By Michael Faulkner – February 22, 2009
The real scale of the financial and economic crisis that is
now upon us can no longer be denied. Since the first intimations, in the autumn
of 2007, that all was not well in the world of banking, the truth has emerged,
first in drips and now in torrents. For months the talk was of a credit crunch.
The government, which for years had been claiming that New Labour had put an
end to “boom and bust”, resorted to arguing that Britain’s economy was better
placed than others to weather the storm. The truth was that due to far higher
levels of debt and an unsustainable housing bubble, Britain was the worst
placed of all the European countries. Until a few months ago the government was
reluctant to admit that Britain was in a recession. Until a few weeks ago, it
was being suggested that the recession would probably be short-lived, lasting a
year at the most. With each day that passes reality renders such optimistic
pronouncements meaningless. More realistic observers, who were never in thrall
to the long-dominant ideology of Friedmanite free market liberalism, are
warning that we are entering a Depression that could last for years.
Bankruptcies are daily news. Unemployment in Britain has hit two million. Home
repossessions are occurring at an unprecedented rate. The financial crisis has turned into a full-blown economic
crisis. Comparison with the recessions of the early 1970s and early 1990s is
now understood to be inappropriate. They now seem like rumblings of thunder
before the real storm, the scale of which is only now becoming apparent.
From Financial Meltdown to Depression
For the past week or so, the banksters have been in the
news. On the 10th February four former bank executives were called to explain
themselves to a meeting of the Treasury select committee of MPs. The spectacle
of these erstwhile masters of the universe attempting to justify practices that
brought the whole financial system to the brink of the abyss, has been met with
a blend of derision and anger. The Press (including right-wing tabloids that
have always been cheer-leaders for the Thatcherite version of free market
capitalism of which these lofty Olympians were the pre-eminent representatives)
has been almost unanimous in its scathing criticism of their unbounded greed.
The Sun covered the story under the headline “Scumbag Millionaires.” It is worth recording that three of the
four are ennobled. Sir Tom McKillop, former chairman of the Royal Bank of
Scotland, Sir Fred Goodwin, former chief executive RBS and Lord Stevenson,
former chairman of HBOS (Halifax Bank of Scotland) were awarded their titles by
the New Labour government. The fourth, Andy Hornby, former chief executive of
HBOS, the odd man out in the title stakes, no doubt believed until recently,
that he also was entitled to a title for his services to the nation. They have
all been ousted from their positions following a £37bn bail out of the stricken
banks. The taxpayer now owns 70% of RBS and 43% of the new Lloyds banking group
created by a merger of Lloyds TSB and HBOS. The Royal Bank of Scotland was in
the spotlight because of its disastrous acquisition in 2007 of the Dutch bank
ABN Amro, which at the time was considered by many financial experts to be
foolhardy and hazardous given the state of the markets. The four banksters said
sorry. They said sorry in the way they had, no doubt, been coached to do by
their PR advisers – sorry that events had turned out the way they did
– in rather the way that one might have said sorry to people who had been
stuck in the snowstorms that swept Britain in early February. Sorry for an
unfortunate and unexpected act of nature. When questioned about their bonuses,
they were inclined to seek sympathy, as in the case of RBS’s Sir Fred Goodwin
who received more than £4m in 2007 but, he told the committee, was unlucky
enough to have purchased £5m of shares immediately after completing the ABN
takeover. It is not only workers who have lost their jobs and their homes who
are feeling the pinch you know.
It is a truly amazing spectacle to observe members of this
secretive financial elite in total denial about the nature of the catastrophe
they have brought about. The disastrous RBS/ABN deal reminds one of
similar mergers on the eve of the
1929 stock market crash, as that between the Corn Exchange Bank and National
City Bank, the failure of which sealed the fate of NCB Chairman Charles E. Mitchell. It was Mitchell’s shady
financial dealings that prompted Roosevelt in his inaugural address to promise
to drive the money changers from the temple.
