The New Capitalism
The contraction of the world's developed economies that we're witnessing represents the end of an era. Taxpayers have been forced to support the banking system and the real economy on a scale we've never seen before.
For many years to come, what's happening will affect the relationship between business and government, between taxpayers and the private sector, between employers and employees, between investors and companies.
A new capitalism will emerge from the rubble.
Please click here [pdf] for my thoughts on how we got into this mess and what the re-made economy will look like.
UPDATE 06:41AM, 9 Dec: As edwddprice noted, the £9bn on page 6 was a typo. It should have read £9trn or £9000bn. It has now been fixed in the pdf.
UPDATE 10:18, 3 Jan: There's another typo on page 2 of the pdf. The word "current" should have been "currency" (goodness knows how I failed to spot that). So the correct phrase should be "the gross foreign currency liabilities of our banks".
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Still no mention of derivatives?
You could have hidden that in the pdf...
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This comment was removed because the moderators found it broke the House Rules.
I assume the 9bn on page 6 is a typo otherwise an interesting piece.
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China is also in a bind. If it asks for its borrowed money back it just damages the economies it hopes to keep selling into. Without checking the figures it is unlikely that taxation in China is as high as in the West as there is virtually no welfare provision, so individual savings are likely to be higher as they are in part pension provision. The fact saving rates are higher in China is not a like for like comparison. It is not clear what the impact will be on China, or India, due to this mess but it could be considerable and very negative.
The desire to prop up large inflexible companies who cannot produce goods that consumers want and who indulge in oversupply is a problem. It may be expedient for a government(s) that wants to avoid immediate rises in unemployment but it could be very detrimental downstream. There is a difference between loaning money to a bank to stop a confidence collapse with the prospect of short term repayment and propping up a business which makes products it cannot sell and which is probably in longterm decline. Part of the climate issue is related to overconsumption and built-in obsolecence, something which is beloved by many of the large businesses which are likely to be in trouble. Therefore simply preserving them in their current form has other implications also.
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Robert,
Very well written piece - would have liked to have seen something about the other derivatives and the CDS bubble. I think it is too simplistic to blame sub-prime mortgage holders who only hold a tiny proportion of the toxic rubbish that sits waiting to crush us.
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New Capitalism? I think not!
What we are living through is a return to value, and the world of values that Captain Mainwaring would recognise.
First came the undermining of the system of values, then of value itself.
The rot started with Thatcher with all that talk of deregulation and BIG BANGS in the City. At the same time she destroyed the industrial base of this country.
What Thatcher started Blair/Brown finished.
Now that the Thatcher/Blair model of "New Capitalism" is dead,
WHERE TO NOW FOR THE UK ECONOMY?
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Came in the bank with a tank, fired a blank
But I didn't take nothing (Thanks!)
My pockets got a shortage
Everything I wanna buy I can't afford it
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WHATS that you say??
There'll be a formal recession in most developed economies, and the economic contraction is highly likely to be more
severe in the UK than almost anywhere else.
I think youll find Mr Brown does not agree Sir.
Funny that Eh?
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Oh dear. Someone has been reading our comments.
Credit deflation and why the inflationary solution will not work. Thank you for the admission.
See you on the other side of the singularity.
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I hope people watched "The Ascent of Money" tonight..
Perhaps we will realise the effects of a bloated and desperate big (and truly global) welfarist system, based on fiat money, coming to the end of existence... inflation, printing of money (or "Fiscal easing")..
The only solutions are to take the medicine, and cut government spending massively..
Lord Mandy calls it "Smart" government, but it is just desperate spin.. and we are doomed to a decade of stagflation as a result.
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Robert - you suggest that the taxpayers are likely to have to bail out the banks again in the near future. This in order to maintain lending to companies.
If the millions that you predict hit the dole queues then that burden will fall upon less taxpayers who in turn will tighten whatever tey have left to tighten.
In other words the slide downhill will be accelerated into possibly the full blown depression that we all fear.
Surely the key has to be to prevent companies laying off staff, in order to maintain tax revenues, by spending in far bigger style that so far has been the case, on infrastructure and solid assets and to restrict financial assistance to those companies maintaining or creating employment. The conservatives had that part right at least.
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It is easier for a camel to squeeze through the eye of a needle than for a rich person to get into the kingdom of God.
And it is easier to get sent to jail than it is to get out, (unless you have a Get Out of Jail Free card)
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Robert,
Basically OK but a bit optimistic I feel,
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Robert
I have read your pdf.
I am curious what you see as 'recovery'.
I do not believe that 'recovery' can be defined in returning to the bubble economies of the last decade, then what will 'recovery' be?
My thesis is that 'recovery' will be when borrowers pay a reasonable price for their loans and savers and investors get a reasonable fair return for their investment.
It is really quite important to define what is defined by 'recovery' for otherwise we will not know how to achieve it nor will we know when it has been achieved.
The Bank of England's near absolute silence on the matter I find most disturbing, but absolutely typical!
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Reading that reminds me of when I was at Napier University in Edinburgh in 1993. We had a talk from a banker (Bank of Scotland) explaining how we (the public) would become holden to the bankers. I never could reconcile how it would be sustained and for a while of course we were captured by our love of debt. However, it appears that a decade or so the table has turned.
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Robert, i agree with the majority of your article. However, I believe that the retreat to fortress positions is the only way that we in Europe can survive the coming catastrophe.
If during 2009 we reach a 3 million plus unemployment rate then we will see an equivalent rise in the "can't pay -won't pay" households. That will be far more than the banks, building societies and credit card companies could stand. The economy, or what remains of it will be destroyed. The situation may appear worse in the UK but the same ramifications will hold true across Europe. Therefore if we are to avoid social and economic meltdown then we have to combine our efforts with our EU partners and pull up the drawbridge.
yes we will have to default on our debts. But if we do that on a Eurpean basis, the rest of the world will come to terms with it. If we try and do the same thing as the UK we will get slaughtered.
So the Middle East and China hold loads of our paper. But what good is that to them? it does not sell one more tv or another barrel of oil. To maintain their own existances they will deal. But they will only deal with entities that have future strength - and that is Europe.
If you don't think that isolationism is not already staring to look attractive to the US then you are deluding yourself. Their bottom line will be that they can clothe, feed and defend themselves. Alone the UK cannot do that. But we do have this capacity as the EU.
You argue that a new capitalism will emerge and I agree. But let it be a European cooperative one.
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Surely the Global GDP is more than £36 Billion. Do you not mean £9 Trillion is a quarter of global GDP.
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The New Capitalism is an excellent start to what should be a continuously developing subject. More on the governance of UK financial institutions eg Bank, FSA and HMT would be good. Something wrong with world GDP figures. Please check.
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The problem... Fundamentally, our monetary system... Fractional Reserve Banking... Without debt there is no money. The more loans there are the more money there is.
To understand why we need reform there are various links here:
http://moneyredeemer.webs.com/links.html
And to petition for reform:
http://petitions.number10.gov.uk/frb-reform/
--- "There were twin connected bubbles in assets
and credit."
Yuhuh... Read Rothbard, Mises etc.
--- "A couple of questions follow. Who's to blame?"
Well... Who profits most when lending? The lenders. 30% profits as long as the Ponzi pyramid continues growing.
But you know what? That Fractional Reserve Banking system is still there and the banks are being bailed out to the tune of hundreds of billions. Who's to blame for that? Who is to blame for not removing the people who continue to allow it to operate? For not replacing it with a better more equitable monetary system.
Well? ... Who elect our leaders?
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you don't have a global computer system to keep track of the global economic system, just a bunch of banks brokers, agents, counterparties, intermediaries etc sending each other messages trading and settling.
But then trades volumes grew and grew and grew
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I will raise a glass to you this Christmas, Robert, you surprised me with your honesty today. Do mention next time though, that not all taxpayer funding will be repaid. The government has chosen to pick winners and losers and this will not be without cost.
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I hope I'm right in saying that 4 of the last 5 recessions followed a heavy spike in oil prices. Until the origins of the recent spike are assessed, and its consequent impacts considered, any forward planning is frivolous.
The spike to $147/bbl was entirely exceptional - not only in its scale, but also in its somewhat obscure origins.
Very senior knowledgeable people wrote of the inability of crude oil supply to keep pace with demand after 2005,
leading to an increasingly"tight" market
(that is one lacking a cushion of a rolling surplus capacity to offset sudden outages by weather impacts, strife, accidents, etc., which led in turn to escalating prices.
An officiously cheerful lobby derides these observations, claiming that the entire spike was merely an artifice of speculators.
Given that the spike was unprecedented, it seems worth asking why, if speculation caused that spike,
it had never achieved any such thing in the past ?
If it was actually caused by society reaching practical limits to increasing global oil supply, (due to both geology & politics) then our route out of economic recession is uncharted.
Once general demand started to pick up globally, and oil demand, and prices, once again rise, we'd again meet those limits on supply, and see a new price spike choking off the recovery.
In fact, with the oil price crash, oil field development is being slashed, meaning that we'll have less new capacity coming on stream to offset old fields' depeletion - i.e. the supply limits are tightening.
The sole route out of this awful decline, is simply to end our ruinous dependence on liquid fossil fuels.
So when will the BBC find the courage, as a public service corporation, to inform the public of these prospects ?
Regards,
LewisC
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Very interesting piece of work.
I write a monthly column on energy issues (technology, economics, biz devt and other stuff) for a well know Scottish publication and about two years ago I had a real go at the private equity industry for its abject failure to create anything new. The number of start-ups and spin-outs in this sector whether in so called renewables or conventional energy is pathetically low and of course now is almost non existent unless VC cash can be pulled in from overseas.
I was harangued by the PE boys up here but I knew darn well I was right... Now of course we all know that those of us who took this stance were absolutely right.. In fact, we probably understated the damage these companies were actually doing whilst - we must remember - Crash Gordon looked on in admiration !
Good on you Robert..
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Sounds like a suicide note.
Unfortunately I thinks it's a pretty accurate assessment.
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Your future plan sounds a bit like decorating a house before it gets repossessed.. you may as well have one big final party, last one out locks the door
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looks like rain dear
never mind luv
draw the curtains
poke the fire
and tommorrow we'll book two weeks in spain for july
it'll all be sorted by then
alistar sez:
time for 60,000,000 heads to be put right me thinks,
who's going to do that then?
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#2 gracethecollie wrote: "you are a liar"
He all but admits we are about to enter a depression and the certainties you had are gone. What is dishonest about that?
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Is there no limit to the brilliance of Robert Peston's analysis of this historic economic catastrophe?
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Your solution - a global institution to monitor risks etc. Sounds a lot like the IMF.
Many will remember the number of times the IMF warned the government of the risks in the UK housing market and debt levels and many will remember the government ignoring them and claiming to have rid us of boom and bust.
Strikes me, if we are going to build a globalisation watchdog, it has to have teeth of some sort, some sort of guarantee that politicians will listen and act when they are warned. Maybe the media should have done this but they didn't (too busy chasing stroies about the latest non-entity to have become famous the day before). The political opposition should have done it but I don't blame them because the public at large would simply have ignored them and accused them of being cassandras.
Something that also occurs to me is that it is not possible that bankers etc. didn't realise betting on the American housing market was not a one way bet. A cursory glance at history or a basic knowledge of economics would have told you that eventually it was going to go wrong.
I believe that bankers and regulators knew a retrenchment was on the way but asssumed the recession would be 'normal' in size and scope and after a few years, they could start all over again.
