enough.

One good starting point is a new pamphlet just published by the Left Economic Advisory Panel which is part of the Labour Representation Committee headed by John McDonnell MP. It's called 'Building the new common sense: social ownership in the 21st century'. It has contributions from RMT general secretary, Bob Crow, and former Morning Star economics editor, Jerry Jones, amongst others. Copies can be bought for £3 either online at www.l-r-c.org.uk or by sending a cheque payable to 'Another World is Possible' to LEAP, PO Box 2378, London, E5 9QU.

Do what is needed, not 'what it takes'

John McDonnell MP, writing for Guardian Comment is Free on the financial crisis and what a Labour Government should do.

Careful thought has been given to the form of words to be used by the prime minister in reacting to the latest crisis of capitalism. There have been repeated assurances that the PM will "do what it takes". The Conservatives and Liberal Democrats have rallied round in almost patriotic fervour to support the government in doing "what it takes".

But "do what it takes" to do what?

Stabilise a system which has allowed homelessness in our country to double over the last decade? Bail out speculators whose obscene incomes and binge consumerism has created a society more unequal than at any time since the 1940s? Attempt to restore confidence in a system which has allowed 3 million of our children to continue living in poverty after 11 years of a Labour government?

And who is going to pay for enabling the prime minister with the support of the Cameron-Cable coalition to "do what it takes"? People are already paying for the crisis and are increasingly facing real hardship. The number of missed mortgage payments is up 50%, repossessions are up by 48%, unemployment has risen in each of the last seven months, electricity bills are up 18% and gas bills 28%, child poverty has increased in each of the last two years, and 20,000 pensioners are dying each winter from cold-related illnesses.

The government must do what is needed, not what it takes. What is needed first is an honest debate about how we got into this mess. The government has a duty to lead the debate on the fundamental causes of this crisis and the Labour party has a once-in-a-generation opportunity to lead the discussion of the profound changes needed in our society to transform an economic system that creates poverty, insecurity and inequality.

The seeds of this crisis were sown in the 1980s, when the belief in the unfettered free market moulded the attitudes of a generation of political leaders. Concreted into all governments' policy since has been that it is neither possible nor desirable for governments to seek to fetter finance capital nationally or globally, but labour costs must be constrained by privatisation, deregulation and restraining employment rights. In this market state, the provision of housing, energy, water, health, and education become less and less the essentials of life for which government stands as guarantor and more and more commodities for sale and opportunities for speculative profit-making. If prices soar and wages are held down, demand is reduced but debt can take up the slack to keep the boom going.

After three decades of the reign of the economic law of the jungle we can now reassert the basic principle that rational democratic government must control our destinies, not the irrational forces of the market motivated by rumour, speculation and profiteering. Market solutions to market failure will simply risk an unstable rerun of the same mistakes.

The government could take four simple steps to demonstrate decisively who is in control:

First, rather than reacting on a case-by-case basis as firms collapse, the government should act decisively by nationalising now all those financial institutions involved in home loans or at least taking a determining equity stake in these bodies. The current policy of bail-outs and nationalising the losses whilst privatising the profits of the banks means that ordinary people will eventually pay the cost of market failure. Repeated bail-outs caused Japan's government debt to soar from 65% to 175% of the country's GDP. In contrast, Sweden part-nationalised its banks in 1992 when their imprudence led them to the brink of collapse.

Second, to avert the prospect of the longest and deepest recession in living memory, the government must reassert democratic control of economic policy by overriding the Bank of England monetary policy committee (MPC) and cutting interest rates significantly. The remit of the MPC could be widened beyond ensuring price stability to advising on the wider economic health of the country but the bank's policy role should revert to being one voice amongst many others to be taken into account when democratic government not bankers determine our economic policy.

Third, the government must re-establish its role in the provision of secure housing, democratically accountable public services and affordable energy. The government programme needed is blindingly obvious – a massive social house-building programme, repossessions converted to social rentals, ending the privatisation mania, and control of fuel prices or re-nationalisation of energy companies.

