How to get credit flowing? Nationalise the banking sector, say Tories

(Only kidding about the Tories bit! The rest of it is true, but please, stay with me…)

Wonko, for one, is not happy. No wonder: Paul Mason noted that on Friday

Wrekin Construction – a business with £50m of orders reportedly on its books – went into administration. It told the press that RBS had refused to extend an overdraft: it needed £3m. Now 600 civil engineering and railway construction jobs are at risk – and we’re supposed to be in the middle of a government-driven civil engineering boom.

It was partly Paul Mason’s insightful post that made me pen the following comment atDuncan’s Economic blog

Arguably the best way to get credit flowing again is for the banks to be nationalised. I think this worked in Sweden quite well and here’s why:

Commercial decisions will still be made on who to lend to and at what cost to the lender – but public ownership will get around the one big obstacle, which is that the people running banks are looking to provide returns to the owners and so make decisions on lending in a different way. Instead of being cautious about lending because they are mindful that their job is to give a return to investors, they will be more eager to lend, but nonetheless mindful of risks, etc. We can see the government has reversed its previous policy with Northern Rock.

With public ownership it’s not about the sectional interest of shareholders (or even, the government as shareholder) but about the interest of the whole of our economy in the long term – ensuring that productive enterprises get the financing they need.

The big problem with all of this will be the EU’s rules on these matters. Sweden’s banking crisis and it’s recovery happened prior to the country becoming a member of the European Union. The political right likes to paint the EU as some kind of warmed-up Soviet Union, but in fact EU institutions would probably oppose nationalisation of the private banking sector on several grounds (competition rules, the rights of shareholders, etc.).

Now, it’s the kind of measure that might need EU approval, and might take a damaging length of time (look at the govt assistance to our car manufacturers – it was held up while the European Commission vetted it). But the government will have to be tough and say it will take the consequences from the Commission.

As to the future ownership in the banking sector, I think we would be wise to learn the lessons of this crisis: the shareholder-as-owner has proven dangerous.

Which financial institutions have been responsible and have not needed public money to bail them out? The building societies, owned by their customers: no one expects from building societies anything other than boring banking – no financial wizardry. Indeed, many of the failed institutions were once owned by their customers – Bradford and Bingley, Halifax, Northern Rock, etc.

As a customer and member of a building society, I don’t ask much more than a good service, either as a lender or saver; I certainly don’t demand of the people running it that they come up with more ways of making money. Now it might be argued that this kind of old-fashioned high-street banking doesn’t apply to the financing of bigger businesses – but my question would be, why not?

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For a democratic banking sector!

Gerry Bates writes on the national debt in the AWL’s Solidarity:

Sack the bank bosses! Bring finance under democratic social control

Bank of England and government support for the banks so far totals something like the equivalent of £18,000 for every child, woman, and man in the UK.

The Bank of England’s Financial Stability Report of 27 October 2008 gives the figures: a total of £1107 billion.

It can’t be right? After all, the average household in the UK is about 2.4 people. That average household doesn’t have £43,000 (£18,000 times 2.4) to give to the banks, even if it wanted to.

Indeed, the Government and the Bank of England have not been packing up £1107 billion in banknotes to hand over to the banks. The entire total of bank notes and coins in the UK is much less than that, about £50 billion.

The Government has been extending credit and guarantees to the banks. Across the system, a lot of the dodgy assets “cancel out”, so not all the £1107 billion in guarantees can be called in.

That is why the figures for Government guarantees to banks are so huge; yet still may be not enough. But there is more to it all than the huge notional figures.

As Anatole Kaletsky put it in The Times: “The provision of £100 billion of state guarantees to a grossly mismanaged and insolvent mortgage bank [is] a gross insult to the hundreds of thousands of workers in businesses from coal, steel and textiles to performance cars and advanced electronics whose jobs could have been saved with Government guarantees or ‘temporary’ nationalisations costing one-tenth or even one-hundredth of the £100 billion”.