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How about writing about the New Capitalism if your going to upload a 6 page pdf entitled as such? I'd love to hear your ideas on a new national/international world order...or is some original thought and conjecture too much effort compared to critiquing past events?
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Your thoughts are very instructive Robert but I haven't quite been able to see what your New Capitalism is going to look like, Socialist bureaucracy looks probable to me.
'When it's gone - it's gone!'
The next tasks are to get accustomed to our poverty, share the pain in an acceptable way, and learn to make an honest living in world markets to pay for the essentials.
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Please can we have crass, half-witted slanderous statements like "You are a liar" witheld from the comments section. Totally unsubstantiated insults infect the reader, if only temporarily with the turgid state of mind of the contributer.
Why does decency continuously have to be thrown on the sacrificial alter of 'freedom of speech'? You censure Jonathan Ross for using offensive language, cant you at least censor this oaf.
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“small companies, …the unsung heroes of our tale of monumental financial folly: even today, the aggregated savings of small companies exceed their debt” .
New small companies create employment and significant tax revenue. They will now be even more reliant on equity finance as bank lending to start-ups will be negligible.
Unfortunately the sector was recently betrayed by the UK Government which after promising the tax break for almost 10 years withdrew the world class incentive of a long term 10% CGT rate to punish private equity abuse of taper relief, an unrelated issue.
Investment incentives need to be restored, urgently, to maximise investment in small companies. Long term this will be of more benefit than bailing out large "dinosaur" companies
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It's interesting that the recent USNIC report on Global Trends to 2025 highlighted the possibility of many developing states viewing the "China" model of greater state controls operating within a "free" market economy as more attractive than the models we have been operating here in the West.
Looks like we may be heading that way ourselves and when viewed from the perspectives of climate change, risk management and global wealth distribution it may not be a bad thing.
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sometimes I think you have much clearer understanding of the problems and issues then the people put in charge of dealing with them.
However now that we know the problem and what caused it, what is the solution? Most commentators are lamenting the problem possibly too long. But smart brains like yours should now be suggesting possible solutions - however drastic they sound.
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Great article as usual, Robert. I do wish, however, that you would not say that we are all to blame for this situation. I do not see how I am to blame in any way. Like many other ordinary people, I've played by the rules, worked hard all my life, haven't taken on any debts that I could not repay, and now I find that my tax contributions and savings are being depleted to prop up and pay for other people's irresponsibilities. I for one, will certainly be looking forward to a new, more responsible, citizen-orientated form of capitalism.
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I think BBC is not a commercial media? Would not be appealled by the TV advertisement money?
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"Households borrowed too much. Businesses borrowed too much."
Where's the mention of "Government borrowed too much"?
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Your views on the new capitalism are interesting, but of course regardless of the commodity type our exports are another countries imports, just as their exports are our imports. It is clear now therefore that every country depends on all of the other nations of the world in some way or another.
The problem will not go away, all countries now recognise that the system must be audited by honest responsible people who have the knowledge to complete that audit. Why? Because we now understand that the word honest has a different meaning to many people, and many people do not even know what the word means.
Perhaps we should start world wide with a course in definitions? The main problem arose because financial institutions packaged so called rubbish and sold it on as something other than that which they represented it to be. Once trust disappears so does everything else.
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The pdf was an interesting read. I was wondering: one of the areas of debt that will have increased massively in recent years will be that of student debt, e.g. I have a student loan that is approx. £16,000. It's still increasing as I am now doing a PhD, so am not earning enough to begin paying it off. Since the interest on student loans is linked to the value of the pound, is there the possibility that inflation could ruin me?
(Don't worry, I'm not losing any sleep over it, but I thought it was a worthy question!)
Also, buried in the small print of the new (as in post top-up fees) student loan system, is that if after 25 years of employment you haven't paid off your student loan, the balance is wiped. Isn't this just another big funding gap, especially if the prospect of increased unemployment becomes a reality?
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Good summary.
I would like to see you come down harder on Globilisation. In my mind it is bad for jobs and for the countries the global corporations sometimes control (with none of the responsibilities of government). Global corporations seem to be good only for a handful of already wealthy individuals and a nightmare for everyone else.
There is a film called "The Corporation" which explains some of the problems.
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Many recent articles (yours and others) mention debt levels. What about the asset/wealth base of Western economies.
A short google uncovered this: http://news.bbc.co.uk/1/hi/business/7018253.stm which reads as farcical now, showing how dramatically net UK personal wealth had grown thanks to rising house prices. Are there any good current estimates of the wealth base, for comparison against debts.
How far are we from collective negative equity, or, how much further would house prices need to fall for us to get there.
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Dear Robert,
You said that the Government will either devalue the currency or presumably increase interest rates. But you didn't make a call one way or the other. Could you at least make an educated guess. Much Obliged, Michael.
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This article is fine as far as it goes but there are a few more points. What we have seen in the last decade or two has been a very large reduction in production costs as manufacturing has moved east which has created high levels of profit. This has created the problem that in order to sell what has been made a proportion of these profits has had to be lent to western consumers to fund their purchases. Part of this has obviously gone into asset investment but a proportion has had the effect of supporting consumer prices. This is a virtuous circle from the point of view of profit maximisation of course. Exporting profits as well as goods to the west has the effect of stimulating demand resulting in both a higher volume and higher prices than would otherwise be achieved. This process has ground to a halt and we are at the beginning of a deflation of consumer prices as well as asset prices the extent of which is difficult to gauge. Prices of comuter screens have apparently collapsed by 50% in China in a few months and it is hard to see how western governments are going to be able to isolate their countries from this process.
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Debt, like addictions and corruption, takes two to tango. There are pushers and takers.
Politicians and financial insitutions always blame the victims for the causes and emphasize the victims' action. It is a cloak, a calculated spin, and a very cynical shift of most of responsibilities to those with the smallest influcences, least able to defend itself, and, in mortgages, no alternative to borrow less.
Yes, collectively we borrowed too much and we have been lend too much. Small businesses may look like the unsung heros but it is proably because lenders are much tougher and prudent when lending to small businesses.
But hidden from most of us, who are pushing credit to retail banks and trapping them with debts to pass on to us?
Nick Mathiason, business correspondent of The Guardian, reported on 6th Decemeber that pope Benedict attacks tax havens for robbing poor and contriuting to international financial crisis. The Pope points to estimate that the global fiscal deficit caused by offshore activities cold amount to US$255bn.
Ther amount coudl be many $trillions with the power of compounding over the years.
Responsibilities must be proportional to rewards and power. And now, we must adjust the rewards and power of those who are not able or willing to take those responsibilities which have been used as excuses and false justifications for making fortunes and grabbing powers.
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A very good summary!
As Robert notes, the short term decision for the government is do they want the 1930s or the 1970s?
Or to put it another way, shaft mortgage-payers with deflation or shaft their retiring parents with inflation.
My guess is that they will opt for the 70s, but either way there will be a lot of worried and angry people in the next 10 years.
The long term decision for the government is how to build a society with reducing dependence on oil.
Not easy.
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Robert, I am confused. I was under the impression that China's huge economic expansion over the last 10-15 years came as the result of an export orientated manufacturing base relying on free access to US and European markets (rather like the original post war Japanese model)
If there wasn't a massive trade imbalance, how would they have been able to achieve the massive growth that has increased their living standards so much?
If you don't think it is zero sum game, what exactly were we supposed to have been selling back to them?
To turn your argument around, we have massively indebted ourselves simply to provide the engine for China's economic growth. We have given them the leg up, not the other way around.
The chinese eventually spotted (a good 30+ years after Japan) that the western achilles heel is its near religious belief in free trade, unregulated markets etc etc. The chinese are pretty good at strategy when they get around to it.
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#10 I too watched The Ascent of Money.
Nothing is worse than intelligent people deliberately distorting the truth. Ferguson is supposed to be a Historian, but did a hatchet job on Allende, and a whitewash on Pinochet. His playing down and apology for murder and torture was disgusting. If it had ever happened to anyone in his family, he might not have been so blase.
Much of the rest of the programme was flawed too, or just wrong. Certainly, the "welfare state" was not the sole ore even the main cause of Chile's problems. Friedmanite economics was just a fig-leaf used to justify the repression of the poor in what was a race and class conflict, aggravated by much meddling from the outside, especially by the CIA. Something similar may be brewing now in Bolivia. The divisions and hatreds in these societies go back to the conquistadors.
Some of Ferguson's more general points may well have been partly valid, but his highly selective presentation of alleged facts means that I wouldn't trust any of his analyses even if I agreed with the conclusions.
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Robert
A very good analysis. How on earth the government sorts out the public sector is beyond me.
Most folk I have come across in the public sector live in a different universe. They expect to sail on with minimal job losses and fancy pay rises. [nothing personal but compare BBC with ITV]
The other big problem for Government is the currency. The Pound is sinking slowly but surely. Will it still be worth more than a Euro by Christmas? No one is focussing on the old problem - balance of payments. We have to stop spending and start saving otherwise the Pound will continue to do a Titanic.
I suspect if we were to attempt to join the Euro the ECB would tell us to sort out the public finances,
So we have three choices -
1) fix our finances ourselves
2) get Brussels to fix them for us
3) get the Chinese to tell us what to do (good idea re the Olympics!)
Of course the British Empire Loyalists will continue to bury their heads in the sand. As for foreign adventurism in the Middle East we should forget it. Playing at big power politics is way beyond our budget. Indeed we can't even keep the runway at Stansted clear.
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Yes, yes, Robert, you and your Common Purpose bots are slavering at the prospect of the New World Order that your leader Brown has been promising for years, fingers steepled to show he means it.
Tough luck for you, old chap: Brown is a busted flush, and you don't yet have enough initiates on the ground to steal an election. Come 2010, you're out of here.
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i wanna know what plans hes makin
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Time for a change.
Why have none of the Banks boards not been charged with fraud; for despite the dangers posed by the US mortgages and other financial things being reported up to 2 years previously on the BBC and Channel Four all of the board failed to mention their exposure to these things at share holders meetings or in company reports. Presumably, because they wanted to get their bonuses. Not knowing about them is no excuse as they have a duty to know.
I actually think that their greed and mismanagement is on such a scale that it has potentially put the realm at risk, that’s treason. I further believe that as a consequence they must all be barred from holding board positions and that all their assets including pensions must be seized, this will amount to over 200m and could be used for much better use else where in the community.
I think it’s about the right time at this stage of development of society that company rules where change so that the enrichment of the share holders is no longer the prime concern of the board. I would suggest that helping society at large / the environment should be the first duty (i.e. make certain that their actions or inactions did not result in direct or indirect hardship to persons or damage to the environment). Secondly; that the welfare, fair remuneration and training of the employees must be made a statuary duty, including paid sick leave. That directory remuneration should be capped at some multiple of employee’s salary below management level and that the boards should be pacifically band from paying themselves share options, they can buy them the same as any other employee or profit sharing. Then the share holder, increase in share value, capital appreciation, must be considered as equating to a dividend. Paying back dept must take priority over any dividend paid as must the two duties above.
Politicians says they want a farer society, I sceptically await.
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You see? We warned you all along this market economy idea was going to end in tears.
Now you're ending up nationalising the lot AND having enough debt to make your head spin.
Reap what you sow, capitalism. Unfortunately it will take me down with you. Damn.
A. Socialist
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Thank you very much for the clarity with which you explain economic facts to all of us.
