Tuesday, September 30, 2008

Brown out on the Economy

Ian Williams: With an almighty boom, neo-liberalism goes bust

September 29, 2008 1:05 pm admin cartoons

THE group of conspirators who caused the major implosion in Wall Street damaged the economy more than Osama bin Laden and al Qaida did when they caused an explosion in the same district. In the latter case, the United States went to war in Afghanistan and Iraq, pledged to root out terrorism. In this latest incident, the US government has rushed to give the conspirators $1 trillion as a down payment so they can return and do it all over again.

It is almost 30 years since Ronald Reagan and Margaret Thatcher persuaded gullible governments that they should get out of the way of business and leave everything to the “market”. That caused deep economic recessions in both countries and the wave of deregulation that set in is still leaving aftershocks.

In the 1960s, confronted with international financiers, Harold Wilson had castigated the “Gnomes of Zurich” who, with assistance from the City of London and their representatives in the Treasury, spent a decade undermining him and his successor, James Callaghan. Gordon Brown’s lesson from this was that the financial institutions needed to be stroked and massaged rather than confronted. In a country left even more vulnerable since the Tories stripped what few defences the economy had, this was understandable.

But just as the “masters of the universe” in Wall Street fell victim to their own Ponzi schemes, Brown seems to have given them a lot more credit for their sagacity and honesty than they merited. It is one thing to stroke them, but quite another to believe them. Sadly, he has shown signs of that. Just think of the Private Finance Initiative, which began as a super wheeze to build infrastructure without the money appearing on the Government’s books, but which Brown ended up defending even when it became clear it was now a channel for shifting the public money to the financiers and their advisors.

Northern Rock and Halifax were thriving, efficient mutually-owned building societies until the tide of neo-liberal opinion drove them to the stock markets – and disaster. Think of the enterprises, the gas, water and electricity providers, British Airways and British Petroleum built up, despite the Treasury, into efficient and profitable companies.

A Tory Government with a very dubious title to them sold the former water authorities, the fruit of a century of social investment and entrepreneurship by the cities of Britain, to companies whose short-term pumping of their stocks to enhance executive earnings is in direct contradiction to the long-term needs of heavily capitalised infrastructure.

What is different about this latest lesson is how pervasively the cancer of bad debts has spread through the global economy, but the results of keeping government out of business were already apparent to all but the most mesmerised followers of finance. In the US, we had the Savings & Loans scandal, with which John McCain was intimately involved. Almost two decades ago, that cost the federal government as much as $400 billion. Then there was the tech stocks bubble, followed by the energy companies debacle and the airlines’ leaden landing, in each of which deregulation played a starring role. There was the Asian currency crisis and the bailout of Mexican bondholders, all culminating in the sub-prime mortgage meltdown.

Now Treasury Secretary Hank Paulson, a former Goldman Sachs chief executive, is trying to stampede the US Congress into giving him unlimited powers to buy the dead assets his former peers were peddling. He wants a minimum of $700 billion to buy up the dubiously-valued assets that his peers in the banks had been peddling furiously to one another. Now no one wants them.

Paulson is trying to avoid conditions, such as requirement that the government get shares in the company in return for taking on toxic debt, or limits on executive pay at companies helped. Deadpan, the Wall Street Journal explains: “He fears that provision would render the programme moot, since many firms might choose not to participate.” They would rather the companies went under than that they forfeited any of the bonuses, options, deferred pensions or golden parachutes. This is about free-for-alls, not free markets.

At the risk of sounding Clintonesque, a paradigm shift is called for. Just because the US government is now nationalising the miasmic swamps of the economy is no reason to rush to take over the commanding heights. However, there is every reason to reconsider the neo-liberal shibboleths that became part of the mantra of “new” Labour.

While the bankers, the gnomes of Zurich and the masters of the universe are all mesmerised with their impending bankruptcy, Gordon Brown can unashamedly return to the roots he had when he wrote ILP leader Jimmy Maxton’s biography. It is time to turn the intellectual tide, abandon the rush to privatise whatever public services have been overlooked and celebrate the real potential of public enterprise. At a minimum, this means better regulation of the City, public infrastructure spending to avert the impending recession and no handouts. As we have been told for 30 years, they pose a moral hazard. Make them pay.

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