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Spain's pain goes beyond the busted cajas

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Paul Mason | 19:40 UK time, Wednesday, 21 July 2010


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The land around Sesena is dry. In fact the name La Mancha, the Spanish province it is part of, stems from the Arabic for dry land. And in the 800 years since the Spanish reconquered this terrain, it's fair to say that nobody managed to conquer the thistles. They stand head high, big as your fist, in the dusty fields competing only with wire-sharp grass and discarded tyres.

For 800 years this area was one of the most sparsely populated in Europe. Then came the Spanish property boom. A speculative developer built 13,000 brand new flats in the middle of nowhere. Then the boom ran out, as did the developer's political influence and access to credit.

Nine whole blocks at Sesena stand empty; the rest stand partially occupied, their ground floor retail units bricked up. They're decent flats, with a swimming pool and basketball court in every quadrangle. But many of those who live here now can only afford to rent: migrant workers from Latin America or north Africa, scraping by on part-time jobs. Even at 100% finance - and it still exists here - buying is off the agenda.

It's not until you see Sesena that you realise the mess Spain is in. Because there are one million brand new unsold homes in Spain. And these homes don't just litter the landscape: they sit as bad debts on the books of Spanish banks. And the problem is nobody knows how bad the debts are - because prices are still falling (another 25% is the best guess of Barclays economists).

That's why the Spanish finance system has become the object of acute curiosity in the run up to the stress tests set to be announced by the Committee of European Banking Supervisors on Friday evening.

Spain's big banks are rock solid. Their system was designed to be counter-cyclical - so they were obliged to hold more capital than banks in the Anglo-Saxon system, and the mortgage system forces a lot of the risk onto the homebuyer. But the problem is the cajas.

Cajas are small, local savings banks. They go back to the 19th century and are technically mutual companies, owned by no-one. Often they have local politicians on the board and even priests. Already I can hear you thinking: what could possibly go wrong with a bank run by politicians...

It turns out the cajas lent around 450bn euros to the property developers and face estimated losses of 45bn. The Spanish government, after some hesitation, has moved to restructure the cajas - forcing some to merge, seizing the assets of others - and stands ready with a 90bn euro fund to bail them out if necessary.

But the cajas are not Spain's biggest problem. Its problem is structural and will not go away even if we get through Friday with only a modicum of blood on the carpet.

Spain's unemployment rate stands at 20%, 40% for young people. Its domestic economy has been in recession for nine successive quarters, with only exports keeping the official GDP figure above zero in 2010. The construction sector, which at one point accounted for 12% of GDP, has collapsed.

Now the public sector, which was also large, is being slashed: a 5% pay cut across the board for employees, and further cuts to pensions and public services, will take 15bn euros out of the economy for starters.

With the credit markets tight, and growth flat, there are also signs of core deflation. If you add that to massive bad debts in the private sector then Spain becomes the first candidate country for a disease economists first noticed in the 1930s: debt-deflation. If debts remain high but incomes fall and asset values fall, you get a death spiral or at the very least a Japanese style decade of stagnation.

The remedy is budget cuts and an end to the model of social welfare and generous labour rights Spain has enjoyed since the fall of fascism. Actually, it is even more complicated, since one of the key labour rights bosses dislike - the right to 45 days redundancy pay for every year worked - is a hangover from the Franco era.

At Rubi, in Catalonia, Francisco Elias guides me through his small engineering factory. Bombas Elias makes pumps and sells them to 23 countries. But once the cajas got into trouble, Francisco saw a projected loan of 750,000 euros unceremoniously withdrawn. Now he's struggling, laying off workers and downsizing; in future he'll outsource more, offshore more. He survives, for now, on the goodwill of his customers.

So the caja crisis eats through to the industrial crisis and feeds into the problem of unemployment, which is massive.

Spain's government - as the Deputy Finance Minister Jose Manuel Campa tells me - has a plan. Restructure the cajas, boost exports, deregulate the labour market so that the core of workers with strong employment rights is replaced with a more flexible, younger workforce.

But Spain is a young democracy whose institutions are untested in prolonged austerity.

On a demo of one million people, on the streets of Barcelona two weeks ago, I saw conservative nationalists march alongside communist shop stewards in favour of political autonomy for Catalonia. On the demo the whole demographic rainbow - from anarcho youth to well-heeled professionals - told me the same thing: we're paying too much to central government, we're sick of Spain, they're sick of us.

The main slogan was "Adeu Espanya" - which you don't need to know Catalan to understand. And - slightly chillingly for a country that was once fascist - more than one young person informed me: "democracy isn't working".

Javier Díaz-Giménez, a professor at the IESE business school in Madrid, is pessimistic about the prospect of structural reform.

"The swing voter, the man who decides the election, is a guy with a secure job, good wages, guaranteed pension, a subsidised railway system, free roads - and he's not going to vote to give that up."

"So nobody can reform Spain?" I ask.

He smiles ruefully:

"The markets will."

Comments

  • Comment number 1.

    Massive housing bubble, bloated public sector, an economy based on rising house prices and lending the money to buy more and more expensive houses.

    So, what is the difference between Spain and the UK?

    It may be the cajas which have all the mortgage debt in Spain but it is the major banks in the UK which have all ours. If the UK housing market crashes will it brings down our banks?

    In my mind Spain is more akin to the UK than Greece is. I think that where Spain goes we will follow. Just a matter of time.