Four, at a time of economic downturn, the government must ensure that people are secure in their jobs and that their pay reflects the cost of living – this means abolishing Brown's public sector pay cap, making the minimum wage a living wage, and restoring trade union rights.

If the role of democratic government is reasserted, the real debate can now start on what type of democratic government is needed.

Read more from John at www.johnmcdonnell.org.uk

US Bail Out Failure Demands Decisive Action From Gordon Brown

Labour MP John McDonnell, chair of the Left Economic Advisory Panel, has called for decisive action from Gordon Brown in face of failure of US bail out plan.

John said:

"After Bradford and Bingley and the failure of the US bail out plan we are facing further collapses and a long and deep recession. Simply addressing this crisis in Britain on a case by case basis means that the economy is staggering from one crisis to another into recession.

"The root cause of this crisis is the Government's policy of allowing the housing market for over a decade to be used for profiteering speculation rather than to provide homes. The resultant crisis of confidence in the financial institutions has created a self-fulfilling crisis of liquidity.

"Gordon Brown must take decisive action before it is too late. I am calling upon him to bring the home loans industry under pubic ownership and control and override the Bank of England Monetary Policy Committee to cut interest rates decisively."

John McDonnell on the latest crisis

Labour MP, John McDonnell has warned Gordon Brown against any plans to follow the US model of bailing out the bad debts of British banks and financial institutions.

This comes as the Treasury has announced the nationalisation of the debts of Bradford & Bingley, while Santander is rumoured to be taking over the savings and branches side of the failed bank.

John McDonnell said:

"People will be extremely angry if Gordon Brown tries to use taxpayers' money to implement a US style bail out of the bad debts of Britain's financial institutions. Every year we have witnessed obscene levels of bonuses doled out in the City.

"Ordinary people struggling with housing, food and fuel costs should not be forced to pay for the profligacy of these city speculators. Allowing the City to pass on its poor investments to the taxpayer whilst retaining the cream of the crop is simply not acceptable. Nationalisation of all the assets of an institution is the only fair way of balancing the risks to taxpayers.

"Given the current liquidity trap the Prime Minister needs to introduce an immediate and significant cut in rates if we are to avoid further institutional collapses."

Graham Turner @ Bookmarks tonight

Graham Turner will be discussing his new book 'The Credit Crunch' at Bookmarks bookshop in Bloomsbury Street, London.

The current financial crisis has shaken globalisation and challenged the free market economic model. This book shows that the housing bubbles in the West were deliberately created to mask the damage inflicted by companies shifting production abroad in an attempt to boost profits.

Bookmarks Bookshop, 1 Bloomsbury Street, WC1B 3QE

All these events are free with refreshment provided however we do ask that if you’re coming you reserve a place in advance if possible.

To book or for more info call 020 7637 1848, email enquiries@bookmarks.uk.com or see http://www.bookmarks.uk.com/

Read Graham Turner's article from Monday's Guardian.

A policy error too far

It’s good to see praise for the work of contributors to LEAP such as Andrew Fisher’s warm welcome to Graham Turner’s new book The Credit Crunch. But, in the spirit of comradely debate, here are some comments which show that Graham’s book raises as many questions as it answers.

The book correctly chastises the mainstream press for failing to address the underlying causes of the massive accumulation of debt that exploded in the sub-prime crisis of 2007 and the credit crunch that followed, and he is right to say that this is “out of fear that the contradictions and flaws with the economic philosophy they have espoused will be exposed”. Graham is right again in his critique of the neo-liberal philosophy of unrestricted free trade which has dominated the global policy agenda for the last period.

It’s also true, as Andrew points out, that Graham talks about the growing power of the corporations during the period of globalisation. But there’s hardly a mention of it in the main parts of the book, and any deeper analysis of the underlying causes of corporate growth is absent. Rather than tracing the ballooning of credit and debt as the necessary expression of, and complement to the relentless expansion of capital, as is shown in my book, A House of Cards, Graham’s subsequent interpretation claims the whole problem is the result of policy errors by governments.

