Though Cowards Flinch

In 2009 George Osborne said:

The fact that people in the City give us money, even though we are promising tougher regulation, is a sign that many people in the City understand that there needs to be change.

Osborne once sold himself as the Chancellor who would be progressive and tough on banks, carry out well needed reform, and still walk away with votes from the city, because he was decisive, on top of things, and they recognised the need and public thirst for change.

So what, 2 years on, was the change the bankers could believe in?

Britain’s biggest banks are to be given until 2019 – longer than had been expected – to implement radical reform of their operations to prevent another taxpayer bailout of the system.

Of course, George Osborne welcomed Sir John Vickers’ findings, or what the Independent Commission on Banking have admitted were “deliberately composed of moderate elements” – but, given the almost universal agreement that high street and speculative arms of banking should be separated (apart from Bob Diamond and a few others), one wonders why the ICB stopped short of a recommendation for a full break-up, plumping only for a ring fencing of the two activities.

(On the subject of Bob Diamond, he met with the Chancellor on the 1st of this month to request he delay banking reforms, possibly repeating previous threats that he’ll take Barclays and leave the UK. Just saying).

As an Independent leader article put it: “ring-fencing still leaves open the possibility of banks stealthily dismantling the internal demarcation over time.”

I guess with (not so) tough measures like this, it’s obvious why big shots in the city are bankrolling Osborne – they want a man who can get things done for them.

The issue of debt has risen to the top of the political agenda. Domestically, all parties are agreed that the level of public and private debt in the UK has risen too far.

Internationally, nations like Greece and Ireland are being forced to carry out drastic cuts in wages and public expenditure in order to satisfy their creditors.

But to listen to the debate one feels that John Maynard Keynes lived and wrote in vain. None of the political participants seem to have any real understanding about what the most original economist of the last century wrote.

Discussion is limited to how soon and how fast to cut public expenditure. The Tories say cut hard and fast, Labour say delay cutting unless it harms the recovery.

Neither side seems to have Keynes’ feeling for the interdependence of thrift and debt. There can be no thrift without an equal and opposite rise in debt. One person’s saving is another person’s borrowing.

If government debt is to be reduced, then some other section of the economy must move from financial surplus to financial deficit to compensate. Which other sector do the political parties propose to move into deficit?

During the lead-up to the crisis there were 3 surplus sectors : the rentier class, the company sector, and the overseas sector. These sectors were building up their financial assets. There were two deficit sectors: the state, and households, particularly working class and middle class ones who were building up their debts to the banks and credit card companies.

If the state and debtor households are to start paying off their debt, which of the other 3 sectors is to move into deficit to compensate?

Cutting public sector wages and can temporarily shift borrowing away from the state. Its first effect is to force public sector employees either into debt, or force them to run down their relatively small savings. But employees are much less credit worthy than the state, and quickly cut their consumption, throwing the deficit in turn onto the company sector and the import sector. Firms are more creditworthy than private individuals, but still less creditworthy than the state. Firms will respond with futher layoffs and wage cuts.

Falling tax revenues, increased unemployment benefits, throw the deficit back to the borrower of last resort : the government. In the meantime the productive economy has gone down the tube.

It was against this insane commonsense response to public debt that Kenyes polemicised in the 1930s.

The only sectors onto whom the deficit can be sucessfully shifted are the rentiers and the overseas sector. The rentiers could be taxed at sufficiently punitive rates to run down their financial assets. In compensation the public debt would fall, since the public debt is nothing more than a liability to this class, and within a given national economy, the public debt can only be run down by diminishing the assets of the rentier class.

The only way the assets of the overseas sector can be run down is by eliminating the trade deficit and running a trade surplus. This would imply a much more stringent devaluation of sterling than has so far occurred, which would be no bad thing from the long term working class interest here since it would slow the outward migration of manufacturing jobs.

The UK can do this, deficit countries within the Euro can not. Within the Eurozone, orthodoxy has no real alternative way of dealing with public debt but a race to the bottom like that which impoverished the world after the great crash of 1929.

But all this evades the real cause of public deficit: the growing financial assets of the international rentier class. This can ultimately be dealt with only by one of 3 expropriation processes

1)The Denis Healy solution : tax them till the pips squeak.
2)The Weimar solution : pay them off with newly created state currency to inflate away the debt.
3)The Biblical solution : anounce a jubilee and cancel all debts.