Wednesday, January 21, 2009
To earth with a crash
You may have noticed the world's media creaming its collective pants over the Obama inauguration yesterday, with superlatives every bit as hyperbolic as Obama's speech was bland. Gullible liberal columnists couldn't get over the "magic" - it was like being five again, and Santa Claus was coming. Everyone, it seems, got the chance to cry again, and to tell everyone else about how they cried, as well as where they were when they cried. All of that stuff about Obama's disappointing appointments, his bellicose language, the support for TARP and his Wall Street backers, and the silence over Gaza, was forgotten for one spellbound day, sprinkled with fairy dust and dubya pee. Today, it's back to the bad news.
The "trillion dollar crash" is fast becoming the multi-trillion dollar crash. The US economy has continued to slump, despite the immense capital resources injected into the financial system. As Doug Henwood points out, the statistics for December were horrendous. Employment fell by over half a million, and the official unemployment rate is now 7.2% (sure to be a substantial underestimate). Retail sales took a record dive of 10% last year. Almost one in four US banks was unprofitable in the third quarter of 2008 and things can only get worse. The outgoing Bush regime estimated that the US economy would lose close to 3 million jobs over the next year. As incomes plummet, the number of unpaid or 'troubled' loans will increase. TARP will soon have more sequels than Police Academy.
Obama's elite supporters are sanguine about his ability to sort out the crisis. Indeed, Obama would probably not have won had he not benefited from a surge in support after the collapse of Lehman Brothers. Yet,the new Treasury Secretary (and known tax-dodger), Timothy Geithner, collaborated with Hank Paulson's disastrous decision to let Lehman Brothers go bust when he was chair of the New York Federal Reserve. The incoming Obama administration promises a fiscal stimulus, which is vital, but it is not likely to be more interventionist than the Bush administration has been over the last few months. On New Years Day alone, they threw $10bn at the Bank of America. It now seems that the incoming admin is intent on rehabilitating the failed TARP strategy of buying up 'toxic stock', removing it from bank balance sheets and supposedly leaving a healthy, profit-making institution in its place. This policy of socialising the losses while privatising the profits was exactly what made 'TARP I' so unpopular. Paulson actually abandoned the idea of buying toxic assets some time ago in favour of direct capital injections (though with only nebulous commitments from the institutions receiving such funds), but Geithner is now pushing the strategy quite forcefully, while blunting the edge with a promise to help small businesses and 'working families'. No member of the incoming administration shows any signs of wanting to reverse the Bush administration's pattern of buying non-voting stock in failing banks and allowing existing management to stick around with little or no alteration in their generous payments. This means that the same people who helped bring us to this impasse continue to be rewarded, maintain their power, and have no incentive to act in a more accountable way.
More bad news. The UK banking system is close to terminal. Contrary to the insistence of the Treasury that we are better placed than other economies to weather the storm, New Labour have encouraged a disproportionately huge and powerful financial sector while allowing the manufacturing sector to slowly bleed to death. Not only that, but the UK economy is uniquely reliant on overseas investment, which supports a third of all UK lending according to Will Hutton. As the world banking system collapses and neighbouring economies shrink, we are unusually exposed. As a result, unemployment is soaring - hitting just under 2 million by November (earlier than even David Blanchflower predicted). Current predictions are for unemployment to reach 3 million by 2010. Corporate profitability in the non-financial sector is sliding, which means that the resources for new investment are diminishing. Consumers, lacking income and with a tightened credit market, are increasingly forced to rely on pawnbrokers and short-term moneylenders. That will restrict their future spending even more.
Now, even the strongest City institutions, such as HSBC, are the subject of reports suggesting they need urgent recapitalisation. They continue to insist that this isn't so, and that they won't be going crying to the government any time soon, but the stock markets appear not to believe them. And as Lloyds-HBOS and RBS shares slide, the chair of the Treasury select committee is demanding their full nationalisation. If things continue as they are, the result may be a protracted and reluctant take-over of the entire UK banking system. The government's proposed new bank bail-out was received poorly by financial markets, probably because they know it doesn't go anywhere near far enough. Darling, like his new trans-Atlantic colleagues, is committed to buying up 'toxic securities' to help the banks stay afloat as private entities. Now, if we are going to pay for the banks' losses, we should own them and as owners we should protect jobs, and ameliorate conditions for borrowers and home owners. If the government is going to rehabilitate Keynesian demand-side economics, as it noisily announced in November, this would be a very moderate demand at the moment. As it is, we have a situation where banks are being given big rate cuts by the Monetary Policy Committee, but are refusing (with the exception of HSBC and Lloyds) to pass it on to consumers. True, the Chancellor has pledged that he won't let a single bank go down, but he has yet to be open about what this means. Leaving these institutions under private control while accepting the liabilities means that the government budget has to effectively bear trillions of pounds in liabilities. This could literally lead to the UK going bankrupt, Reykjavik-style.
The timidity of the Brown government is odd. It can't be explained by its relationship to big business. British capital is obviously divided over this, but when the Financial Times calls only half-jokingly for the government to shoot the bankers and nationalise the banks, it is obvious that a profound shift is taking place. Nor can it be about the polls. New Labour has never hesitated to impose unpopular policies, and it is right now implementing welfare cuts that are sure to further alienate its voting base. The government's proposed tax increase on higher income earners was popular, but it will raise little toward the costs now being racked up. The Fabian-funded research suggests that most people would support much higher taxes on upper incomes - but polls have often found much stronger public support for wealth redistribution than exists in the parliamentary Labour Party. My vague intuition is that, for all the bravado of the pre-Budget report, and for all the hints that Brown and Darling were dusting off the Keynesian texts, the government's reflex position is decidedly neoliberal. Neither the Labour Party, nor its parliamentary representatives, nor the cabinet, possesses a left-wing force substantial enough to force a different direction. Moreover, I think that both the Blairites and the Brownites, for all the petty wrangling between them, are keen to avoid anything that encourages the Left. Their psephological analysis continues to tell them that to win an election they must build an electoral coalition that includes pro-business, pro-family middle class voters in marginal constituencies, and they are determined to resist anything that looks like burying that New Labour project.
The political fall-out from this, even if we don't go bankrupt, is potentially explosive. Even on the overly optimistic assumptions of the government's last pre-budget statement, the Treasury expects to slash public spending in a disastrous way by 2011. Now, with a new bail-out weighing heavily on the public purse, and more surely to be expected, the only way to balance the budget will be to have serious tax rises, and a sustained and vicious attack on public services and welfare far more extreme than anything we have seen so far. Even before we get to that stage, millions of people are already being pushed to the edge by the job losses and pay cuts. Partly because of the government's weakness in the polls and the threat of a Tory government, most of the trade union bureaucracy is resistant to giving any expression to those grievances. This appears to be what is happening with the Chemilines dispute, for example. Moreover, the fear of losing a struggle in the current climate, where people are frightened of losing mortgages and so on, is likely to countervail against any tendencies toward militancy. If that pessimism and lack of confidence prevailed, then the initial stimulus for any widespread revolt might well originate from outside the institutions of organised labour, in the form of mass protests and riots (Reykjavik-style). Such a combustion has the virtue of gaining momentum rapidly and giving people confidence, but it also has the disadvantage that, unless it feeds into union resistance and lays deep roots in society, it will lose that momentum just as quickly, and hit the earth with a crash.