While others have traced the growth of a global network of transnational corporations which have transformed the role of national governments, and some even, like Leslie Sklair, have shown the development of a transnational capitalist class, Graham tends to take an anti-historical view, preferring to see the world as it was when Keynes lived and breathed. His is a macroeconomic world of nations competing in a system of more or less free markets. If only they’d followed the interventionist theories and advice of the economist and Lord John Maynard Keynes, governments could have kept the corporations under control and sustained a nice balance between corporate power and workers’ interests.

Graham’s account of the historical build-up to the current crisis takes in the 1920s and 1930s Great Depression, but leaps over the Second World War and the destruction of capital made necessary by the investment frenzy that led to overproduction and the 1929 crash. The creation and elimination of surplus productive capacity is an essential component determining the boom-bust trajectory of the capitalist economy and Graham sidesteps this question.

In my view, seeing the present crisis as a result of “policy errors” is itself a profound error. Policy-makers and corporate power represent a division of labour within the capitalist system as a whole. The globalisation process propelled them into each other’s arms, transformed the roles of the IMF and World Bank, institutions created at the post-second world war Bretton Woods to manage relations between nations (in which Britain was represented by Keynes, but largely sidelined by US interests), and created a process which led to global institutions like the World Trade Organisation. All now became subject to legions of corporate lobbyists serving the self-developing expansion of capital. If mistakes were made their origin actually lies in the accumulation process of capital itself, an objective process reflected in the heads of policy-makers obliged to serve its interests.

Graham’s proposal to rebalance the power relationship as a way of keeping profit levels high assumes that governments are in control, when they are patently not. It’s why he ends his book with a despairing hope. Even as domestic and commercial property prices tumble around the world, Graham’s hope is that central banks and governments can prevent the debt-induced collapse of asset prices by issuing even more credit. He calls it ’quantitative easing’. In my view, this policy is not only unrealistic but also ties us into the retention of the fundamental, exploitative relationships of capitalism as the biggest economic disaster of all times looms. That indeed would be a major policy error when a bold leap to social ownership as the solution to the crisis seems a more progressive way forward.

Credit Crunch

In LEAP's publication on the Credit Crunch published in May, Graham Turner wrote "There is no doubt the authorities have badly underestimated the advent of 'peak oil'. Bio-fuels, by far the predominant cause of the rise in food prices, have been a disastrous response to the looming energy shortage".

In July, The Guardian revealed that "biofuels have forced global food prices up by 75%", according to a leaked World Bank report. Graham Turner reported the effect of biofuels for LEAP two months before.

It's little wonder that BBC Economics Editor Evan Davis describes Graham Turner as "one of the economists I rate most highly". Graham now appears regularly on BBC Newsnight commenting on the credit crunch and bringing insights others miss, obscure, or want hidden.

Graham Turner's new book, The Credit Crunch, has just been published by Pluto Press. Subtitled 'Housing Bubbles, Globalisation and the Worldwide Economic Crisis', the book traces the roots of the credit crunch back to the aggressive globalisation of the neoliberal era.

Northern Rock is no aberration, as the latest bank collapse in the US proves. As Graham Turner writes, "There is systemic failure, one born of a failed economic policy that gave too much power to corporates".

To understand why this system is now unravelling, and how it got to this, there is not a better book.

There Is An Alternative

To its credit, the conference provided a rare opportunity for a good number of concerned people – mostly politically active already - to raise a broad range of different ideas and proposals in response to the rapidly escalating crisis. Many, but far from all, saw the urgent need to end corporate power and establish 21st century models of social ownership. Some were for a return to Keynesian economics looking for ways to get the economy back in control through improved systems of regulation.

But it seems that ordinary people understand the immediacy of the global economic crisis of capitalism better than many political activists because working people are struggling every day with rising prices for food, shocked every time they fill up with a tank of petrol or heating oil, with mounting debts, lower wages and redundancies. Evidence is mounting of a new imminent implosion in the financial system, beginning with the biggest US mortgage lender Countrywide, that will reverberate throughout the world, whilst in the UK, Bradford & Bingley heads the sick list. Its effects could be many times greater then the 2007 credit crunch which broke the property market leaving millions here and abroad facing repossession. The coincidence of all these facts of daily existence with a mounting political crisis in Britain adds up to an even greater test for political campaigners.

