Friday 20 March 2009

They still don't get it

They being the government and their advisers in the Treasury and the Bank of England. Much public anger is being directed at Sir Fred Goodwin and the others who have made off with mind boggling pay-offs. Quite right too. The same is happening in the USA, where it is the executives in the Financial Products unit of AIG who are in the firing line for receiving huge retention bonuses. These are the very same people who helped create this financial mess and they are being retained - to do what? Create an even bigger financial mess? And remember, as in the UK, these bonuses come from public money. At least in the USA there has been real public anger, which has forced the politicians to take some action. The House of Representatives has just voted for a 90% tax rate to apply to people getting substantial bonuses from firms that have received public money. Sounds like a great idea. What about it, Darling Brown?

Of course the real question is why the governments here and in the USA let this happen? It's not as if they didn't know about the bonuses and the pay-offs. The main answer to my mind is that the people at the top - in government, the Treasury and the Bank of England - are still so in cahoots with the financial and business sector that they are not seriously interested in changing the system. Poor Lord Myners - why would anybody think that someone with his background in the banking and finance industry would ever challenge his buddies in the RBS or any other big financial institution? It's the same in the USA, where despite Obama's victory, it is the same old faces, again mainly from the failed financial sector who are in charge of clearing up the mess.

And this is the real crisis, at least the real political crisis. How can we, the public, bring about the change in personnel and thinking that is required to develop a new economic and financial system that in the first instance stops the rot and in the long run creates the conditions for stable economic growth?

An indication of the scale of the problem and of the steps we need to take can be found in a recent article in the Washington Monthly by James K Galbraith, son of the famous economist - No Return to Normal, Why the economic crisis, and its solution, are bigger than you think. The whole article can be found here

Galbraith's main argument is that our top leaders have misjudged the crisis. This is not simply credit crunch, but rather a fundamental failure of the current system and that the main issue is insolvency or the fear of insolvency. And simply throwing more and more taxpayers' money at the banks will not help. As Galbraith puts it: “There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?”

Galbraith then goes into a bit of history to review the key lessons from the New Deal in the USA in the 1930s. His conclusion is that only public spending can prevent a total collapse of the whole economy. As he states: “A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.”

What this means in practice is that we need more not less government spending and not just for a short time, but almost certainly for years if not decades to come. It's not as if there isn't plenty to do – improvements to schools, hospitals, health centres, social care, not to mention long term investment in green energy alternatives. This has to be a better way of restoring the economy than just giving billions to banks and bankers.

Is any of this likely to happen? Not by the leaders currently in charge. In the USA it is the same failed old faces. Though as a new president still with enormous popular support, Obama could break with the past and appoint new people. People who anticipated the current crisis. But he would need to be prepared to split the Democrats as most of them, at least those in Congress are pretty much tainted by the current mess. In the UK there is at present zero chance of real change. New Labour is now bereft of any ideas and it is an insult to intelligence to even pretend that Cameron and his Tories have the wit or desire to challenge the current system. They have too many ties to finance to even contemplate wholesale changes. And as for more government spending? Vincent Cable of the Liberal Democrats has come up with some good points and suggestions, but again he and the Lib Dems in general are still too tied to the old way of thinking to lead us out of the mess. I am afraid it is up to you and I to get really, really, really angry and keep pestering and pelting all our politicians until they get the message. If we, as members of the public do nothing then do not be surprised if our leaders stay around and continue to do nothing.

No comments:

Post a Comment