One of your conclusions is that common decency is what perhaps should result.
Antisocial behaviour as supposed to cooperative behaviour is the core problem in time memorial.
What we lack is the courage to pin it down in good time and fight it. If I may be bold Robert, I would like to challenge you and indeed your collegues to draw attention to role models that we need to compare ourselves, to adapt ourselves, theory alone will not do.
And if there is one unhelpful word that you have written here it is the word "new". It is a very persuasive word, but a very dangerous word and it is a politician's word. Striving into the new, the unknown, leads us again into making mistakes, the same unnecessary mistakes.
What we may need from wordsmiths like yourselves are words, a new word for "printing money" for instance. Since this is what we have been experiencing, the printing of money in different ways. Then you must, as a journalist "point your pencil" at the printer of the stuff. At that beauty, at that lass called Prudence who for all her pretence lowered her nickers but goes on as if nothing had happened and tries to teach us virtue.
Regards
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Yes, it will be a new age and about time too...
4000 BC - sun in Taurus - Egyptians bull worship
2000 BC - sun in Aries - Old Testament lamb of God
0 AD - sun in Pisces - New Testamanet fishers of men
2000 AD - sun in Aquarius - the great leveller
As one age collides with the next the established hang onto the excesses of the previous age and butt against the visionaries of the new age.
Also, the ancient Mayan calendar has it that 2012 is the start of a new age.
I've recently left the UK for South Africa because that's where my family is now and I want to spend more time with them.
Unfortunately I also believe that the UK is now facing severe financial stress as the economy (was) based on the financial sector as manufacturing had already been brought to its knees. There is also a huge pensions crisis to come and I also believe that there will be a conflict in the next 5 years (probably with Russia) over energy supplies.
My house in Surrey is now basically worthless and I'm handing back the keys to the bank and starting over again in South Africa. Good luck to everyone left behind.
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Thanks for the essay, Robert. I plan to share it with friends.
I think your vision of the future is a bit too optimistic, in that it doesn't factor in human frailty and depravity, which got us into this mess to begin with.
Still, all in all, a very worthy piece of writing, and well worth reading.
Keep up the good work.
(And for a more homespun version of basically the same analysis, I refer you to www.fredpac.org, where you can view Senator Thompson's more humorous musings.)
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Robert, superb piece
#16 foredeckdave
While a European solution would be the preferred option, unfortunately I suspect the response from the rest off Europe would end in "off". The UK and Spain are the two countries which have binged the most and those countries which were relatively well behaved are unlikely to want to ruin the Euro on our behalf. Four years ago German banks were still insisting on a 30% deposit and no more than 3 times salary for a mortgage. What problems thay have now are imported and not a result of a domestic credit/housing binge as in the UK. Most European countries also have a far stronger manufacturing base to pull themselves through whereas the UK based it's economy on financial services.
I think the UK is headed for a long period of low/negative growth, high inflation and/or high taxes. I can remember the early 70s (just) and the winter of discontent. I see the UK headed the same way again, even down to the power cuts if we are to believe the energy companies. I can only hope that the government comes up with a more sustainable exit strategy this time - one based upon manufacturing rather than financial services.
Still, to look on the bright side, in the mid 80s I picked up a whole load of undated war bonds at a 15% yield. The best long term investment I ever made. Perhaps I'll get another chance.......
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As lucid an explanation of the difficulties in which we now find ourselves.
For those of us who always doubted the wisdom and equity of neo-liberal capitalism, it is the end of 30 years wait for vindication.
Unfortunately with vindication will come years of hardship to put matters right. It will need political leadership and international cooperation on a scale not seen since WW2, when the so-called Bretton Woods system was put in place.
Our children and grandchildren have a huge challenge before them!
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Robert I am answering your concept before reading your paper and I will respond again after reading it just for personal comparison.
We have already over the decades had many systems of capitalism - knowledge capitalism, military capitalism, religious capitalism, feudal capitalism, exploration capitalism, artistic capitalism, industrial capitalism, philanthropic capitalism, political capitalism, technical capitalism, market capitalism, being the main one and you could slip in several dozen more. - [dozen old money measure for when we worked in real numbers pre decimal devaluation].
The other reality is that while one may prevail in the mind at one time the fact is that most have some relevance all the time like mini conflicts to the favoured one
Problem is capitalism is a truly self levelling force if you let it run its full cycle.
Problem is some times its to scary to let it run its full course.
Example artistic capitalism one time all artist were very poor their work barely kept them fed slowly but surly we have see more artists become extremely wealthy in their own life time
Market economy our great current and so far the fairest is useful while somebody has something that someone else wants and a great leveller in that the rich buy from the poor artisan who becomes wealth and buys the land of the wealthy who become poor and make things that the wealth buy from them and they all swap round again.
It is sort of rags to riches and back again and again. Problem is every time you get a new wealthy group they want to hang on to what they’ve got and not give every one else a turn.
It’s not that capitalism doesn’t work its human nature wont let it because when some get the money they wont give the others a turn even though there are no pockets in shrouds.
Now don’t even think about it its competitor communism cant work without horrendous repression of the masses. (Just work it through)
Reality is competition only works when everyone gets a turn if they don’t you get Anarchy (talk to the Greeks they’ve don it all before many times over even BC [that’s before Christ not before capitalism]. [looks like they are at it again].
There is an answer that in the next few hundred years we will eventually reach. The instruments to do it are in place the drivers are in place, the enlightened are aware. Problem is human nature will ensure it takes decade if not centuries to reach global cooperative capitalism.
That is not the type started in Rochdale though the pioneers had some pointers [tough call though this change especially for policy makers].
Right enough said I am away to read your thesis on a new capitalism but I will be back.
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I don't think that capitalism is broken; at least not irrevocably.
Back to basics? Meaning proper oversight, prudence, responsible lending - yes, that all goes without saying.
But to really fix things now we need free trade. Free movement of goods, services and PEOPLE. The Doha round has got to be resurrected: protectionism won't save anyone. And, incidentally Robert, neither will "savings". Take a look at Japan, a very conservative culture (as far as personal debt goes) now falling into a huge recession - having barely grown in 10 years. Even China is fearing social unrest from the downturn.
Free up the markets, but strengthen regulation - the only way.
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Well, some fairly vague generalities and figures, aired before, wrapped up in a pdf to give it extra Peston-style importance. There is nothing visionary in this at all.
Why don't you just concentrate on journalism? We pay your salary so that you can do that. If you want to be a consultant, do that, or, if you want to be chancellor, stand for parliament.
[Pre-moderated by the BBC]
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So, a bad case of over endulgence then? I thought I was going to read much, much worse.
Well, like the Plane Stupid lot who blame their forefathers for all that is wrong today, so I too should blame the Thatchers, Blairs, the Browns and... who was it that said we've "never had it so good"?
Capitalism will be with us always, even when we won't have a penny left. There will always be those that manipulate, like whoever it was that pushed oil to $140 a barrel - no-one's speaking about that and they all know who it is!
Nope, we never knew the value of what we really had and even if we had, we would not have known how to preserve it anyway.
The successful capitalist is the clever man, anyone else is just 'educated'.
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A good and useful essay: would that more of the Beeb's pundits wrote as thoughtfully as Peston (and Mason)
You have documented the dereliction of duty by ministers et al, but finally allocate the main blame to "bankers – because they systematically failed to do what they were handsomely remunerated to do, which was to properly assess the risks"
Maybe they should have been - but they weren't ! Self-evidently, the formulae in their extraordinary bonus schemes were completely devoid of such objectives. They, and other industrialists, are more concerned about quick bucks and lobbying.
No, the regulators cannot dodge the primary blame, and the politicians - Brown well to the fore - created the climate which positively encouraged them to ignore what was happening.
Meanwhile, the dominos continue to fall, one by one.
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Dear Robert
You are right this is a period in time that hopefully will never happen again, Banks being bailed out by the tax payer, --------Absolute rubbish,
This economic down turn, inspired by the Banks Greed, and designed to boost Capitalism and Globalisation, has been the plan all along.
Only the developed countries have suffered the Economic Down Turn as Politicians muster a Global excuse on which to unite behind.
The Banks are getting exactly what they were Promised, "re finance, "
enabling them to recoup their losses on the back of the tax payer, who now suffers at their hands.
Sub prime was the Trigger, and then Developed countries followed suit, Government Economists Knew that the credit availabilty could not be maintained so they collapsed the markets to prevent even larger losses at a later stage.
THIS ENTIRE ECONOMIC DOWN TURN HAS B3EEN STAGE MANAGED TO GET THE TAX PAYER TO BAIL OUT THE FINANCIERS AND THE BANKS.
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Robert, you omitted one other critical relationship: that between government (or politicians) and the taxpayer.
One aspect of this unholy and unprecedented mess that receives scant attention is the potential for social breakdown and even civil unrest as things go from bad to worse. I don't know about others, but I am furious at the abject failure of this government to lead and administer our country competently.
On the contrary, the "Labour Project" (a sinister term in any case) has been a monumental and costly exercise in political cynicism, led initially by that arch thespian Blair who secured power on the back of his ability to play to the gallery. Brown, sneaking about behind Blair, has screwed the British economy for a generation on the back of his own perverse notions of social justice. We are where we are today precisely because of the performance of that dangerous duo.
As all this unwinds - and goodness knows who's going to repair it, because the Tories don't seem to have a clue - the relationship between our dismal political "elite" and the ordinary citizen is going to become very strained indeed.
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Thanks very much Robert for that insightful analysis.
I'm also confused re the Chinese. Aren't they just as badly off now that the demand for their goods have lessened? Won't the lack of demand from the West translate to job losses and a similar downward spiral in that part of the world? It would seem to me that the Arab states are the ones who are really well off, as their economies don't rely on cheap goods that westerners can no longer afford; however we are still so reliant on oil. Green, sustainable alternatives to the oil-based anyone? Not just good for the environment anymore.
Also, regarding the regulation aspect. I find it breathtaking the level of ignorance displayed by the average banker - not just those in the top tiers. Shouldn't a more stringent system be introduced whereby a 'training period' of a few years for every banker and trader is introduced (apprentice like period), in which time they MUST pass exams that ensures proper examination of basic concepts and regulatory rules...and make it HARD so that it isn't easy to pass..it seems only fair since so many jobs require this sort of thing, why should these guys who affect us all so much be so richly (pun intended!) ignorant and cause this mess? If there were a few more well-educated about the - applied and theoretical - economic basics and regulatory rules, this mess would not have occurred.
pestoblogger
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As always during these times of change, one good section to invest in is in the war industries. Guns and bullits should be very profitable as change nearly always leads to war. Oh happy days.
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Capitalism/Communism, whatever system you like actually.
They all fail if CORRUPTION is allowed to take hold and they all make the assumption that REPONSIBLE people are in the positions of power...
That's the biggest lesson the world needs to learn.
What system we follow, is largely academic, in my view...
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The current contraction of world economies is only the beginning of a fundamental restructuring. Co2 is only one of the ecological drivers that will force us to decentralise, to build in multiple redundancy, to localise production and consumption, towards less technology not more, towards Small is Beautiful, towards localised resources and accountability, towards sustainability. The planet is getting tired of consumpton, people are getting tired of consumption, people are demanding freedom, states are losing power, global mass communication is shifting the ancient hierarchies of state and personal organisation towards being meaningless. We are becoming global citizens at the same time as the planet is saying 'go home, make community, live lightly, and stop building cities!'