  • Comment number 2.

    It couldn't happen here! We don't have any cajas run by politicians and priests.

    Our overblown banks are rock-solid, some say northern rock-solid, backed to the hilt, and beyond, by taxpayers with oodles of spare cash, guaranteed pensions and bonuses (most work in the public sector).

    The next phase of this economic and social experiment is to offer unpaid work to all, as front line jobs in the public sector are outsourced to voluntary workers.

  • Comment number 3.

    Paul, fair enough, however the subject of Spain will return no doubt, when it does I would be interested in a slightly more underground look at it.

    Harder for a Journalist to dig out I know.... but I can't help reflecting on a couple of snippets of info which is leading me to wonder about the growth of a parallel economy outside of the reach of taxes and 45 day redundancy payments for each year worked terms.

    I am talking about the economy of a nod and a wink, a shake of the hand and a bit of mutual trust and respect between individuals sealed with a glass of shared home made wine.

    Are 40% of the youth of Spain really 'unemployed' in the same way we consider it here?

    Would a developing 'parallel economy' be more robust and survive another crisis much better than the increasingly disconnected and 'unreal' economy of billions being created and lost on the detail of exchanges of CDS or other similar such increasingly virtual financial entities?

    The current world dynamic is absolutely fascinating, unseen in three generations probably in its potential to transform.

    I believe things will change substantially within my lifetime, I just dont know how it will manifest itself and gain traction yet, therefore I find myself constantly straining to observe the first signs of what may be coming over the horizon.

    I am guessing for it to gain enough traction it will have to be something which comes in under the radar of the existing systems of control which support the current model, not big enough to cause alarm, it wont appear on the horizon all guns blazing and decked out in signal flags, it will be subtle, hard to see yet substantial non the less below the surface.

    Hence my interest in the growth of a sustainable parrallel 'black' economy, which could fit the bill.... but does it exist?.. is it growing?

    You are probably one of the few journalists with sufficient common touch to be able to find out.



  • Comment number 4.

    democracy isn't working because it institutionalises incompetence. Anyone without qualifications can become chancellor just through a popular vote. Anyone think they want their brain surgeon or air traffic controllers chosen like that? or should some evidence of competence and a society building plan be mandatory for anyone wanting to be elected.

    of course this would be criticised for 'discrimination' by the equality/fairness worshippers.

  • Comment number 5.

    The 'remedy' is a recipe for impoverishing millions and destabilising a shaky democracy. The Spanish economy needs stimulating and rebalancing using public works in a strategic way otherwise just where is the growth coming from? Can they make DVD players for less than ten Euros like the Chinese?

  • Comment number 6.

    The housing bubble has resulted in the main asset for millions of people simply being too expensive.

    Salaries are such that you have to spend so much on a mortgage that you have no cash left over to save for retirement or to spend on 'things' to help drive the economies of the West.

    This is at its most extreme here in the UK.

    So we either have a deflation of this asset class - houses - to rebalance the economy or we have massive printing of currency and the resulting inflation.

    The problem with the inflation route is that it rewards the heavily mortgaged, the heavily in debt, and does nothing for the millions of young families, school and university leavers looking to buy a home - if anything, the concept goes further away from them with inflation.

    So we can't built DVD players at 10 bucks a unit when UK house prices are currently beyond even the wages of many professionals.

  • Comment number 7.

    Those empty, sometimes half-finished houses and blocks of flats are just staggering to look at.

    Listening to the small business owners is worrying. I have to wonder if this is the UK in 6 or 12 months from now.

    I have said it before, and with all respect to Newsnight and it's audience, but it is such a shame that these items are not on at an earlier time so that a larger audience can watch and perhaps understand what is truly going on in the global economy.

    The BBC's main output seems bent on trying to persuade the British Public that the economic things happening in Europe are happening in far-off countries about which we only know sun, holiday homes and sangria.

    This sort of item should be put on a News 24 loop once an hour every hour over the weekend. It might make a lot more people wake up and realise what is going on.

  • Comment number 8.

    "democracy isn't working"

    Capitalism isn't working!

  • Comment number 9.

    Great post Paul M.

    What a mess they're/we're in.

  • Comment number 10.

    Another superb blog, keep 'em coming Paul.

    If the FT.com can charge €3 a week to read Gideon Richman et al., and the TimesOnline can charge £1 for, for ... well some news, you should be able to get a few bob for this! Darn socialist BBC always getting in the way of the markets!!

  • Comment number 11.

    Thank you for such a great report. Indeed worth watching. Although it oversimplifies at times the situation with the Cajas (not all are that bad), the report is a great piece of work with an independent stance on a complex economic issues and its political ramifications. There are not many foreign journalist out there that do not rely on a state sanctioned and centrist view of Spain.

  • Comment number 12.

    another great report, Paul, you could have run the same sequence and instead of Spain just say the Irish republic..housing estates with nobody in, high youth unemployment, employers running for the hills and I suppose we should thank (some never will) Gordon Brown for keeping us out of the Euro as Blair would have taken us in regardless of the exchange rate (what is a mere detail like rates of exchange when you can buy a dodgy dossier)in anexcellent report I feel the most sorry for the Spanish youth. The father was almost in tears as he described his three sons without work and he being the only breadwinner. My father's best friend a guy called Jimmy Pugh went to fight fascism in 1936 with the International Brigade and he came back injured but chose to fight to preserve democracy and support the elected government of Spain. The Spanish republic had no support from France, the UK, and any European country, only Russia sent any help as it was the left that was up against the wall and arch appeasers like Lord Halifax advised against helping 'an elected government' funny that, sixty years on we will see the emergence of new 'left' that will not be kidded into submission or railroaded into crazy IMF restrictions but will fight alongside the Greeks to give Europeans a real taste of 'democracy'

  • Comment number 13.