Also, in real money the bail-out policies mean a much increased total debt from Government to the public, and therefore, as Marx put it in another context, “with it, pressure of taxes, the rise of the vilest financial aristocracy…”

£200 billion increase in the national debt looks likely. Assume the rate of interest the Government pays on that debt is about 5%. That is £10 billion a year extra in interest payments — equal, for example, to one-quarter of the Government’s total schools budget.

Meanwhile Government-supported or even Government-owned banks are run in just the same way, by the same people or the same sort of people, as the pre-crash privately-owned banks.

Ron Sandler, put in by the Government to run Northern Rock, gets £90,000 per month — £1,080,000 per year — more than the £690,000 basic salary of Northern Rock’s previous chief executive, Adam Applegarth.

Northern Rock workers are losing their jobs, and Northern Rock mortgage-holders are being evicted from their homes.

The Government does no more than plead and cajole with the banks to continue lending and to hold off on evictions.

The vast guarantees for the bank bosses, without anything in return, are indeed an insult; and, with jobs bleeding away and evictions mounting, an insult we can’t afford.

The labour movement should demand that the Government:

• nationalise all the big banks and high finance, without compensation for the big shareholders;

• sack the bank bosses;

• reorganise high finance as a public banking, mortgage, and pension service, under democratic and workers’ control;

• organise the allocation of credit, under democratic control, to safeguard jobs and homes, and to expand public services.

Is progressive taxation is back on the agenda?

The Compass group has welcomed the Pre-Budget Report with as much optimism as the Chancellor’s asessment of the depth of the recession:

Neal Lawson chair of Compass said: “Today’s Pre-Budget Report marks a move away from the Neo-Liberal/free market economic consensus pursued by both Labour and Conservative governments of the past 30 years – but this should not just be a blip before normal service, in the shape of speculative consumer capitalism, is resumed – the government needs to make this a turning point that leads to the moral transformation of our society”.

Jon Cruddas MP said: “This is exactly the kind of measure that we’ve been advocating for a while now and it’s good news for people like my constituents in Dagenham. This should be the first stage in re-balancing the tax system so it’s fairer for middle and low income earners, as well as kick-starting the economy in the short term. When the new US administration takes office then we have the chance to move in to another phase – an international crackdown on corporate tax evasion. Meanwhile, Cameron is now retreating from New Conservatism into orthodox Thatcherite economics and we have to expose that.”

Gavin Hayes General Secretary of Compass said: “A financial crisis that was in part caused by the excesses and risky behaviour of those at the top should not be allowed to unnecessarily hurt the rest of us, so today’s announcement on reducing VAT, whilst at the same time announcing plans to increase the tax burden on the super-rich should both be welcomed, it is absolutely right for government to limit the impact of the recession by using pragmatic and sensible measures such as these.”

As Richard Murphy points out, cutting VAT by such a small amount isn’t likely to impact upon retail prices for consumers:

On an item costing £4.99 the VAT saving will be under 11p. Can you see anyone shifting that price to £4.89?

On £500 (VAT inclusive price) the saving is £10.60. That’s neither here or there: if you are going to spend £500 then £10.60 or so will not change the decision. Other influences are much stronger.

So at low price points this is a boost for the retailer who will take much of the gain. I really do not expect them to pass this on. At high price points I doubt the impact.

Either way the saving goes to marginal jobs in the UK, and Woolworths won’t be saved by this, whilst cheap imports are the only likely sector to see a boost. The business to business sector will see none at all: VAT does not impact them.

But it’s more than that: this might fuel deflation, which we can ill afford. So it’s a mistake.

VAT is regressive, but not as badly as some taxes (e.g. council tax) so the poorest who need help will not benefit most.

John McDonnell MP, chair of the Left Economics Advisory Panel said of the tax changes:

“The introduction of a higher rate of tax for high earners is long overdue but the Government’s proposals are hardly a revolution, and delaying them until after the next election is pointless. The higher rate should be the start of creating a fair tax reform agenda, redistributing wealth from the super rich in order to take the low paid out of taxation altogether.

“The Government should also move immediately to tackle the large scale tax avoidance by the corporate sector, introducing legislation to outlaw tax havens, mirroring the Obama bill in Congress. The public revulsion over City bonuses and bank executive salaries has opened the way for radical tax reform. Government must seize the moment.”