Sustainability means a completely different way of doing things. At the global level it demands governmental cooperation - war is the wrong answer since the effects will turn and bite us all rapidly. At the local level it means more self-reliant communities developing innovative ways to capitalise on their own (social, ecological) resources - trade and the current extended diversity of economic function will be secondary considerations which will most likely contract to pre industrial revolution levels.
The Great Civilisation experiment needs to take this 90 degree turn or it will burn out in a cloud of its own making.
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Oh dear Mr Preston you always seem to have excellent sources that you "over embellish" by the use of tabloid adjectives etc.
There will be a return to the former style of banking quite soon. What went wrong was that the the new management failed to operate within sound banking principles. You have not highlighted the fact that the real culprits in this debacle were the artificial banks created by the building societies. These told their new masters that they could lend with abandon and without fear or favour and to help this along the US market, principally, created the securitised mortgage product. Over there home lending is almost always based on "loan to value" whereas here with most sensible lenders it is a combination of "L/V" and "ability to pay". As a retired banker of the old school I could see it all coming. A simple reversion to the old principle of "only lend to those who do not really need to borrow" works. Coupled to this you have top management in the banks who had not come up the conventional banking route but had been part of the crazy 80s and 90s boom.
As soon as the "Buy to let" fraternity came along, coupled to Gordon Brown stripping 5 billion pounds from the pension funds per annum and so-called pundits saying property was better than a pension, disaster was inevitable. I would like to see all the amateur "buy-to-let merchants burn their fingers. Unfortunately their tenants will suffer too. If you are going to rent alwys determine if the owner is a professional "buy-tolet" investing company. If not do not rent from them.
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2012: The three Horseman of the Apocolypse are due, according to Nostradamus, allegedly, if you believe that sort of thing...
Drought, Famine & War...
Hmmmm. It is not entirely inconceivable, in the current global situation, economically, politically and environmentally, is it ?
Might as well go and spend what little cash I've got left on importing a big gas-guzzling V8 American Motor, as I can't take it with me and I'm getting no interest worthy of the name these days ... !
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The inevitable consequences of an unregulated financial and banking system, and a free/global market are coming home to roost, as in the 1930s.
Exporting jobs to countries where salaries are a tiny fraction of western salaries means less real money circulating in those western economies due to higher levels of unemployment and a falling of salaries in real terms for the majority of consumers.
The lack of regulation in the banking system has made borrowing ridiculously large amounts of money in relation to income, to offset the effects of the disappearance of jobs and the diminishing of salaries, too easy.
Hence the higher levels of personal debt and the lower levels of personal savings.
What is the point of exporting jobs to make goods cheaper if the result is fewer people able to sustain a reasonable standard of living, to be able to buy the basics, without resorting to debt?
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I am back [always wanted to say that see my earlier post 59]
Robert very good analysis of where we are and how we got here and although they are tucked in there some where I think there are three points that I feel need pointing out more
Firstly the West is unlikely to dictate the timing of the recovery and certainly will not decide it without the cooperation of the East.
Next the bankers mainly built the false economy [financial bubble] by exploiting the vagaries in language of a 600 year old accounting system and their and our greed
Finally the speed of the technology age [now irreversible} has compressed time cycles to a point that is self defeating to human life cycles.
As I wrote elsewhere back in 2000 the internet age allows for the return of the smiths. So the economic, natural resource, climate and social solution will rely on the smiths to bring about a new order. A world where only information knowledge and caring is the essential world traveller and everything else is local supply and consumption.
The role of government and big business will cease to be the creators and they will become the facilitators and stabilisers maintaining a balanced world in which the cooperation of the smiths provide the drivers and satisfy the needs of society.
While this is way to big a concept to debate even outline here I hope some people, some commentators and others will begin to start to debate the look and shape of a sustainable global social economic future rather than condemn the past mistakes all of which were reached through ignorance and greed. Because if we have a future it has to be built on knowledge and sharing.
Now that is going to scare an awful lot of people but its time to stop condemning the past and debate a solution for the future that is tested at every line of its concept with the question why.
Regrettably I would not mind betting that the rest of this blog will be more posts moaning about others [bankers, politicians] past short comings and the wrong political alliances of other views with little if any suggestion as to a universally acceptable solution to improve all our lives.
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One other observation on your article Robert. You seem to sit in the same trap as other commentators on this subject. Namely, the trap called "endless cheap energy" (fuelling infinite, global economic growth). You talk rather glibly, if I may say, about globalisation and imply that we shall forever go on flying strawberries from Bolivia to Waitrose in Marlow under the banner of "unfettered movement of capital, goods and services".
It would be great if a journalist of your calibre would take a long, hard look at the prospects for mankind as cheap energy declines (rapidly over the next 5 - 10 years), "globalisation" fades into a nonsense term and "localisation" becomes the way forward.
It's this perspective that scares me, because the idea that we're somehow going to recover that financial support for the global financial system (at one quarter of the earth's GDP) is predicated on, er, the application and exploitation of endless cheap energy.
Back to my earlier point at # 65: social breakdown and civil unrest must surely be a risk as we enter into the next decade mired in debt, with diminishing prospects for ever repaying it. How does that work?
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Dear Robert
What a thoughtfull and informative piece.Thank you.
It seems to me that the whole thing started with cheap money which not only allowed everyone to borrow like mad and push up asset values but also allowed companies and Hedge funds/Management buyouts to borrow to fund their activities rather than raise equity from shareholders.
Borrowing from money lenders is essentially borrowing short and using it to buy companies or invest in capital assets is lending long. Very dangerous to do without a large spread of investments.
Raising equity on the other hand is borrowing as long as you can get.
The effect of this type of funding was to allow management to do what they liked with the companies they managed. There was no need to keep the shareholders on side because they never needed to ask them for more capital.Better borrow it from the East.
This of course led to the explosion in management salaries to the ridiculous levels we see today, plus the public sector saying "me too" because it is the going rate.
So up goes the cost of running public services as well.
Now the money lenders want their money back and they want it at the same time as the potential lenders in the shape of shareholders are feeling the pinch.
So businesses are being forced to go to HMG for cash. The banks being the first example of this.
Can I suggest that it would be better for everyone if HMG used taxation or rather tax relief to make investing in companies more attractive than it is at present so that the population will be encouraged to invest in UK industry.People will invest when the reward risk ratio looks right.
Governments are really not good at funding businesses because political considerations get in the way of business ones. See the muddle over the banks at present.(It also spawns more expensive and intrusive civil servants and we really have enough of them.)
This will help replace borrowing and strengthen all company balance sheets.It will start to replace the money shortfall that we are going to see because overseas lenders will not want to lend to us; and it will start to build a savings base which we desparately need.
If company boards have to go to shareholders for money they will have to modify their behaviour which should stop the obscene salary and benefit packages which make it difficult for capitalists like me to support the system.
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Before we all capitulate and seccumb to collective mass depression and economic suicide, it may be worth considering the following:
Retail sales have barely moved, year on year - so it appears there is no mass desertion of the High St. this Christmas (good news for the Chinese).
People are generally earning the same salaries as 12 months ago but their outgoings are progressively reducing in the form of cheaper mortgages, petrol, food etc. This trend will continue in the short and medium term.
Borrowing costs are decreasing and interest rates will continue to fall.
Housing costs are down and will stay that way, at least in the short term, though buyers are beginning to return to the market in increasing numbers.
Very little new house building is occuring, including in the so-called "affordable" sector (housing associations, like everyone else, cannot get funding). Therefore supply is constrained creating the build up of future demand.
In short, lighten up dudes....keep working, keep spending and keep the entreprenuerial flag flying. Don't do a Peston; bury your heads in the sand and adopt a bunker mentality as this will simply make the whole mess worse.
Think and act positive and you will be able to read Peston's pdf this time next year and laugh!
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Robert
Interesting article just one point or error, you wrote:
"then our banks and private-sector companies will have to work much harder to sustain the goodwill of those who are keeping them alive: millions and millions of taxpayers."
The goodwill will not be the "millions and millions of taxpayers" but the people who are funding the government deficit until such time as they get their finances into surplus. That is something that on historical and current evidence is beyond the capability of Gordon Brown and his bunch of spinners.
His big problem is that he still considers himself the "best chancellor in the history of Britain" , has wasted the last 10 years but is never going to admit it.
Arrogance and ineptitude in equal measure, in reality he is unfit for government.
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Very interesting viewpoint. I'm interested in the angle which you alluded to but skipped over, which is the sustainable size of the British banking system at the end of this crunch. I suspect that the sustainable size of the city will be something like the size in the early 90s - which will have profound impacts on the south east housing market, the tax income of the government and the amount of available credit in the country.
I suspect that in the long term this will be a good thing, but the semi managed economic process to get the end state is going to be very painful as you state - as traumatic as the fall of communism.
I suspect that the end state of capitalism won't be determined by moralising at this stage; although I agree 100% with your sentiments I'm more pragmatic and cynical. My take is that a combination of regulation and expedience will shape the new face of banking here and abroad, and it will be based on a culture of what can we get away with under the scrutiny of the regulatory rules and media rather than some road to damascus style conversion to compassionate capitalism.
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We are indeed in dark times and the awful thing to me is that this Government's answer is still tinged with 1960's class hate. The planned tax changes produce some appalling results. Marginal tax rates of up to 61.5% and parts of the pay scale where to get £3,500 into an employee's pocket could cost an employer more than £10,000. I know a very bright chap, very hard worker, someone who is british but has worked all round the world. he is here at the moment in London but when I explained what was coming, he said he'd go back to America when the new tax regime arrived. So we'll get a high % of nothing from him. Well done Brown and Darling.
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What's the difference between a bubble and a pyramid (except one pops and the collapses)? Why not call the unsustainable practices of our govts and financial sectors what they really are and use the law to sort it out.
The point about what the recovery actually should be is spot on. It seems to me we are trying to recreate the same system that spectacularly failed, to quote Einstein 'you cannot solve a problem with the same thinking that caused the problem'.
Maybe it's time we faced up to the fact that permanent, exponential gdp growth is a dream (or speaking as a self proclaimed environmentalist, a nightmare) and tried to build a sustainable economic system that our children will thank us for.
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good analysis Robert, you obviously do read our contributions!
At last you pin the blame on Gordon Brown.......(interestingly according to today's Times poll, he is still seen by the majority as the best person to handle the economy!) By the way we are not all to blame, many of us are not in debt, we have been saving only to be punished now for the greed of the others!
Actually there is nothing wrong with the old capitalism as long as the population isnt lead astray by profligate governments....just start paying off debt and start to live within our means. Stop using houses as a savings scheme, sensible house prices and sensible affordable mortgages, the way they used to be......when i bought my first house the building society would not even take my wifes considerable salary into account....."you will be starting a family soon".....
Cut the credits cards in half and only buy what you can afford, and what you need not what you would like...I recently visited my daughter in England, in a household of two adults and two teenage children , i counted four computers, five televisions, numerous playstations and mp3 players, two cars, three dvd players....and she complains because she cant afford to have four holidays a year...I hate to think how much debt they have.
So the message for the new capitalism for both governments and the population is "live within your means"
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So what you are saying is we need a new scam to exploit the population and take their wealth.
Paper stocks, bricks, mortar, income tax, cash savings, diamonds and gold are losing value.
Its good timing anyway, because, we had reached the limits to growth and have depleted the world's resources.