  • Comment number 14.

    Seriously though, the markets won't reform Spain, they'll destroy it. Either the European Central Bank must print money for regional development, or Spain must leave the Euro and introduce capital controls.

    At least Spain can feed itself. A weak currency will mean that iphones and other imported luxuries will be beyond the reach of many, but will help them concentrate on meeting their own genuine needs.

    As I've said before, Britain doesn't really earn its own living. We are dependent upon the City to steal much of it for us. I'm all for cutting non- jobs like Welsh language compliance officers and hedge fund managers, but we need to have a strategy to provide for our own needs with our own resources - which means more people doing useful things, and a more equitable distribution of (lower in real terms) income.

    http://www.taxpayersalliance.org/news/hedge-fund-manager-and-other-non-jobs

  • Comment number 15.

    5
    ..Can they make DVD players for less than ten Euros like the Chinese? ..

    not without having their own manipulated currency and ignoring human rights and rule of law over patents, copyright, environmental standards etc.

    china is not a model that works within the rules of civilised society.

  • Comment number 16.

    12 ..but will fight alongside the Greeks to give Europeans a real taste of 'democracy'...

    marxist democracy

    http://www.youtube.com/watch?v=iDJeTnLKLEI

  • Comment number 17.

    @5 Read Orwell's "Homage to Catalonia" and others. The Soviet Union was a false friend to the Spanish Republic, trying and failing to hijack it, then undermining it and ultimately selling it out.

    @16 Spain has always had far more of a taste for anarcho-syndicalism than Marxism.

  • Comment number 18.

    ...Spain has always had far more of a taste for anarcho-syndicalism than Marxism...

    which is probably why it appeals to british liberals.

    if anyone spoke using those bloated anarcho-syndicalism terms in real life people would think they had walked out of a monty python sketch.

  • Comment number 19.

    This was very interesting .... next stop perhaps an update on Mondragon?

    http://en.wikipedia.org/wiki/Mondrag%C3%B3n

  • Comment number 20.

    #16, 17, 18

    Orwell's Homage to Catalonia is a very good book to read.

    What happened in Spain all those years ago is very relevant today.
    Just as then capitalism is in crisis, but back then Spain was a largely peasant society with a strong church enforcing the class system.
    Those against the existing order were split into two main camps - anarchists & communists (with Orwell's POUM in between).

    The communists essentially took their orders from Stalin.
    Stalin was more concerned about keeping power in Russia than promoting revolution in Spain.
    Hence the communists were ordered to support bourgeois democracy against fascism rather than create a communist revolution.

    The anarchists wanted a new order, they wanted the revolution & half suceeded in 1936 - in the first chapter of Homage to Catalonia, Orwell describes the atmosphere in Barcelona were the 'working class were in the saddle'.
    Inspiration, indeed.

  • Comment number 21.

    16, 17, 18 & 20

    During the period of the Spanish Civil War the CNT-FAI, the political front for the anarcho-syndicalists, had a slogan which in English can be given as `Peace to all, death to the institutions.'

    In short and in modern parlance this means that mankind should live in peace and solidarity together and could do so if it wasn't for the state (power)and the banks (money).

    We should try it some time....

  • Comment number 22.

    Ah, the Spanish Civil War... the romance of Communism through rose-tinted spectacles.

    Orwell, Hemmingway et al brought up in such hardship. All those years down the mines, all those years being oppressed. Watching their farms being burned down, their womenfolk taken away.

    Wealthy folk playing at being impoverished and oppressed.

    Spanish Civil War? Bloody, nasty, vicious - both sides.

  • Comment number 23.

    The BBC and Sky are getting very excited by the 6.6% jump in UK construction in the past quarter.

    Stephanie Flanders has urged caution on News 24 this morning but this appears to have failed to get across to the presenters and Editorial.

    According to the below link more public money was spent on UK construction in the past quarter than in any month on record - and all we got was just 6.6% growth.

    Now that there is no more money, now that Messrs Brown & Darling are not throwing public money at builders in the run-up to an election, what hope is there for construction in the UK?

    All this at a time when there is massive building going on in the East End of London for some sporting event.

    ---

    A last hurrah for construction before the axe falls

    http://brickonomics.building.co.uk/2010/07/a-last-hurrah-for-construction-before-the-axe-falls/

  • Comment number 24.

    even today Spain has so many ghosts, many unresolved issues, the true left has yet to emerge from it's sleep...but when they wake!!! even Lorca's grave is kept back, the right has still to reap the whirlwind....

  • Comment number 25.

    16, 17, 18 & 20 etc

    Inspired by #21 '' peace to all death to institutions'' guiding ideal I looked up 'anarcho-syndicalism'

    This wikipedia snippet on the subject particularly resonated with me in the context of the modern dynamic which is often discussed here.