The bonus culture that has burst all bounds with the rise of
the Olympian elite has been stubbornly defended by New Labour. It is still
defended by the banksters, who argue that if the most talented people are to be
attracted to and retained by the financial institutions, they must be
appropriately rewarded. The notion that bonuses only reward “success” is shown
to be nonsense. The banksters are demanding that bonuses should be paid to those
who have created the present catastrophic failure. The RBS has been bailed out
with £20bn of public money and the shareholder stake in the bank is 70%. Yet it
is demanding the right to continue paying bonuses to the tune of £1bn.
Apparently some members of the cabinet are uneasy about this. They are worried
that the Tory opposition, which is increasing its opinion poll lead over the
government, may steal a march on New Labour by demanding an end to the bonus
culture. But business secretary, Lord Mandelson, whose affection for the super
rich is well known, wants to protect New Labour’s reputation as a friend of big
business and is reluctant to come down too hard on his friends. At the very
moment that RBS is fighting a rearguard action for the right to pay bonuses for
failure, it has announced that it is to cut 2,300 jobs – 2% of its UK
workforce.
Every day brings another exposure of a system that has
produced the most grotesque inequalities in income and created a financial
elite of such obscene opulence that the world they inhabit bears no relation to
the world of ordinary mortals. And every day brings another embarrassment for a
government that has no idea how to deal with a crisis largely of its own
making.
The latest embarrassment came in the form of a hitherto
unknown whistleblower. Paul Moore, a former head of regulatory risk at HBOS, in
his testimony to the Treasury select committee, revealed that he had been fired
in 2005 for warning that the bank was taking dangerous risks and pointing out
that it had “a cultural indisposition to challenge” and was a “serious risk to
financial stability and consumer protection.” He was threatened and finally fired. This is particularly
embarrassing for Gordon Brown because the former CEO of HBOS, Sir James Crosby,
who had fired Moore, is another of the banksters ennobled by New Labour. But
worse than that, following the recent merger of the stricken HBOS (which he
left in 2006) with Lloyds TSB, engineered by Brown himself, Crosby was appointed deputy chairman of
the Financial Services Authority, the body supposedly responsible for
regulating the City. As a practitioner of the “light touch” regulation
encouraged by Brown during his eleven years as Chancellor of the Exchequer,
Crosby was a man after his own heart. But last Wednesday (11th February),
following Moore’s revelations, he was forced to quit his job as banks
regulator. There could be worse to come. It has just been revealed (The
Independent on Sunday. 15th February) that Moore has a further 30 secret
documents which, he claims, will be so damaging to Brown’s role, both as
Chancellor and PM, in encouraging reckless lending by the banks, that he will not
be able to remain in office.
As this saga continues to unfold, it is easy to get caught
up in the mood of fury that is building up against those justly accused of creating this
crisis. There is growing popular anger and unrest in Europe, from Iceland to
Greece. Some of the most trenchant analyses of the causes of the present
Depression come from Keynesians who are now being listened to again after
spending many years in the intellectual wilderness. Britain’s Will Hutton, at
present in Washington, advises President Obama to take as his role model FDR
rather than Abe Lincoln. The Keynesians are advocating a reconstructed
capitalist order in which banks are closely regulated and the state takes
command of economic policy. This, they seem to suggest, is the only guarantee
that this depression will not be repeated. Without wishing to disparage them,
it should perhaps be pointed out that this was all said after the Crash of
1929, and, after a terrible slump and devastating war, the lesson appeared to
have been learned. But it was not. This inclines me to the conclusion that what
we are experiencing now is the latest in a long line of financial and economic
crises, which must ultimately be explained, not by supposedly ineradicable
human greed, but by a systemic tendency to crises of this kind. The banksters
behave as they do because the system allows them to. Either the system will be
radically changed and replaced by one fit for human beings to live in, or the
existing system will ultimately lead to global catastrophe. 