(get rid of the FSA - investors in people logo)
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An exert from your next book Robert?
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#74
"Back to my earlier point at # 65: social breakdown and civil unrest must surely be a risk as we enter into the next decade mired in debt, with diminishing prospects for ever repaying it. How does that work?"
Perhaps in the artificially imposed scheme of things, it wasn't meant to.
Ok, we're all to blame, even those of us with savings and no debt. Yet, the style and substance of the current crisis did emanate from the USA and from all accounts it's going to be a "Doozie".
Remember the weird religious component of the recent military exploits of the US lead coalition? At it's most fervant peak, there was much talk and expression of "The End Of Days"
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Global inflation
For a number of years I have been mystified by the ability of the city to pay out huge bonuses and fund massive companies. How could banks produce investment returns for customers while extracting huge amounts of revenue for themselves? Someone some where must be losing money. Well the reality is now clear, money was not transferred from one player to another, the market simply created more money to play with. Every one’s a winner. It’s simply called economic growth or expansion. If this occurred in a single country the international currency markets would have identified this activity as inflation and crucified the currency of the offender. The global banking system has escaped the boundaries and controls of the nation state. There are no brakes on inflation – anything that stands up to mild scrutiny can be added to the trading system and traded. There are few guaranteed assets in the real world - oil, gold, land, property, and if any of these can be linked to an tradable instrument they will hold value. We are suckers for any market with a limit. Peak oil, geographically restricted property markets, limited gold supply. Add these certainties to an ever expanding global “asset” pool and you have the ingredients for a massive bubble.
The bad news for us is that from now on we can only spend what we can earn. If you mortgage is greater than three times your salary you are stuffed!
Enjoy you bonuses bankers of the world!
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thank you for you pdf long explanation. most enlightening.
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Your article is interesting, Robert, but very narrow-band in that it assesses the future from largely a global banking and stock market perspective. And possibly also from the perspective of the new rich who made far too much money from the financial services bubble.
The financial markets are but one of a large range of influences on how we live now and in the future. For example, the accelerating rise of technology, its impact on reducing the price of products to the consumer, on healthcare, on leisure and so on, will not reverse. This will continue to have a very positive impact on our future standard of living. For example, it is possible to buy a computer this Christmas at less than one tenth of its equivalent cost five years ago. Life enhancing drugs now exist that were unimaginable twenty years ago.
A greater awareness of the importance of global resource management and climate management (if the latter is not too late) will also have a fundamental impact on our attitudes to what is important in life and our lifestyles.
So it has long been a challenge to find a measure of "lifestyle" that is not solely based on simplistic economic indicators. The problem at the moment is that there is too much emphasis on financial doom and gloom in the media and not enough understanding as to how this really relates to the man on the Clapham Omnuibus and their day to day existence. I think that probably, for most, the answer is that the impact of a financial glitch will be minimal and laregly irrelevant in the overall scheme of things.
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Wake up people!! This is NOT a recession. We are on the edge of a SLUMP.
This slump will be totally global and no individual economy will stand against it. No political philosophy will stand against it. The old reality will fall.
This is the time to look for partners with common interests in survival. The little Britainer's will not like it but for the UK this means Europe.
Society has changed radically since the 1920/30's. Society will not accept hunger marches and soup kitchens. So it will have to combine in some new economic form for all of our sakes. Plus this social crisis will be as true for us at it will be for France, germany, Italy etc.
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Alistair Darling told the FT in his first interview as Chancellor that he didn't believe in "economic patriotism".
I wonder if he's changed his mind yet?
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Thanks for a very well written although scarey piece. I just hope that Darling-Brown is reading too although I doubt there is the political will to act on the true situation.
We are certainly in for some pain and it would seem those who have money saved are the target. Still the Baby-boomers will not be around for too many more elections so that may not matter.
It would be great to have a serious debate about what we should do in this crisis but it all seems to degenerate into spin (with labour being the masters of such - Take a bow Mandy!)
It is just nice to be able to come to such an oasis of sanity and see a realistic view of the situation. (Not that it helps - but it does prove that sanity is not dead)
Thanks Robert!
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I'm normally a pessimist but I'm starting to feel a bit like houseflogger (#77) - yes it's going to be a bumpy ride with a considerable number of people losing thier jobs but as a person in the street my essential costs are coming down - fuel & food already, I'm hoping electricity and gas after Xmas and then in the summer when my fixed-rate expires on the mortgage, I'm expecting a huge drop (which I'll use to overpay and shorten the term).
Did anyone hear the king of misery and doom Mickey Clarke on Wake up to Money on Friday saying that the media are going too far describing everything as "carnage" and "disaster" - interesting........
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i dont really think in the short term anything will change,the rich will get richer and the poor will get poorer.in reality theres no differance what so ever in any of the political partys in this regard.long term if people in the uk are educated properly and realise the real value of money ,and that you have to give something ,in return for it,then things may improve.all these things have happened before, its just that ,in effect , its not in our living memory.invest in people invest in things that we can make, skill up our people pay proper wages for proper jobs done....this is the new capatalism.
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#55
To which I add Abbot Malachy and knowing pretty much what happened to the article in Revelations 11:19. The downside is absolute, if this is right.
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Just a general comment. I may have missed it but I think that I am right in stating that nowhere on the BBC have you referred to a recession but only a DOWNTURN. If this is correct then you are certainly in denial and also in the pay of Gordon Brownshirt.
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#74
"Back to my earlier point at # 65: social breakdown and civil unrest must surely be a risk as we enter into the next decade mired in debt, with diminishing prospects for ever repaying it. How does that work?"
Perhaps in the artificially imposed scheme of things, it wasn't meant to.
Ok, we're all to blame, even those of us with savings and no debt. Yet, the style and substance of the current crisis did emanate from the USA and from all accounts it's going to be a "Doozie".
Remember the weird religious component of the recent military exploits of the US lead coalition? At it's most fervant peak, there was much talk and expression of "The End Of Days", The Second Coming" and "The Rapture", all associated with specific terminal events due to take place in the Middle East.
How large a section of the "Powerful" in the US actually believed in that stuff?
Because if they did, the effects of such belief could easily have been transferred into the financial sectors, encouraging a "Final" destructive binge, with no thought for future.
This condition was interestingly mentioned by none other than the illustrious Jeremy Clarkson in the video clip of a radio interview he gave recently on the subject of the Motor Industry bail-out in the US.
Emotive times for Jeremy, which is perhaps why he expressed his view of the situation as an "Economic End Of Days".
Strange beliefs can shape societies.
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PS to my 94
I'm not joking, I've got the Vatican defending its property in this respect, I can supply Mr Moderator with the press articles confirming it - I'm not yet prepared to publish here, so he must contact me privately for the link. I've also got a serious track record at this level, so perhaps its time to get serious about the wheels coming off permanently.
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I love to sing love songs
But I have got a war on my hands and I have got to win it
When I win the war, I will come back and sing you all love songs
Too much illusion brings on confusion
Too much confusion brings botheration
Without food and cash
A man will get rash
What will the wicked have to tell Jah say
On that Judgement day
Where will they run to
Where are they going to hide
They run to the rock and say they want to hide
but the rock wants a hiding place for itself
All the crimes committed
Day by day
No one tried to stop them
In any way
All the peace makers
Have turned war officers
Hear what I say
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#61 Leave Pesto alone! I am quite happy to help pay his salary through the licence fee. I don't always agree with parts of his articles, but so what? He is paid to give views and analyses and he does. (That's a difference between a reporter and a correspondent by the way.)
Thank you for taking the trouble to do the pdf Robert. However, as the financial services industry is unlikely to recover to its previous strength, the question to as is how we pay our way in the world? We must reduce imports drastically, and/ or find goods/services that we can produce that the rest of the world really wants, and will continue to do so on a sustainable basis.
One other thought, what is the cost of our military involvement in Iraq and Afghanistan? Especially compared with the other non-US developed nations? If the rest of the "rich" world benefits from our commitment, perhaps they should pay our bills?
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#92 splendid for you....then what ? what happens wen the interest rates go thro the roof...what happens wen your income tax goes thro the roof? what happens then? your house isnt worth anywhere near what you think its worth! its worth as much as what some one is prepared to pay for it...the days of silly money are over my friend.
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Can't put the blame on the government at a lower level than the bankers !
The bankers are to blame, yes.
But the regulators (i.e. the Government's agencies) allowed the bankers to wreak havoc for chance profit, and the government must take the biggest responsibility.
That is, except for the.....
Accountants and Auditors (who nobody has mentioned !!)
-
The Accountants and Auditors have sold their profession to the devil. They are Faust reinvented, and their audits and evaluations are now treated as worthless and without meaning, good advertising and marketing copy, but worthless for investors (except those many gullible and ignorant investors still pay a little credence to their mutterings).
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'Some may see this as a threat to national sovereignty, as the thin end of an antidemocratic
wedge that’ll see the world ruled by unaccountable bureaucrats.'
That is exactly what this is about and why the crash was engineered. Huge fortunes were also made as the market went down.
Global finance controls the world. Banks are nothing more than expendible money making tools. The fact that they had no money to lend merely shows that it was temporarily withdrawn from the markets. In two years it will be back when assets hit rock bottom.
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The aswer is quite simple. All banks and financial institutions should be forced to reveal their EXPOSURE or an EXPOSURE RATIO to assets for each EXPOSURE greater than x% to an individual organisation. Smaller EPXOSURES would be aggregated as OTHERS. This would instantly introduce the beginnings of a KNOWN POSITION and create confidence in some banks. There would obviously be knock-on risk ie bank A thinks bank B is a good risk, but bank B turns out to be bad when the figures are disclosed, making bank A a riskier bet. Thus the above process would need to be iterated a few times before figures are published to markets. Inevitably some institutions would go to the wall, but well ... that's life - but the end of the depression would come MUCH MORE QUICKLY.
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I never forund that Mr Preston actually raises the real issues in depth. His writings and TV appearences look to me only like 'cut & paste' exercise of data which is publicly published.
His analysis is just shallow and this last one has nothing more to add.
As a whole the ever bailed out BBC (tax funded) is not doing a good job in covering the disintegration of the current monetary system and economies.
Why are you not, Mr Preston, researching and informing people of the real matters?
- Derivatives outstandings suicidal bubble
- Countries on verge of defaults and who
lend them the money therefore will
take the hit.
- Manipulation of Commodities prices.
- Dead present monetary system and
how people will loose all or 90% when
a new one is made up by the thieves.
- The role of Britain in the global
conspiracy for disintegration.
- Why the same people who claim to
want to save the world organised
such a robbery in the first place.
- What new capitalism? You jump stages
by mentionning this so early.
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points are well put Robert
Come next year and 3.5 million unemployed Brown will be blamed for ignoring the problem for the benefit of the previous tax revenues and labour will disintegrate as their polling support drops to 18percent.
Luck is a strong card which Gordon has not got as had the Tories been in charge we'd probably not be in a different place , but the tories will get the reward..swings and roundabouts
My final point robert is that what you have written is encapsulating , but that what was going on (redistribution of our wealth to wholesale lenders) , was so obvious that I want to know why more pieces like this were not written 3 months ago.
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#77 At last - the voice of reason ! Suddenly everybody's a macro-economic expert. 'The biggest fear is fear itself' has never seemed so true.
Yes it looks like there's a downturn in progress; so we drown in our collective misery or we get up off our backsides and do something about it. Keeping working and spending (within your means obviously !) seems a good bet to me.