    ''It seems to me that this is the appropriate form of social organization for an advanced technological society in which human beings do not have to be forced into the position of tools, of cogs in the machine. There is no longer any social necessity for human beings to be treated as mechanical elements in the productive process; that can be overcome and we must overcome it be a society of freedom and free association, in which the creative urge that I consider intrinsic to human nature will in fact be able to realize itself in whatever way it will"... extract from chomsky on a 'debate on human nature'.

    The fact that the extract is from a debate on human nature is key for me, it touches on the philosophical routes of this whole developing mess.

    It also resonates with the development of a parallel and ever growing 'black economy' in the shadows of the 'recession' which I tried to capture a little of in #3.

    Interesting thread this, looking forward to reading more once I extract myself from the machine I currently work for at 5pm.


    They will have to work on the name though 'anarcho-syndicalism' hardly trips off the tongue or offers any feeling for what it actually is......sounds better than '' the big society'' though, which seems to try and use some of the Anarcho-syndicalists ideas.


    What a funny world we now live in.

  • Comment number 26.

    #22

    "Spanish Civil War? Bloody, nasty, vicious - both sides."

    I don't disagree.
    The republicans (anarchists & communists) murdered many.
    The hatred of the church was intense.
    The atrocities committed on priests, nuns, etc cannot be defended.

  • Comment number 27.

    #23

    From where I am sat, very much in the engine room of construction and being involved in numerous projects from all sectors. There was a mini boom in construction which started towards the end of last year and is now petering out, this was almost entirely driven by public money.

    Those of us more in the forefront of the construction delivery process have had a sharp collapse in inquiries in the last 2 months, which will take time to feed through the long delivery chain and be reflected in growth figures at the more voluminous end of the delivery chain.

    Nobody is expecting things to pick up any time soon and most people are expecting it to get worse. Double dip a reality by the end of the year.


  • Comment number 28.

    This is absolutely essentially viewing as it sums perfectly and very succinctly Spain's current economic, social and political problems. Very scary stuff - lets see results of stress tests later today (which I think will be massaged) and the market reaction.

    Interestingly I wrote about the cracks in the Spanish banking system, especially the Cajas, 15 months ago which was published in a few magazines and online blogs: Spain’s much lauded banking system begins to crack Why? http://www.eyeonspain.com/spain-magazine/banks-crack.aspx

    Corruption is another major problem undermining the economy and faith in it - see my articles:

    Why is Spain one of the most corrupt democratic countries in the world?
    http://www.eyeonspain.com/spain-magazine/spain-most-corrupt-country.aspx

    Corruption is Drowning Spain.
    http://www.eyeonspain.com/spain-magazine/corruption-drowning.aspx

    As far as what Makes Spaniards Spaniards, this is my opinion:
    http://www.eyeonspain.com/spain-magazine/spaniards.aspx

    For the record, I am an anglo-spaniard (UK born, spanish parents, ex-banker) and have been doing business in Spain for over 25 years and living here for the last 8 so feel well qualified to comment on these matters.

  • Comment number 29.

    @22 "Orwell ... brought up in such hardship"

    My father was brought up in poverty, at least after the 1926 strike: but he did have a loving family. Orwell had the horror of going to a minor public school - I know which I would prefer!

    Orwell knew all about poverty because he deliberately experienced it, as described in "Down and Out In Paris and London" and "The road to Wigan Pier" - one of the most depressing books I have ever read.¹ JB Priestley's "English Journey" covers similar ground.

    I am grateful to the writers who chronicled the realities of those times. It complements what I have from my own family's oral tradition. Life for many people was very grim - thanks to the banks and speculators - incidentally, not least of the "criminals" was Goldman Sachs - as chronicled in Galbraith's "great Crash".

    ¹I don't think the image of the tripe shop will ever leave me!

  • Comment number 30.

    #29 Sasha: -

    I was being ironic - no irony smilies on this blog alas.

    People read Hemmingway and Orwell and what a romantic adventure they were all having in Spain... neither came from the impoverished backgrounds, for example, as the coal miners of South Wales and the North of England did... nor when they returned to the UK did they return to poverty, hardship and a slum existence.

    Orwell may have experienced poverty but he could always escape it - no different to luvvies sleeping out for a few nights in cardboard boxes in London. Did he ever truly experience or understand the complete and utter lack of hope? Complete despair that things will not get better. I doubt it.

    Don't get me wrong - he did some good but he did it from a priviledged position.

    There is something very peculiar about middle and upper class Englishmen embracing Communism in the 1920s through to the 1970s. You get the impression that they thought it was all one giant public school outing, after which there would still be honey and tea prepared by 'Cook'.

  • Comment number 31.

    @30 I don't disagree with your general sentiments, especially about upper class communist flirters,☟ but you are wrong about Orwell. The Wikipedia article on Orwell is ok, but I recommend the Britannica article if you have access to it.

    His family were too poor to afford his education - he only got the education he did through winning scholarships. He described his family as "lower-upper middle-class", because they had aspirations but not the means to go with them. He always had to work for a living.

    Also, he was never a communist, being far too libertarian (though not in the modern right wing sense of the word). In "The Lion And The Unicorn" - 1947 I think - he criticised the emphasis of the Labour Government's programme, saying that the best way of changing Britain for the better would be to abolish public schools and the House of Lords.