The Public and Commercial Services Union warns of the impact of so-called “efficiency savings” and points out that billions of pounds in taxes go uncollected:

Commenting, Mark Serwotka, PCS general secretary, said: “Further efficiency savings of £5 billion should not be a prelude to yet more job cuts, office closures and privatisation.

“Key public services, such as justice, welfare and tax are already struggling to cope against a backdrop of massive job cuts and office closures.

“Whilst the promise of additional funds for jobcentres is welcome, the government needs to reverse its job cuts programme across civil and public services to safeguard their delivery.

“Whilst the promise of additional funds for jobcentres is welcome, the government needs to reverse its job cuts programme across civil and public services to safeguard their delivery.

“For example the government should be looking at tackling the £21.5 billion worth of uncollected tax and £25 billion lost through tax evasion, by putting more resources into HMRC to claw back the billions in lost revenue, which could be ploughed into public services and stimulate the economy.”

The Morning Star‘s editorial is critical of the direction of travel signalled by the Pre-Budget Report, not so much a return to Real Labour but a continuation of Blue Labour:

Out of his own mouth
(Monday 24 November 2008)

CHANCELLOR Alistair Darling condemned himself out of his own mouth when he said that the central objective of his unambitious pre-budget report was to support firms and businesses going through difficult times.

That is why he opted for a cut of two-and-a-half percentage points on VAT, which will be absorbed into business income rather than find its way into lower prices.

Working people, especially those wondering how long they will be in a job, are unlikely to run out on a spending spree on the basis of a VAT cut.

And, if Mr Darling really wished to spark economic activity, he should have helped those on the lowest incomes whose extra cash would certainly have increased demand.

Those robbed when Gordon Brown abolished the 10 per cent tax rate should be compensated by being lifted out of income tax liability entirely.

State pensioners, whose living standards have been eroded every year since the Tories abolished the link with wages, those working for a totally inadequate minimum wage and others forced to exist on the jobseeker’s allowance pittance should receive a boost in their income.

It is pathetic that the Chancellor should be posing the possibility of no more than a 5 per cent increase to 45 per cent for tax on annual incomes over £150,000 and then only on condition that Labour wins the next general election.

This proposal will not bring any additional income to the Treasury in the life of this government. It’s not even of sufficient scale to encourage the electorate to vote Labour in the hope that it will switch the burden of taxation from working people to the rich.

Government failure to tackle the spiriting away of potential tax revenues of at least £25 billion a year through overseas tax avoidance centres, mainly in British crown territories, emphasises once more its priorities.

The bulk of taxation should fall on the shoulders of those able to pay rather than those too poor to afford avoidance schemes.

And the government should also lift the cap on National Insurance contributions, which is a hidden tax benefit for the better-paid, and introduce a wealth tax.

But the government must not restrict itself simply to measures calculated to increase demand.

It has a responsibility to intervene actively in the economy, especially since the banks have been quick to accept cheaper Bank of England lending and government investment but have not passed benefits on to small businesses seeking to weather the recession.

The government must put substance behind its much-vaunted commitments to environmental issues and to higher employment levels.

Financing at least 100,000 new council homes a year and a nationwide programme of renovating and insulating existing local authority properties could begin to tackle the housing crisis, improve energy efficiency and cut fuel bills.

Similarly, a crash programme of expanding the railways would not only improve the transportation network but increase demand for steel, concrete etc, safeguarding jobs in these industries as well as construction.

Unless the government adopts an economic programme with social justice at its heart, its cosmetic measures will simply prop up big business and ensure that costs of the recession will be paid for by workers.

Not lending? Time to nationalise the banks!

The chair of the Treasury Select Committee has been waving a big stick at the bankers in the form of naming and shaming:

Demand for full-scale nationalisation of more banks could also grow if loans were not made, John McFall said.

The Chair of the Left Economics Advisory Panel, John McDonnell MP says this demand should be heeded:

“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.”