You only live each day once - you may as well try and enjoy each one, you won't get it again.
A. Optimist
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This is just about the gloomiest assessment that I have seen to date. Whilst much of the blame for bursting the bubble can rightly be pointed to the US, it is our own profligacy that brought us to our knees and is probably a well deserved lesson in how we should live for Government, Business and the population generally.
It would appear that there is nothing to be done about the situation in the UK and that we are doomed to take one of two options:
1) Accept that we will shortly acquie the status of a banana republic and live with it.
2) Apply to become a state within the USA, we after all, closer than Hawaii, and benefit from the largesse of the new President.
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Robert
Excellent article. Bottom line as you say is that we either get out of this
- by repaying our debts over the next 3-4 years to the point where they become sustainable; or
- inflating our way out of the problem.
History would suggest the latter actually ends up being more painful, and longer. But given where interest rates are, feels like where we're going.
My other comment would be that in my view, central banks and especially Greenspan have really caused this whole mess: they held interest rates far too low for far too long, and ignored the asset price bubble until it got so big it burst. (Bernanke tried to do the right thing with small rate rises, but too late.)
The oceans of liquidity Greenspan created:
- drove down the cost of debt, perpetuating and worsening the asset bubble
- encouraged people to take on debt even if they didn't need it (why not buy the better widget you can't really afford when it costs you nothing to borrow the readies?)
- skewed people's view of risk because the oceans of liquidity drove the price of risk way too low, concealing the reality
To stop this happening again, central banks need to focus on asset price inflation across the board as well as retail/consumer inflation. This will mean structurally higher long term interest rates, more stability, and lower but sustainable growth.
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Another thought. How much money does the public and private sector in the uk pay to Microsoft each year? This surely runs into hundreds of millions at least?
I run linux on my two computers. Although is is non-commercial software, they function better than most windows computers. It needs a little tweaking to start with to get optimum results, but then just works. No blue screen of death, no viruses, very few crashes and no data loss. As a hobby, I have installed it on the computers of a number of friends, and update when needed. I have promised to do it for more. No-one wants windows back.
Why can't the government encourage this outstanding example of cooperative endeavour, thus saving most if not all of us from paying the huge "Microsoft Tax"?
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Thanks - you flatter us by making us half believe that we understand what is going on.
I am still deeply puzzled by some of the unspoken presuppositions of what constitutes a satisfactory outcome. Are consumers to have ready access to relatively cheap credit or not?
There must be a lot of us who were brought up to believe that "if you can't pay for it, you can't have it". The attitude becomes ingrained, and contains within it a degree of comfort. However, reading some of your earlier comments, it felt as though we were responsible for some one else's unemployment. Now we are good guys. We appreciate the value of things. If something is worth having, it's worth saving for. We would not willingly cause distress to anyone. Are we the people who have caused the problem, or are we the people who have a solution to it?
On another note, I heartily endorse the comment made earlier about the undesirability of intemperate language in these comments. Some people are just silly, and use witty (not) phrases like "Crash Gordon" to put you off trying to make sense of what they say. Come on, chaps, we're British.
David Butland
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We all believed that capitalism would make us rich and happy. But capitilism it seems is not that different to a game of monopoly where everyone goes bust except for one winner who ends up owning everything by default.
I think the writer touches on but doesn't fully put forward his own belief in what is happening and what will happen.
The consolidation of the banks into several massive world entites, the begining of the end for 'real money' and a move towards cards and electronic transfer only. A seemingley fairer and flatter economy which is only really the same old model streched across a wider playing field which serves the financial masters that will dictate and control it.
In a few years time the worm will turn and the seed of blame will be laid at the people's door for borrowing so much and being irresponsible. Governments will begin to legislate against the 'unpredictablility' of the populous by bringing in a range of laws to ensure we can never again be allowed to operate in such a free and casual manner. But first they need to let fear loose on the jobs markets before we start to vote for it all in utter despiration.
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Polecat, Houseflogger -
Shall we start, "aware of the seriousness of the situation but not predicting the end of the world" club!
#100 - when those things happen, I'll do as I do now and live within my means- yes I do won money on my house but, no, I never regarded as an investment rather somewhere to raise my children in.
I put aside money each month for a rainyt day and I've even got a veg patch for when the national food supply runs out!
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I have read most (but not all) the comments but for my indebted tuppence worth . . .
The scale of the debt that the tax-payers already owe and are owed (and that IS the conundrum of this new Capitism!) is already humungous and is likely, in my personal view, to get larger in order to stave of the effects of this recession or even depression should it become so.
That would mean that the new Capitalism - for all its new found responsibility, softness, genteelness, and kindness (Yeah, Right! Phffffff!) - will be based upon a huge debt that can only ever be repaid by asking the tax-payers to cough up more and more tax.
When everyone is working for the State, and their income is paid directly to the State as 100% tax in return for food and shelter and and a standard of living that equates to the "value" of their job (as decided by the State) are we not then living in a Marxist economy that was the dream of the Bolsheviks in 1917. As I recall the Bolsheviks first act, upon coming to power in Russia, was to nationalise the banks and then they nationalised Russian agriculture and industies and then they nationalised the Russian people?
Anyone for a cup of deja vu?
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i must say i agree with what cameron said today, these massive tax increases coming will come on the back of another government(praying like mad) surely brown should call an election so these mad decisions he has made can be thought thro correctly by the electorate, and not saddle the uk public with massive debts for many years to come. the figures are scary forget any capitlism , it will be the big exodus out of the uk.and what a sham tax credits are subsidising poorly paying employers...in effect we subsidise low paid jobs. anybody who supports brown must need their heads testing to be honest.
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I know that the next few months, years will be undoubtably painful for all of us but as I have said any time before we all needed this wake up call and no one it seems was prepared to kill the dream. Now we have a nightmare instead.
Many of us have known for years that the bubble just had to burst, many of us knew that as far as the world's resources are concerned it was totally unsustainable and either the bubble had to burst or we would all, in the not too distant future starve to death. (older people might die before but children and grandchildren will be affected)Maybe its good its only the bubble that burst!!
Now we just all have to accept the utter stupidity of it all and the clever economies of the World will see this as a great opportunity to forge out of the mess a sustainable economy, not only for now but for future generations.
Anyone who believes we just need to get things moving again and all will be OK, is living in cloud cuckoo land. The World cannot sustain that madness.
The Iron Lady gave all this credibility and successive Prime Minister, Chancellors etc juts followed in her foot steps.
David Cameron and George Osborne still haven't grasped the enormity of the challenge.
We need people with vision and I don't see anyone on the horizon.
We can all help by taking a very close look at our own lives and look around at our possessions and see what is really necessary and what is totally frivolous. What we need and what we want or desire are two different things. So much of what is manufactured and trundled half way round the World has absolutely no use to man nor mouse and we could all live quite happily without so much rubbish. All this has to be manufactured using scare and diminishing world resource, adds to climate change in its production, its transportation and its ultimate demiss. Think how much we all throw away or clear our conscious by 'giving it to charity'!!
Much of all this consumerism has brought no more happiness than if we hadn't had it. Retail therapy only works for the moment of purchase, so if we wean people off that addiction we can move forward. If not we are sunk.
Everything will need to become small scale and local and that has to be a good thing.
Trickle down was a complete con by those who stood to gain most.
Those who gained most didn't move money round they bought fast expensive foreign cars, bought homes abroad, bought fancy yachts which they moored abroad, so again the Iron Lady was either misinformed, misguided or just looking after her own.
My 'bible' would be 'Small is beautiful', it may not have all the answers but it would go along way to resolving this self inflicted misery.
The Government cannot possibly save all the big businesses and shouldn't but needs to put in place opportunities for retraining people in a sustainable economy.
When Mrs T made it her mission to shut down all the mines she didn't put in place any opportunities for retraining until they were closed down. In Germany as mines were shut because they were no longer viable they had a ten year on site training programme. So miners worked and retrained at the same time!! Its not rocket science but I guess it depends how much Governments really care about people.
Firstly we need to ensure we can feed ourselves and not be reliant on foreign imports.
I beleive 40% of milk is imported- how utterly stupid is that. We export meat and then we import other meat!!!!!!!!!!!!!!!!!!
We need to look at how economic our High Streets are. If you care to look up at 2nd floor level and above most are unoccupied. We need a use it or loose it policy and these need to be brought back in to use as living accommodation. this means a landlord could charge less for the ground floor shop accommodation because he would be getting rent from all floors. Small business, at present unable to sustain exhorbitant rents would be able to move in. e.g we could have local bakers, fish mongers etc etc who could have living accomodation upstairs. This again would stop huge artic lorries trundling up & down the Country causing huge damage to our roads, (which we all end up paying for) as well as to the environment.
We really need to think radical not pussy foot around, tinker at the edges and hope it all comes out in the wash.
I would also love to see the end of the obscene celebrity culture. For me all this pain would be worth it if that and gutter press went to the wall.
Life could manage very well without them but would be a much sorrier place if we didn't have nurses, doctors, police, fire, refuse collectors. We need to look at life's priorities as they say we need a root and branch operation. A good pruning often means a much healthier plant if done correctly, otherwise it fades and dies.
As its Christmas thought you would like to know just how obscene celebrity culture is. Did you have your town lights turned on by a 'celeb' well if you did, a couiple of 'soap stars' would have cost £10,000 just to flick a switch and bigger celebs (not going to name any but I do happen to know what they charge, can demand £25,000-£40,000. You would think when its the season of goodwill they would give something back to the people who give them so much.
There is so much that could go, we need to make sure it does and hopefully a kinder, more egalatarian, more sensitive world will emerge, that really does care about what we do in this generation is how we pass it on to our children.
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You state that the government support to the banks could soon top 1000 billion GBP. Perhaps you could write an article on the alternatives, i.e. the taxpayer NOT propping up the banks any more.
After all, the current banking system has to be only worth so much. Therefore there must be a point where the cost of supporting banks is more than the cost of them failing. We should at least have some idea where that point is.
My view is the banks will ask for a bit more support and then a bit more support and then a bit more still. This will go on and on until they have milked the country dry. It is what the Americans call "nickel and diming" (although the term is bitterly ironic when you are talking about hundreds of billions of pounds).
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So if this is an accurate assessment of the present situation, will you now be returning to real journalism to actually ask relevant questions of why certain people allowed the whole thing to happen?
Actually get them to answer the questions and stop avoiding the blame.
Surely we can't get out of the problem until everyone recognises what went wrong. Then we can concentrate on fixing it.
Otherwise we just have status quo, and in the world of the blind men a one-eyed man is king.
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Thanks for the little PDf "confession" Robert.Nothing we did`nt know already of course,with much distortion and half-truths thrown in as well for good measure:
"Economic conditions in 2009 will be treacherous. There'll be a formal recession in
most developed economies, and the economic contraction is highly likely to be more
severe in the UK than almost anywhere else."
So you are implicitly calling Gordon Brownstuff a liar.Fair play to you Sir!
"Capitalism is changing in fundamental ways. For many years to come, what's
happening will affect the relationship between business and government, between
taxpayers and the private sector, between employers and employees, between
investors and companies"
What about the relationship between the private banking dynasties that control the policies of the central banks and our
political parties,and everyone else("captains" of industry included)?
Not worth mentioning?