    (☝It's very difficult to escape the shackles of your upbringing - rebellion is "cool", but then your biggest influence is still what you're rebelling against!)

  • Comment number 32.

    Now here is an interesting article - it was on Wiki's front page today.

    http://en.wikipedia.org/wiki/Confirmation_bias

    Ok - it states the blooming obvious, but one should still consider one's opinions in the light of it?

  • Comment number 33.

    Paul should be congratulated for finding such a clever way to bring home the key issues raised in this piece.

    I'd like to turn it around and ask where did all the wholesale money come from to bankroll these regional Spanish banks? The answer is that there is now such an unbelievable amount of capital out there looking for a return but so little real profitable industry to invest in that it can only go into speculative bubbles like Spanish property, based on the dual delusions that consumers can and will buy and that there is collateral/equity in the asset that therefore detunes the level of risk involved in wholesale lending - remember the US sub-prime bubble?

    All this money is what Marx called "dead labour" - i.e. cash taken out of circulation in the real economy and turned into capital. There is now such a huge pile of cash looking for a return from the likes of you and me that it is impossible to invest it with a reasonable rate of return at an acceptable risk level. This capital formation comes from the energy exporting economies, the profits of financial services and the trade imbalances with countries like China. Of course we do it too with our pension schemes - and look at the lack of return they are achieving now.

    What will happen? I'd like to suggest a new theory: "Gaia Value" - this states that just as the world's environment has feedback systems that self-heal as posited by James Lovelock, the free market seeks to equalilse and self-heal - and it will do so to these huge stocks of capital by devaluing them to a level which is sustainable again in terms of the real rate of return, size and margins of the real economy.

    Therefore the currency in which this huge amount of capital is denominated in - mainly the dollar but others too - will and must collapse in value to a sustainable "true value" to match the real rate of return that can be sustained by the real economy.

    As real interest rates are negative and should reflect the real rate of return in the real economy, I'd suggest that allowing for the multiplier effect of money circulation in the economy, the right level of depreciation for the dollar is approaching 90%.

    So just as we now know the environmental imperative is to stop mankind swamping the planet's ability to self-heal through carbon emissions, then in our economy we must end the overproduction of money, the overformation of capital and the trade imbalances that create debt that leads to individuals, companies and nations soaking up the excess capital that they are helping to form by consuming more than the value of what they produce.

    I am no fan of Marx's proscription for a just society, but his anyalsis of the contradictions in the capitalist system are as valid today as when he wrote them. In the post-war boom we have escaped this contradition by constant growth that soaked up the excess capital by investing in new capacity: we are reaching the limits of this growth in terms of the sustainability of the economy, our society and the environment. Without constant growth, the contradiction of excessive capital formation comes home to roost.

  • Comment number 34.

    The Economist had a huge article on the global housing bubble circa 2003 I believe - it argued that the bubble could not go on much longer and would soon burst... but it went on for many more years around the World thanks to easy credit, property porn TV and, um, more easy credit and endless more property porn TV... and debateably is still going on in the UK.

    The article studied numerous reasons for the housing bubbles globally but, along with easy credit, it did go into considerable detail about alleged money-laundering from the former Soviet Union via Spanish property-building.

    I just thought it was worth a mention.

    ---


    Sasha, I will re-read up on Orwell. Thanks.

  • Comment number 35.

    BP to drill in the deep water off the libya coast in the next few weeks.

    Do the executives at BP not read the news? Or have they already given up on the States as a market for them?

    Or perhaps in mitigation they are helping Megrahi put together the documentary he is now working on to clear his name... due out in November I hear.

    '' Abdelbaset Ali Mohmed al Megrahi has now lived longer outside jail than any other convicted murderer released on compassionate grounds in Scotland.''

    Just a co-incidence that Megrahi got the least reliable diagnosis ever given by a Scottish prison doctor, I mean these things are never precise are they? I mean who would have thought that Dr David kelly could die from blood loss when there was hardly any at the scene and the thief that stole his dental records..then returned them 24 hours later... well he obviously mistook x-rays and notes for money and when he realised his mistake returned them. ..who would miss dental records for 24 hours.

    Next thing you know people will be saying that the torpedo that sank the south korean warship was a set up.


  • Comment number 36.

    I will recommend Orwell to anyone. My late father met Orwell around the end of the war and found someone whose political journey had a familiar feel; a circumstance which allowed him to redefine his own point of view.

    The only books I was ordered to read by the old man were `Animal Farm' and `1984'. The reason being that he did not want me lied to in the way his own generation was lied to. This lesson succeeded so that my youthful radicalism took me to the libertarian left. I went on to read the other books. The essays are my favourites: I just wish I could write like that. For me it was a good place to start as I was able to hold to my truth whilst most of my generation ran off to embrace munificent careers serving that state socialism whose ruins now lie all about us.

    So where do we go from here is the most practical question to ask? Capitalism has now failed, the liberal state has now failed, social-democracy has now failed, state socialism has failed, and the corporate state has also failed. All the idols of the last forty years have failed.

    In my view all we have is ourselves. I think this is where we have to start over. The last words of the executed Joe Hill ring in my ears `Don't mourn: organise!'

  • Comment number 37.

    #36

    Animal Farm & 1984 (& Homage to Catalonia) exactly what my kids have been encouraged to read & what I recommend to everyone.

    I would also recommend Straw Dogs by John Gray to overcome the illusion of free-will.