It can seem difficult to identify immediate “practical” solutions to recession plus inflation, especially when the market state and client governments like New Labour have neither the capacity nor the political will to intervene. Any action they take in one area makes things worse elsewhere. Providing tax breaks for North Sea oil producers, for example, can only deepen the ecological crisis. The environmentalist Jonathon Porritt summed it up pretty well in his blog earlier this month. “So, food security is back on the political agenda. Climate change is omni-present. Peak Oil is rising. The credit crunch is the new player on the block. Resource wars are looming. Rainforest destruction just won’t go away. Species loss is as bad as ever, but no one cares – for now. Water shortages are chronic. But much, much more worrying are the linkages between all these notionally ‘separate’ phenomena. The synergies, feedback loops, interdependencies. At long last, people are starting to make the connections – and are even beginning to link all those separate symptoms back to their root cause: today’s literally insane notion of getting richer by trashing the planet and screwing the poor.”

We’re in a period of history in which no amount of tinkering can solve the big questions. So we’re obliged to work on the development of ideas that link to immediate problems but raise the spectre of radical socialist transformation.

For example, on the energy crisis, the case for social ownership of power generating and oil corporations increases daily. This essential resource should not be left in private hands or market forces. In the interim, the state could slash prices and subsidise energy through the scrapping of Trident and foreign wars. To save energy, public transport fares could be reduced drastically and services reorganised so that people could get to and from work without using their cars. Rail and bus networks would then be taken back into public ownership.

Food prices could be frozen and steps taken towards bringing the supermarket chains into co-operative ownership, ending their profiteering at consumers’ expense. People threatened with repossession should be allowed to stay in their homes pending plans to convert everyone’s mortgage debt into something more affordable and less of a long-term burden. Speculating in commodities and currencies should be blocked and a programme of turning private sector finance into mutual, co-operatively owned enterprises launched.

The big question of questions looms: Who on earth is going to implement such a programme? New Labour? You can’t be serious. The Tories or Lib Dems? To ask the question is to answer it. The apparent political impasse only poses in a sharper way the spectre already mentioned, that of a break with the capitalist present and a leap into a socialist future. It’s difficult to conceive of but it’s an eminently practical solution given the prevailing view that There is No Alternative. The real challenge out of the Leap conference is to create the leadership and organization needed to bring such policies to fruition. The urgency of achieving this cannot be overstated.

The Credit Crunch

On the BBC website today, the director-general of the WTO Pascal Lamy argues that "a little more prudential regulation" would have helped prevent the credit crunch. Although moderately stated, this puts him at odds with the neoliberal dogma of the Washington consensus and of New Labour: privatise, liberalise, deregulate.


To coincide with the Beyond the Market Economy conference, LEAP published Credit Crunch: Learning the Lessons - our analysis of what went wrong and what should be done.

In the document we look at the question of the regulation of the global finance sector. Prem Sikka states that "The timidity of financial regulators has encouraged banks and financial businesses to become casinos supreme. They take other people's monies and gamble them on virtually everything from oil, gas, commodities, food, interest rate and exchange rate movements, often without adequate public accountability", and argues that "to ensure that regulators (like the FSA) do not continue to be a cheerleader for major corporations, we need more openness. All correspondence between the FSA and any financial institution must be publicly available. Yet there is little sign of such changes in the FSA report".

In another paper, Gerry Gold quotes Mervyn Kings warning that the financial crisis had entered "a new and different phase", arguing that the current global finance system was "designed to bypass whatever system of regulation remained after the progressive dismantling of the post-war system following the 1971 collapse of Bretton Woods", and therefore that re-regulation cannot be the answer.

You can download the LEAP Red Papers - Credit Crunch: Learning the Lessons from the LRC website, and debate them here.