On that startling rise in repossessions, housing charity Shelter reports:

New figures released by the Council of Mortgage Lenders (CML) show that repossessions have risen 12% to 11,300 in the third quarter of the year from July to September.

This means that there have already been more repossessions in 2008 than 2007, and CML director Michael Coogan is still predicting 45,000 reposessions by the end of the year as the economic situation worsens.

The figures also show that the number of borrowers in mortgage arrears was up 8% on the previous quarter to 168,000.

Tory Story: stop me if you’ve heard this one

Turns out some of these short-sellers that have been speculating against banks are donors to the Tories. As well as those hedge fund types

As Bradford & Bingley, the last of the independent former building societies, is shared between Santander and the state, the Tories have been attacking New Labour – whose economic policies (light-touch regulation, privatisation of public services) they have supported.

[On that B&B bail-out, the BBC’s economic correspondent Robert Peston notes that “For taxpayers to lose a penny Bradford and Bingley’s future losses would have to be unthinkably huge.” That doesn’t mean that it’s a good move, mind…]

Why it’s conference season, and the Tories are in Birmigham – and they’re not complacent, honest.

Aside from promises to stand Tory candidates in the six counties (AKA Northern Ireland), carry on state harrassment and demonisation of Muslims, and cut council services, we have an overture to Blue Labour ministers:

Senior Blairites could be offered jobs under a David Cameron government in the ‘national interest’ […] in a bid to poach some of Labour’s brightest talents and split the party.

Michael Gove, the shadow children’s secretary, singled out Schools Minister Lord Adonis, but also warmly praised current cabinet ministers James Purnell and the ‘outstanding’ Hazel Blears.

As for the Tories economic proposals, Green leader Caroline Lucas says we need more people power, not quangoes:

“We are in the middle of a financial crisis caused by a lack of democratic control of the economy, and the Tory response is to marginalise democracy even further. It’s what they call ‘disaster capitalism’ – seizing on an emergency as an excuse to drive through a hard-right ideological agenda.

“The Tories want to outsource oversight of government fiances to a quango they call the Office of Budget Responsibility. But we already have an Office of Budget Responsibility. It’s called Parliament.

“We don’t need another quango, filled with the same corporate bosses that got us into this mess, with a few Tory donors and ultra-right think-tank wonks for good measure. We need real democratic control of the economy, with power returned from multinationals to parliament and, most importantly, to ordinary people.

“The Tories want to outsource the handling of failed banks, too. When a bank has to be nationalised, it should be dealt with for the benefit of ordinary savers and borrowers, but George Osbourne wants banks handed over to the Bank of England for another dose of the insular City thinking that caused the problem in the first place.

“Under a Green New Deal, banks that failed would be restructured into more, smaller companies, so that any problems they have in the future can be contained without putting the whole economy at risk. High-street banking would be separated from high finance to improve the security of people’s savings and mortgages. We would restore some of our lost building societies, which added much-needed stability to the market. We would get finance, and the economy as a whole, working for people rather than distant corporations.

“The Tories want to cut public investment just at the time we need it most. Their attitude is ‘you’re on your own’. A Green New Deal means government doing its job: investing in keeping our economy healthy and building a sustainable economy for the future.

“By borrowing from the people through local bonds, government can create a secure investment for savers. That would allow us to revamp our public transport, energy supplies and housing, generating jobs, revitalising money flows, loosening ties to unreliable oil markets and cutting carbon emissions.”

UK in recession, OK?

A report by Bank of England governor Mervyn King on the future of the economy seems to have started a run on the pound.

So we can take it that the news isn’t good for the bosses.

We know it isn’t good for us: unemployment up, inflation up, repossessions up…

A crisis that’s made in Britain
Communist Party general secretary Robert Griffiths analyses the economic crisis in Saturday’s Morning Star

The recession starting to hit workers.

AS Britain’s economic growth ground to a halt in the second quarter of 2008, Establishment pundits and politicians became obsessed with official figures and targets.

Can the consumer price index be brought down nearer to the government and Bank of England’s inflation target of 2 per cent?