    "So where do we go from here is the most practical question to ask?"

    Develop direct democracy - one way to attempt this is to breath new life ito the social forum movement.
    The whole point of direct democracy is to take collective control of the means of production & to exercise that control through a movement & to prevent a one-party dictatorship.

    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 38.

    @37 "The whole point of direct democracy is to take collective control of the means of production...

    Hmm ... what do you mean by collective control? Also, thanks to the power and vandalism of unrestricted finance, our "means of production", like the steel works where my grandad worked, are no more. Too much of production for OUR benefit takes place where labour and life are cheap.

    @33 Sorry, But I think you've coerced the facts to fit your "Marxist" straightjacket. Our last crisis was not a Marxist crisis; Marx died before the evolution of modern banking, and wasn't that interested in the intricacies of finance. He was too intoxicated by his own theories. Inevitable really given his background in philosophy. I'm not saying philosophy is unimportant, but when it comes to analysing messy reality, give me an engineer any day.

    Galbraith (père) is very good on financial crises. He started life as a farmer before becoming an economist, New Deal administrator etc. But I don't think he ever forgot the "smell of manure".

    Modern society is a very complex mess: We need practical measures, not fine and meaningless phrases.

  • Comment number 39.

    #38 Sasha Clarkson

    "Marx died before the evolution of modern banking, and wasn't that interested in the intricacies of finance."

    Try reading part 5 of Capital Volume 3 - The Division of Profit into Interest & Profit of Enterprise & particularly chapter 25, Credit & Fictious Capital.

    It is ficticious capital that explains the current crisis very well.

  • Comment number 40.

    @39 I bow to your superior knowledge of Marx. :-) Apart from the Communist Manifesto, which didn't impress me, I've not read him, only summaries. This no doubt due to the appalling experiences of my mother's family in the Soviet Union.

    Keynes, whom I have read and greatly respect, in his "Short View of Russia" referred to Das Kapital as "an obsolete textbook which I know to be not only scientifically erroneous but without interest or application for the modern world". Keynes 1925 view of Russia was spot on at a time when many on the liberal left were still being hoodwinked.

  • Comment number 41.

    So this economy thing - is it just Greece, Spain and Eire. Heck, you hardly hear anything bad about the US on UK meeja these days.

    So reassuring to know that the UK is not in the same mess as all of the above.

    Makes me sleep well at night.

    :-)

  • Comment number 42.

    #40 Sasha Clarkson

    Stalin, or even the Bolsheviks, are not the sum total of all Marxists.
    Marx was very much a democrat - not a supporter of the fraudalent parliamentary 'democracy', but direct democracy.

    The Soviet Union & the Bolsheviks had a semblance of direct democracy, the Soviet (based upon the historical mir), but power was very much with the party.

    Hence with industrialisation (& the required collectivisation of the land) applied at breakneck speed to catch up with the West, huge human right abuses happened.

    You will find that there's a lot of Marxists/Communists/Socialists who make no apologies for Bolshevik rule.
    Indeed, many Russian communists lost their lives at the hands of Stalin.

    Try reading up on Rosa Luxemburg & left-wing communism in general.

    And to be fair to the Bolsheviks, including Stalin, a lot of what happened wasn't the result of bad people per se or flaws in communist theory, but rather was the result of the historical situation, an isolated revolution in a peasant economy led by a vanguard.
    The pesants wanted the land, the party wanted control of the land to feed the workers of the cities & to industrialise, & so to be able to withstand invaison from the west.

    Arguably the Mensheviks were right in hindsight - parliamentary democracy & capitalism - was all that was possible.
    But Lenin gave it a go & if Germany had followed, as it nearly did, then the whole world situation could have been much different.

    You reference to Keynes & his comment on Das Kapital is interesting.
    Is there a fuller context to it with justification for such a view?

  • Comment number 43.

    Paul,

    Finally managed to track down video of your culture show interview with Zizek, and finished "Living in the End Times" ; in short Zizek falls into the same prat trap as Hegel, Quine,and the artist formerly known as Jaded Jean - the one best illustrated by Borges in his " Funes the Memorias".

    My only conclusion is that it is Zizek himself who is the Kung Fu Panda here !

    P.S for the sake of those who don't lip read what was your response to his salutation " see you in hell or communism" ?

    apologies for being off topic - I'm curious to know how much weight you are affording Zizekian thought ?

    http://www.egs.edu/faculty/slavoj-zizek/videos/capitalism-marxism-and-kung-fu-panda/

  • Comment number 44.

    #43

    Hugely entertaining interview, some good stuff in there too. Just goes to show the extremes you have to go to to get alternative thought some attention nowadays.

    Whatever you think of Zizek, debate within the confines of 'acceptable intellectual norms' is just boring.

    He reminds me a bit of Diogenes of Sinope 404 to 323 BCE.

    People have forgotten what cynicism originally meant, Zizek a a true cynic in the celebratory style of Diogenes and others.


  • Comment number 45.


    "see you in hell or communism"

    As Rosa Luxemburg said, "Socialism or Barbarism".

  • Comment number 46.

    Thoughts on commodities & money.

    Capitalism is based upon commodity production: things are produced for sale not for immediate consumption.

    Exchange has implications for production.
    The market is a place in which the labour of individual producers is brought into relation with that of other producers, and so of society as a whole.
    The market is a particular way of allocating social labour, appropriate to a particular kind of society in which individuals work independently of one another to produce goods for the use of others.