"As for alleviating the burden of all that debt, history would suggest that’ll necessitate
the printing of money on a colossal scale, a revival of inflation, to reduce the real
value of the debt. But as a deliberate strategy, that would be fraught with risks for the
Government, since the influential babyboomer generation is now old enough to
consist mainly of savers rather than borrowers – who would be the victims of
spiralling prices rather than the beneficiaries."
Don`t worry about Gordo`s love of us commoners,Robert.He`ll strip us to the bone before he`s booted out of office in
disgrace,make no mistake about that.It`s not as if he has`nt shown prior form is it?
"It takes a whole book to assign culpability. But the short answer is that we’re all at
fault to varying degrees"
Utter,utter, bunkum.We know full well who`s to blame for this monumental fraud and theft.
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The "New Capitalism" should answer the following questions first, before setting interest rates:
Why is there greed? What would the world look like if no one wanted more than they needed?
Why does our economic system exist to gratify greed? What would the world look like if economics existed only to satisfy physical need?
Why does "positive economic growth" mean an unsustainable increase in the consumption of non-renewable resources? What would the world look like if growth in human satisfaction were measured by the quality of appreciation, not by the quantity of consumption?
Before we try to redesign "the system" (regardless of what it's called), shouldn't we be sure what we want it to do?
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Not sure about new capitalism but hopefully more capitalism with a bit better regulations and laws without which it can't exist. I do agree that the industries like the car industry where demand is inevitably going to contract pose a horrible dilemna for governments and they are not the kinds of industry that governments are likey to be able to manage even at arms length with any success. However governments and quasi governments like the Church have been involved in large scale projects earning some pride long before Karl Marx was ever dreamt of. The BBC is an example. If all we had was state financed broadcasting I might leave the country but the mixture seems to enhance the quality and our democracy and I think that I get good value for my licence fee. My point is that the government doesn't have to be to shy about doing business in these difficult times, at arms length in the right areas and involving the private sector with smart regulations with two eyes open, one on whether the project in question is producing something of real benafit to mankind and the other on whether it is economically viable, willit be able to repay the money borrowed to invest in it, which I think was roughly the way some of of those founding Quaker industrialists thought.
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We never had capitalism in the first place. Central planners have been meddling in the economy for a 100 years and they always mess it up.
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113. Menedemus wrote:
"As I recall the Bolsheviks first act, upon coming to power in Russia, was to nationalise the banks and then they nationalised Russian agriculture and industies and then they nationalised the Russian people?"
I just hope you know that it was the Wall Street bankers who funded the "Russian" revolution.
Now why would on earth would they do that?
Also,why is`nt that fact more commonly known amongst the population?
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@109
The trouble with that hypotosis Sasha is that you need IT personel that actually know IT to administer Linux.
whereas MCSE people are dime a dozen.
Novell 6 was a much better network system that Windows 2000 and XP but the personel to run them cost too much.
It is a direct result of dumbing down that has got us into this situation
As a qualified Novell CNA and MCSE I do know what I talk about here.
Also as Linux and other unix systems are open source Government see them as more insecure and open to attack that the wonderful MS offerings.
Quite untrue but perception is everything
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Not much mention of the great importance of confidence in any system - after all the only reason gold is so valuable is due to confidence in it - it has little intrinsic value (unlike a building), and gold could be regarded as the longest-running bubble ever.
Confidence underpins any system from whether an individual consumer feels able to buy the item he wants, to whether a multinational will decide to invest in the UK economy.
As such the BoE's and media's role in undermining confidence in the UK (e.g. the run on Northern Rock) will make the recession particularly bad in the UK.
This continues with the likes of McFall (the Chairman of the Treasury Select committee!-is there any hope?) explicitly threatening full nationalisation of the banks (how would it work, who would the Government blame then, and which sector would be next?).
Are these half-baked threats likely to increase confidence and encourage international and domestic investment in the UK economy - I think not!
The Government needs to rebuild confidence in the UK, which will not be achieved by making funds and guarantees available to banks on onerous uncompetitive terms, which will stifle the onward lending needed to stimulate and encourage productive efficient sectors.
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#77 & 106
In other words turn a blind eye, pretend everything is going to be OK - stop telling us the bad news and there'll be no bad news to hear!
#77 - yes people are still earning the same salaries as 12 months ago - it's net 5% less and there are more of them not in jobs! - but let’s pretend that's not happening....
Cheaper petrol and food - relative to when? - not cheaper my friend just not as expensive!
Borrowing costs are being artificially driven down against market conditions that would normally see them increasing - this is not a natural phenomenon! And will not last
Housing - Don't you get it, it was a bubble – there was a shortage of homes to buy only because lax lending had introduced more buyers into the market, remove people that would have never been offered a mortgage (sub-sub-prime) and the ‘buy to letters’ – what’s left will be the future? As a builder you’ve probably had an unbelievable few years (as a Banker you’ve had an unbelievable few years) – you were right, it wasn’t believable or sustainable – houses will cost what people are lent, it worked for you on the way up!
My advice to counter you advice is – don’t do a Houseflogger and bury your head in the sand – think, spend what you can afford to, save something for a rainy day and most of all beware of advice from someone who might be making money from it!
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Can't we do what any company does liquidate UK plc and start up tomorrow as UK (2009) plc?
Trouble is I have no debt, so let me borrow some money first.
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Well done Robert - another excellent analysis
The whole capitalist system seems to be based on the magic word 'Growth' eg. increased GDP, more sales, expanded company. Everyone wants more and more things, money etc. Ultimately this growth comes for natural resources which are limited i.e. this planet is finite.
The only sustainable (to all practical purpose inexhaustible ) input of energy to this planet , and hence resource, comes from the sun.
Perhaps we should be working flat out to capture this input. However, the amount of energy input is limited by what the sun can give over a period of time.
Perhaps we should be following the maxim of Bunyan's Pilgrim
"I am content with what I have, little it be or much"
But of course Pilgrims sights were set on another world entirely and had a completely different perspective- but I guess he was more content.
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Oi thonk thot the docloine orf mordorn copotolosm os bocose orf the roise orf boi-boi-see onglosh!
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Dear Robert,
Thank you for this very interesting analysis.
It seems to me that if banks want to attract more deposits, then they need to raise the interest rates that they are offering to depositors.
Right now, they are doing the opposite and reducing deposit interest rates.
Surely basic economics says that to attract more deposits, the banks need to pay more for them? I wish you would explore this point in one of your blogs.
I don't think that pushing interest rates down will work. I think that they will inevitably have to rise.
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"A class of labourers, who live only so long as they find work, and who find work only so long as their labour increase capital. These labourers, who must sell themselves piecemeal, are a comodity, like every other article of commerce, and are consequently exposed to all the vicissitudes of competition, to all the fluctuations of the market."
Marx and Engels Communist Manifesto
What you are talking about isnt new capitalism its old communism in a new dress !
This isnt suprising capitialism isnt reformable, it will always result in winner takes all and the smashing of the bulk of humanities dreams and aspirations.
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If we apply logic to the current scenario we must conclude that some time soon the wall of cash looking for a home will be used to buy cheap stocks and shares .If my pension company does not get out there and fill their boots I will wonder why not.
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A largely factual but superficial analysis.
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Robert,
An interesting piece, your PDF document, but as ever you seem easily persuaded of the 'momentous and tranformative events' theory of economic history. There are, in fact, few genuinely revolutionary moments in the history of economic organisation - our economy, even in the 20th century, evolved rather than transformed itself. Even in the 'webonomics 90s' the likes of Amazon were not selling different books or better books, just more books. Today we are facing a change in the character of our economy, but again not in what we produce or how we produce it and how we employ people to produce it.
It's easy to assume that, because the impact of state spending in the real and financial economy is growing, everything else will change. But bread will still be made in bakeries, cars will still be made in car factories employing people, bankers will (eventually) lend (less) money to (fewer) people and businesses.
What is happening is that the contraction in our economy will accompany rapid deflation, falling asset values, heightened risk aversion and reduced lending alongside the rising importance of the taxpayer. In fact this recession looks more like the 1890s than the 1990s.
It is these things - falling prices, competitive pressures from overseas (nothwitstanding the decline in the £), tighter credit - that will force businesses to adopt a new 'respect' for customers. All of the evidence is that, however much the taxpayer throws at financial institutions, for example, they will not respond by even passing on the full BoE rate cut. Bail out car firms, and will your next car be cheaper because of it? Unlikely.
The fact is that it is the recession, not the recapitalisation, that is going to change the way companies behave. Customer service had better mean something again...
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I hoped for something more radical from you, Robert.
I cannot believe that you do not know how you impact on the hope and despair of the listener (of the nation, even). You must realise how much your reporting, for the BBC or the Government or whoever it is, influences the Market and can have it going up and down like a fiddler's elbow.
The Market always had the makings of a casino and, after all, the tenner in your pocket is just a piece of paper.
Take away the confidence in a king's new clothes and what do you have other than the present kind of embarrassment?
A future economic system will involve paying for the damage that you and I really do. It will address damage we do to the planet and the poor in our spending choices and in our acquisitiveness.
I grant you that it takes some thinking outside the normal box - outside the present system, that you suggest just needs to be tweaked whereas it is completely broken already. Carbon would seem to be one possible measure.
And we should wonder to what degree Globalisation is myth or reality. It is much too convenient an umbrella. We should start to define what we mean and understand by that term.
This first depression of the 21st Century is perhaps pause for thought as to whether the course we have been following was, in so many respects (say since 1945), the proper one.
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It has been said several times that in the uk there are 7 savers for every 1 debtor. I find this hilarious to say the least, I don’t believe this for 1 second!
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Robert,
Have you not read Marx's Capital?
Let me try & summarise it for you.
PartOne:
Capitalism is based upon commodity production: things are produced for sale not for immediate consumption.
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).
Prices diverge from values because of the tendency for profits to be equalised between different capitals.
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Part Two:
The circulation of capital: M - C - M'
Money - Commodities - More Money
How does money increase into more money?
i.e. How can capital self expand?
This additional value is surplus value.
Marx's great insight was that the source of surplus value lies in the difference between the value of labour-power (wages) & the value created in the course of the working day.
Labour is the source of surplus value, i.e. the source of all profit.
The capitalist by seizing the means of production leaves the labourer with no choice but to sell his labour to the capitalist to survive. The capitalist keeps some of the value that the labourer produces.
Surplus value can be increased by lengthening the working day - absolute surplus value.
Or by curtailment of the necessary labour (the proportion of the day the worker has to work to produce his means of consumption) - relative surplus value.
Increased labour productivity is the main reason for increases in surplus value.
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RP,
Interesting essay, but not sure I agree with you on where this will all end. One of the problems I have with greater state intervention is the ultra short term nature of government (as in political) thinking. We tend to think of PLCs being short-termist because of the need to meet market expectation on a 3-6 month basis. However, that's positively strategic compared with politicians, who are obsessed with controlling the news cycle on a daily basis. An example of what I mean? Compare the number of times Obama/Brown appear on TV with that of the CEOs of really major corporations (Bill Gates etc). Why? Do politicians really have so much impact on a daily basis? No. So why "be seen" so often?
I have to say I don't see any huge revolution occurring as a result of the credit crunch. The UK has some particular challenges, in particular the potential loss of tax revenue from a smaller financial services sector. Incidentally, that points towards a lesser role for the state, rather than a bigger one, simply because the state will have less money to spend, unless you think the overall tax take can be increased. I rather doubt that. If anything, people will want to keep a greater proportion of income in order to save more whilst not having to make a direct one-for-one reduction in consumption. I can see tax breaks on savings (eg higher ISA allowances, on pension contributions etc) being attractive vote winners. Effectively this reduces the tax take in return for individuals' committing to use the money to save the extra not consume it. It subsidises saving and cushions the need to reduce consumption.