Will gross domestic growth figures for the next two quarters reveal that economic activity in Britain is actually shrinking and that the economy is therefore technically in recession?

The labour movement and the left should not be sucked into this superficial charade. For millions of people, the recession is already well and truly under way.

We are witnessing the biggest onslaught on working-class living standards since the early days of the Thatcher regime nearly 30 years ago.

Unemployment is rising faster than any time since the late 1970s. The official figure stands just shy of one million, but the real figure is nearly double that. The merciless drive to force the long-term sick and incapacitated off benefits and into low-paid work or destitution will increase the misery, while disguising the full extent of further rises in unemployment.

Pay is increasing by no more than 2.5 per cent a year in the public sector and no more than 3.5 per cent in the private sector. The national minimum wage and state pensions and benefits are lashed to the consumer price index.

Meanwhile, food prices are on average 14 per cent higher than this time last year, the biggest jump since 1980. Basic foodstuffs such as bread, potatoes, chicken, eggs, margarine and butter have all shot up in price by between one-third and a half. Motor fuel is up by a quarter.

Domestic gas prices have gone up by one-third so far this year and electricity by one-quarter. That’s 10 times more than any increase in wages, pensions and benefits.

The real annual rate of inflation for many people in Britain is at least 30 per cent.

Yet the government, the mass media and the Bank of England tell us that, according to the consumer price index, the cost of living is only growing at 4.4 per cent a year. Even the retail price index, which includes housing costs, puts it at a mere 5 per cent.

Why such a huge discrepancy between the fantasy world of government, business and media statisticians, on the one side, and the real world of working class and some middle-class people on the other?

The official indices consider yearly price changes for a “basket” of household expenditure items, each item given different weight according to its prominence in the typical household budget.

According to the latest CPI presumptions, the “typical” household in Britain spends just 10 per cent of its outgoings on food, 3 per cent on gas and electricity and 4 per cent on motor fuel. These are the areas where most of the biggest increases have taken place – but their impact in the “typical” CPI household has, not surprisingly, been negligible.

Mr and Mrs CPI, on the other hand, are keen to buy the newest car and audio visual equipment, go to the opera, eat out frequently and pay young Jemima and Jocelyn’s school fees. So they spend 5 per cent on vehicle purchases, 14 per cent on culture and recreation (excluding pubs and clubs), 2 per cent on education and 11 per cent in restaurants and cafes (but not canteens).

These are areas where many of the smallest price increases have occurred over the past 12 months compared with previously. So, hey presto, the cost of living in Britain has only gone up by 4.4 per cent.

Either government ministers know the extent of this deception, in which case they are fraudsters, or they do not, in which case they are ignorant fools who cannot begin to represent the interests of workers and their families.

The reality is that new Labour primarily represents the interests of big business. This government has orchestrated an Indian summer for the spivs, swindlers and speculators.

Whether in the City, oil, gas, electricity, water or supermarket retailing, the transnational corporations have been permitted, indeed actively encouraged, to make monopoly super-profits.

The kind of creature who flourishes under new Labour is not the hospital worker, the engineer, the carer nor even the small shopkeeper.

Step forward Crispin Odey, senior partner at hedge fund Odey Asset Management.

He has had a successful year trading in food commodity contracts, with no interest in providing food to anyone, and “borrowing” building society shares to sell and then buy back at a profit in a falling market, “shorting” in City jargon.

For performing such socially useful work, he has just helped himself to £28 million in fees and salary.

However, the boardroom chiefs at Britain’s banks do not have the competence to match their greed. They are turning last year’s record profits into this year’s losses, as the sky darkens with chickens coming home to roost.

Not even £100 billion of public money – or £150 billion, if they have their way – will save them all from a “credit crunch” largely of their own making.

Maintaining demand in the economy through private and public-sector borrowing was never going to create Gordon Brown’s “new economic paradigm,” abolishing the fundamental capitalist law of boom and bust.

This policy postponed a periodic crisis of overproduction, when capitalism can no longer sell all or even most of its goods and services at a profit. But it did so in a way which makes the recession all the sharper when it comes, because spending power based on credit collapses more quickly.