    Thus the relation between individual producers in a commodity producing society is not directly recognised as a social relation; the producers do not get together to plan production as interdependent members of society.
    Instead the social relation between these producers takes the form of a relation between things, between goods they exchange for one another.

    The exchange value of commodities, is not, therefore, merely a relation between inanimate objects, but it expresses the relation between the labours of individuals who have produced those commodities.
    Exchange relations are a form of social relations of production: the market regulates the interdependence of producers who appear to be working independently of one another.

    Exchange presupposes the recognition of private property rights.

    The imperatives of commodity exchange give rise to money.
    It is exchange that gives rise to money and not money that gives rise to exchange.
    The universal equivalent emerges out of the development of exchange itself.
    Money is itself a form of social relation.

    The functions of money:

    1. Measure of value – the commodity in terms of which the value of other commodities is expressed.

    2. Means of circulation – in order to exchange one commodity for another the value of the first commodity has to be realised in the form of money and the money then realised in the use-value of the second commodity.

    The circulation of commodities has the form C-M-C.
    This is quiet different from the simple exchange of use-values C-C.

    The separation of purchase and sale introduces the possibility that the whole system can break down: a commercial crisis, for every sale is conditional on previous purchases since the buyer must have money.

    3. Means of purchase – while commodities enter and leave circulation, money remains within circulation.
    Thus a given quantity of money is necessary and sufficient to maintain the circulation of commodities.

    Many economists (Monetarists) believe that the quantity of money determines the level of prices. Marx argues that with commodity money it is circulation that determines the movement of money and not vice versa, hence it is the level of prices that determines the quantity of money required.

    Token money can replace commodity money.
    With token money, if too much money is issued the currency will be devalued and price will rise.

    Hoarding increases the quantity of money required.

  • Comment number 47.

    @42 etwasrotwein

    Keynes first interest was mathematics, although he was exceedingly well read in the classics and history. He wrote a well known and highly regarded "Treatise on Probability", published in 1920. Keynes' father was a philosopher and an economist. Keynes himself turned to economics under the influence of the leading Cambridge economist Alfred Marshall, who was an expert in the mechanisms of how the business cycle functioned

    Any serious study of probability and statistics makes one somewhat wary about making categorical statements about the real world. Although Keynes wrote with passion, and sometimes a cutting wit, he was by nature a persuader rather than a polemicist. Keynes writings are highly nuanced. They offer solutions based upon working models, rather than certainties.

    Because of the extent of his studies, and from his experience as an economic civil servant, Keynes would have regarded himself as having a rather better grounding than Marx in the intricacies and principles of the real economy.

    Marx may have become a professed atheist, but Keynes criticised Leninism as a new religion, and here he did become polemical: ..we can picture the Communists of Russia as though the early Christians let by Attila the Hun were uniong theequipment of the Holy Inquisition...to enforce the literal Economics of the New Testament.

    Marx and his followers, start with assumptions about the nature of history and human societies, and then coerce their interpretation of facts to fit the straitjacket of their model. In this sense Marx was a historiographer rather than an historian, and most Marxists are would-be priests and lay preachers in this religion rather than genuine seekers after truth.

    PS Don't romanticise the "mir" system. It was mostly just a way for serfs to participate in administering their own oppression. They could still be bought, sold or exchanged for a dog or a horse.

  • Comment number 48.

    #47 Sasha Clarkson

    "Because of the extent of his studies, and from his experience as an economic civil servant, Keynes would have regarded himself as having a rather better grounding than Marx in the intricacies and principles of the real economy."

    So let's compare the two different interpretations of the business cycle.
    Keynes: deficient aggregate demand due to 'animal spirits'
    Marx: a fall in the rate of profit, which can be caused by many factors, such as a shortage of labour, but also by capital accumulation itself

    Where does profit come from? Can Keynes answer this on a macro level?

    I'm more than happy to debate who can explain the workings of the capitalist economy better.

    Away from this objective test, I agree with the tone of some of what you say, in the sense that there are 'communists' who preach communism as if it is absolue truth.
    This human characteristic of 'preaching the truth' is found in all societies.
    Nazi Germany, present day Iran, present day US Republican party, etc.
    Perhaps this characteristic was important in forging tribal loyalty in pre-history.

    Much better we promote an enlighted understanding, an open-mind.
    As Marx said, "doubt everything".
    Please read more about Marx so you can distinguish him from the 'communism' of Russia.

    In many respects I have a high regard for Lenin.
    But he was a driven man who created the highly disciplined (his favourite word) party that was responsible for so much suffering.

    There is a big difference between Stalin & Lenin (or Trotsky).
    Just as there a big difference between Lenin & Luxemburg.

    Rosa Luxemburg had the temerity to point out how Marx was unable to solve the accumulation problem.
    For her Marx was great, but he was just a human being, not a prophet.

    I'll post some more of my notes on Capital.
    If you're interested in reading them, I'll happily debate them.

    If at the end of the day you can convince me Keynes has a better explaination, then I'll be a Keynesian.


  • Comment number 49.

    Money & Capital

    It's important to distinguish between money as money and money as capital

    Two forms of circulation:
    The circulation of commodities: C-M-C
    The circulation of capital: M-C-M

    In each case a purchase and a sale are combined, but in the first case to exchange use-values, in the second to change money into (more) money.