At the same time, the banks strive to maintain high interest rates to shore up their income, corporations which had borrowed for expansion seek to maintain high prices to meet their interest payments and a government which refuses to tax the rich and big business has to tax the rest of us and squeeze public-sector pay.

So, economic demand continues to fall and unemployment increases, while interest rates and prices remain relatively high – a repetition of the “stagflation” of the early 1980s.

Although international factors have exacerbated this crisis of the British economy, they did not create it. New Labour’s culpability is far greater, having also allowed manufacturing industry to decline as Britain became overdependent on the financial sector.

Only a left-wing programme can mitigate this crisis in the interests of the working class.

Price controls need to be imposed on household fuel, petrol and basic foodstuffs. A windfall tax on the energy and retail monopoly profits would boost public investment – for example, in council housing and solar panelling – and employment, without adding to the government’s net borrowing deficit, which soared to a record £24 billion last quarter.

Taking gas, electricity and railways out of the hands of profiteering extortionists would be more popular today than it was in the late 1940s.

We need unions to lead a big wages offensive for increases which meet the real rate of inflation. The TUC should demand negotiating rights on the national minimum wage, as the labour movement and the left join campaigning organisations in a fight for higher pensions and benefits and the return of subsistence grants.

Finally, the ideological battle must be waged with greater clarity and vigour.

The “free market” is dominated by monopolies who rig it in order to maximise their profits. It is a market which sucks in huge sums of public money in loans, subsidies and contracts, including the private finance initiative, as a vital source of shareholder profit.

And capitalism remains a system of insecurity, periodic crisis and mass unemployment based on exploitation, oppression and inequality.

Still think public sector workers cause inflation?

From the FT:

Factory gate inflation has hit double-digit figures for the first time in more than 20 years, underlining the strong price pressures in the economy that have stopped the Bank of England cutting interest rates.

Economists said the year-on-year increase of 10 per cent in the prices charged by manufacturers increased the risk of a knock-on effect on consumer price inflation, the measure the Bank uses to decide monetary policy.

The figures preceded Tuesday’s release of consumer price inflation figures, which are usually affected by factory gate inflation because they push up retailers’ costs. Economists polled by Reuters expect the annual rise in consumer prices to accelerate from 3.3 per cent in May to 3.6 per cent in June, far above the Bank’s 2 per cent target.

Factory gate inflation rose from an annual rate of 9.3 per cent in May, the Office for National Statistics said. Costs for fuel and raw materials increased 30.3 per cent in the year to June – also the highest in more than 20 years. This was chiefly because of the near-doubling of crude oil prices.

Vicky Redwood at Capital Economics said: “These data underline why the monetary policy committee is unlikely to cut interest rates in the next couple of months, even though the economy is weakening fast.”

Ross Walker, economist at the Royal Bank of Scotland, said: “Pipeline pressures remain substantial and overall, these data reinforce the likelihood that Bank rate will remain on hold for some time.” But in spite of the rise in inflation for factories’ input and output prices to the highest annual rate since the series began in 1986, the monthly increase in manufacturers’ costs and selling prices was smaller than analysts had expected.

Factory gate prices were up 0.9 per cent on the month, and manufacturers’ input costs climbed 2.3 per cent. But revisions to previous months’ data and other technical factors pushed up the annual increase.

The Bank has made clear it can do little to avert the short-term spike in inflation, but has signalled it will watch for any signs of price pressures driving up wage settlements, which in turn boost inflation in the long term.

Michael Saunders, economist at Citi, said a further jump in the prices manufacturers were charging for food and petrol products could feed quickly into the consumer price index. He added that global cost pressures would be magnified by the weak pound pushing up import prices.

“The widespread and powerful inflation pressures evident in the producer price data are likely to be reflected in a large and extended overshoot of the CPI inflation target in the next two to three years,” he said.

The steady rise in manufacturers’ input prices has brought them 69 per cent higher since January 2004, according to Citi – ramping up the pressure on consumer prices.

In contrast, input prices fell by 2 per cent between January 1986 and January 2004.