    The addition to money laid out is called surplus value.

    Valorisation is the process by which value laid out returns to the starting point with an increase.
    It is the motivation of the circulation of capital.

    The aim of the capitalist is the constant accumulation of value, not the pursuit of use-values, thus it is always money that is the end result of his activities.

    The circulation of capital represents a constant movement of value from one form to another as capital takes the form now of commodities and now of money.
    Value therefore becomes value in process, money in process, and, as such capital.

    If commodities exchange at their value, which is the normal form of circulation, no surplus value can be created.
    Surplus value cannot be created if all commodities are sold either above or below their values because gains cancelled by losses.
    The conclusion is that surplus value can be created neither within nor outside circulation.

    The solution to the contradiction is found in identifying a commodity which, when purchased, can be used to create more value than it has itself.
    Such a commodity is labour power.

    For labour-power to be a commodity certain preconditions are required:
    The labourer must be a free individual, owner of his own labour-power, selling it for a limited period (e.g. not a slave or a serf).
    Secondly, the labourer must be unable to produce commodities or subsist on the basis of his own labour.

    The examination of labour-power takes us beyond circulation, to the “hidden abode of production” where surplus value is created as the labourer is set to labour.

    To remain at the level of economic appearances is to ignore the social foundation of the economy and so to take the social relations on which it rests for granted, to treat them as though they were natural rather than a social and historical phenomena.

  • Comment number 50.

    49

    Here is Sraffa's take on the problem, and his consideration of price of labour as an alternative; this was the basis of Steve Keen's approach, see Debunking Economics.

    Incidently Keen finds himself groping with Hegalian dialectics in his bid to develop Marx's economics, and so completes the circle and condems Marxism as a theology - just as had Keynes's close friend Bertrand Russell in his 'History of Western Philosophy'

    http://www.dreamscape.com/rvien/Economics/Essays/sraffa.html

    Of course you can always respond that the tennets of free market capitalism also rely on a belief system, and so leave us all writhing in the mire of dirty empiricism.

    All of us are in the gutter, some are staring at the stars

  • Comment number 51.

    #50 supersnapshot

    This is a difficult article & I won't pretend to fully understanding it all.

    I am familiar with the transformation problem though - from values to prices.

    David Harvey provides a nice summary of the problem:

    "Marx's transformation is incorrect. There seems to be no necessary relation between the values embodied in commodities & the ratios at which the latter exchange...But an examination of Marx's work shows that exchange values, far from being derived out of value theory at some late stage in the game, are fundamental to the enquiry at the outset. Without some understanding of them we could not say anything meaningful about value. Exchange value & value are relational categories, & neither of them can be treated as a fixed & immutable building block...he is most definitely not seeking to derive exchange values out of values."

  • Comment number 52.

    More on value & prices.

    A commodity has both use-value and exchange-value.

    The use-value refers to the physical properties that make it potentially an object of use.

    Value expresses the fact that the commodity is the product of social labour, of a part of the labour-time of society as a whole, and not simply the private labour of a particular individual.

    The magnitude of value is determined by the labour-time socially necessary to produce the commodity, defined as, “the labour-time required to produce any use value under the conditions of production normal for a given society and with the average degree of skill and intensity of labour prevalent in that society”.

    The value of a commodity is not the amount of (concrete) labour actually expended, but that portion of social (abstract) labour that is credited to that commodity. This can only be known in exchange (in the market).

    Since value is a purely social phenomenon it cannot find any direct natural expression, but can only be expressed in the relation between commodities.

    The value of the commodity appears to be an inherent and semi-natural property of the commodity, its price.
    But value is not inherent in the commodity.
    The exchange relation appears to be a relation that exists between commodities themselves, without reference to the producers.
    Value appears to be an inherent quality of the product that dictates to the producer rather than vice-versa.

    Value expresses the labour of the producer as a member of society.

    Value is not a technological concept, it is fundamentally a social concept.

    Exchange-value rules use-value.

  • Comment number 53.

    # 7. At 11:09pm on 21 Jul 2010, tawse57 wrote:
    Those empty, sometimes half-finished houses and blocks of flats are just staggering to look at.

    Listening to the small business owners is worrying. I have to wonder if this is the UK in 6 or 12 months from now.

    I have said it before, and with all respect to Newsnight and it's audience, but it is such a shame that these items are not on at an earlier time so that a larger audience can watch and perhaps understand what is truly going on in the global economy.

    The BBC's main output seems bent on trying to persuade the British Public that the economic things happening in Europe are happening in far-off countries about which we only know sun, holiday homes and sangria.

    This sort of item should be put on a News 24 loop once an hour every hour over the weekend. It might make a lot more people wake up and realise what is going on.

    ---------------------------------------------------------------

    The BBC is a tool to manipulate the mass mood of the nation....just incase you didn't already know.

  • Comment number 54.

    How come alot of you have such an appocoliptic view of the future? Are you all getting out of the house much? Do you have wide circles of friends in financial services? Paul Mason does not count as a friend btw....I am finding it really difficult getting this in perspective. Indeed Paul Masons blog is warping my tiny little mind.

    If everything is as bad as Paul Mason and all you co-conspirators purport, then does this not give credance to the idea that indeed, all around the world, only stupid people are breeding?

 

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