Your essay rather assumes the general population will generally support more state intervention. My experience is that the bulk of people, who are not in the public sector, regard it with disdain (wasteful, inefficient, padded with generous pensions denied to the private sector), and want more control over their wealth, not less, which is the implication of your suggested New Capitalism.
Incidentally, your essay didn't even mention the impact of the recent market falls on pension schemes. Most are horrendously underfunded under FRS19 (or is it 17? I never remember). Putting this right will either be impossible if the rules are not relaxed (ie companies will walk away from their commitments), or will automatically result in reduced current income (ie lower/no pay rises) in return for maintaining future pension entitlements. Or companies will further reduce pension commitments in order to reduce the size of current deficits. That will include an extension to working lives. Whatever the option chosen, we're again looking at lower current income avilable to consume in order to provide future security of pension income. You've not mentioned this, or what it means for public sector pensions and their affordability.
For individuals with defined contribution pensions the position is very simple. They will see much lower values than previously which, combived with lower house values, will make them screw down hard on consumption and save more in order to repair their houselhold balance sheet.
Overall, we'll see a decrease in borrowing (certainly personal borrowing) in the short-meduim term, but that's a result of recent asset value falls. People now simply have less capacity to borrow, eg lower home equity values. Added to that, banks will value retail deposits more and will therefore pay more for them. They will want extra net interest margins to help rebuild their capital base, meaning the cost of borrowing will rise, in which case demand ought to fall. We're already seeing this, eg banks demanding 10-30% equity commitment from home buyers; removal of low margin tracker mortgage products; not passing on full BoE rate cuts.
Finally, I challenge your point about markets not having found a bottom. You might be suprised to know that US equities are now, technically, in a BULL market, having risen more than 20% from their low of 20th November. It might not feel like a bull market, and there is a very wide range of views on where equities are headed short term, but bad news is no longer resulting in major sell offs (eg appalling US employment numbers last week ended with US equities up over 2% on the day).
The world isn't ending, Robert, nor are we likely to see a major revolution in the way our economies are run. A bit of tinkering, yes, try to smooth some of the rougher edges that have been displayed, let's have some blood to make us feel better (eg ban a few of the poorer bank CEOs who were big contributirs to the problem from holding such positions again), but the idea that your mate GB is going to become sort sort of benign economic tzar? Forget it. Actually, he'll be part of the ritual sacrifice resulting from this. It will be like the 1973-74 oil shock: all incumbent governments will lose elections in the next 3-4 years. It's happened in the US already. Check the late 1970s: Democrats replaced Republicans, Conservative replaced Labour, Socialists won in France for the first time since the 4th Republic, Socialists won in Spain for the first time since pre-Civil War. Brown is toast, as is Merkel etc, just like Bush/McCain.
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Incidentally I think the sub-prime "crisis " in the US is a tax fiddle .
What about the residual value of the properties?
Banks are writing off the whole amounts an claiming tax releif .in my opinion
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Interesting article Robert. A couple of extra points that should be noted I think.
Firstly, banks don't just lend the money they've borrowed: using what they've borrowed as security they then print multiples of it to lend (otherwise there could be no growth in the money supply). This is both inflationary and risky.
Secondly, the bursting of the finance bubble was in part precipitated by the tightening of the supply of oil, the major source of energy for the growing economy.
Global oil production has now reached a peak and will decline, so that it will be impossible to ever get back to endlessly increasing production. This will be the major factor shaping the new economy. How does the banking sector adapt to a shrinking real economy - or, does a shrinking real economy need a banking sector at all?
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Robert, I mostly agree with your essay, with one exception, this:
*To put it in crude terms, for much of the past decade, millions of Chinese slaved away on near subsistence wages and still managed to save…. and clever bankers took their savings and lent the cash to us, so that we could buy the houses we cherished, the cars, the flat-screen TV.*
Can you imagine someone in the UK working on the average salary, let alone the minimum wage, and managing to SAVE?
After you pay income tax, council tax (more than doubled in the last decade), BBC tax, road tax, mortgage or rent, utility bills, childcare costs, transport costs (trains, tube, going up every year above inflation) and food, what is left? Basically you are in the red, and that is even before you can think about spending on flat screen TVs, clothes or holidays. Of course, for the average and lower band earners, any extras had to be purchased on debt because their salaries cannot even cover the basics.
What happens in China? I assume the following: Tax levels are reasonable, housing costs are reasonable and affordable, childcare costs are met by the state, transport costs are a pittance or people use a bicycle, there is probably no council tax (or if there is, it is nominal, as it is the case in other European countries), and of course no BBC tax equivalent. And whats more important, the Chinese state no doubt gets value for money for the taxes they spend: they don’t pay endless management consultancies, personal advisors, market research, advertising, PFIs, etc. If they want to build an infrastructure, their cost is just a small fraction (and so it is in Europe, see here *In other countries costs of high speed lines are generally 30-70% lower* http://www.cfit.gov.uk/docs/2004/hsr/hsr/index.htm ) of what would it would be in the UK, because here its all done with expensive lawyers, designers, health and safety costs, endless layers of project managers, consultants, planning advisors, sick leaves…. You get the drift?
It is not as simple as UK consumers living beyond their means, even if that is undoubtedly part of the story. It is also that vast amounts of people have been forced into debt as they cannot make ends meet. It is also the state, not only living well beyond its means, but, in turn taxing people to the hilt to be able to do that, to the point that a) working on a low salary is just not worth the trouble, b) if you do work, you have to get into debt to make ends meet, after you have paid the long list of regressive taxes and stealth taxes.
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If Central bankers had included asset prices in their calculation of inflation, then interest rates since 1998 would have been higher, government, consumer and corporate debt would have been less attractive and the economy more efficient too (less resource allocated to speculation, more to innovative and production)
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Part Three:
Competition drives capitalists to increase labour productivity. This increases the organic composition of capital, i.e. the amount of constant capital (machines, raw materials) to variable capital (wages).
This increase in the organic composition of capital puts downward pressure on the rate of profit (even if the first capitalists to introduce the new methods initially reap higher profits).
This downward pressure on the rate of profit causes the recessions.
Capitalists only produce for profit, if the initial outlay of capital will not increase in value they won't produce.
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Never mind it was a good gig while it lasted.
We can use our CV's to reminisce war stories.
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Excellent analysis, Robert.
But I'm with a few others here, that you could usefully move on now from your very clear sighted analysis of the situation to hosting a big public discussion on 'where next?' for the UK's banks and the world financial system.
I'd like to see you do a series on the Beeb of going round and speaking to representatives of all sectors of UK society about their lives, the role banks have played for them over the last five to ten years or so, and how they may have benefited or otherwise to get where where they are now. Make sure, as you would, you get on record all stories, even the difficult ones (which would be those parties that have made the huge fortunes of course) so include players such as homeowners, small business owners, large business managers, shareholders, bankers, central bankers, private equity guys, hedgies, investment bankers, insurers, pension fund managers, outlining how such people have benefited or otherwise, and to what extent.
I feel very strongly that the banks and the bankers have as a group just perpetrated the greatest (and most fantastically profitable) heist in the whole of human history for their own selfish ends, and that, as a fully functioning democratic society here in the UK, we simply cannot now allow a redesign of the model to be left to these same people. We just do not trust them any longer.
The monetary system in our UK economy should be owned and run on behalf of all of us, and not by one small sector in their own self interest, and as the Beeb, I would say that you should be hosting a public discussion on TV to help us build this better model.
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#123 "Also as Linux and other unix systems are open source Government see them as more insecure and open to attack that the wonderful MS offerings.
Quite untrue but perception is everything"
I expect you're right - I was just, in my little way, trying to help change that perception. :-)
There is quite alot of linux expertise now in our universities, but they still take the MS shilling. IT in schools to me is just indoctrinating a new generation of MS consumers.
Incidentally, Sony now officially support a linux distro for the PS3. I am planning to experiment during the holidays. If it works on mine, then my godson wants it on his. So that will help him with his planned studies.
M$ - does the dollar sign work, or is just the pound that's disabled?
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I find it interesting that I have not heard or seen anywhere on here since the start of this crisis, any mention of just how the global economy came into being, or the reasons for it. My understanding is that the global economy was put into place by the american democracy in the years following the second world war, to ensure that countries around the world became so inter-dependent on one another that they would never again become embroiled in a global confrontation (i.e. a world war).
What is now being allured to is that this process could reverse itself (e.g. where Robert Peston says there could be 'a retreat into national fortesses') so that we could find ourselves in a position that existed just prior to world war 2.
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Dear Robert
I am a regular reader and I congratulate you on a superb article. This is easily the most comprehensive take on the financial crisis and written in the simplest terms. More power to your pen or keyboard in this case.
It would be terrific to have a follow on article which would talk about the implications for the "saver economies" .
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I hate to buck the trend of praise but Robert I wasn't impressed with your pontificating article.
Robert you suggest we are all culpable in a way. I think you are wrong. Being 26 and the only borrowing I have undertaken is the student loan (basically forced loan as the Government wanted to aim for 50% graduates) it would put the finger of blame on the Baby boomers you sort of defend in your article. But you can't just blame the baby boomers. If you read Capitalism Unleashed by Andrew Glyn, this current problem was forecasted in 2006 but of course doomsayers are always ignored. It also points out that Japan just undergoes various fluctuations between recession and growth. The problem does sort of start in the 1980's with Thatchers policies but she was combatting higher inflation. We now run the risk of deflation. Blair and Brown sort of continued the policies of the 80's.
To be honest you highlighted some of the causes and then say there will be a new form of capitalism without really saying what its underlying principles will be. We are in a down turn, this is what really capitalism does, stability comes from a mosaic of unstability. What I don't understand is this fixation with growth. There are systems that can grow infinitely, but they grow very slowly, longer than our own life span and even then it's not the same creature that is growing. Though the idea behind a more generous form of capitalism is echoed by an essay in a recent issue of Nature and postulated by Lord May. Maybe this is the new capitalism you are refering to.
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#29 "Your solution - a global institution to monitor risks etc. Sounds a lot like the IMF. "
"Strikes me, if we are going to build a globalisation watchdog, it has to have teeth of some sort, some sort of guarantee that politicians will listen and act when they are warned."
The IMF is now a toothless tiger. Still fairly strong but without any bite !! This is because of the undemocratic manner in which self-proclaimed champions of democracy shared out the power within this organisation !!
If there is a changing of the guards there AND it is given new swingeing powers, then the likes of Gormless Gordon and his spend, spend propaganda will be shot down in flames !! Harsh austerity regimes will be instituted in America and Europe !! Something along the lines of what happened to Argentina !!
Civil service jobs (and jobs in other pseudo-private organisations) will be to first to be massacred !! Unemployment benefits will be cut to barely survivable levels !! Illegal immigrants will be deported without delay and any jobs that fall vacant as a result will be filled from the dole queue !!
It happened in Argentina and it can happen here !!
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Thank you Robert for this well informed, seminal and balanced briefing on our very serious situation. I can see your pdf being quoted in the history books when this all blows over as a 'what they thought at the time'.
I keep telling you that the only way out will be to print money and I am seeing that you are now beginning to agree. Capitalism will never be the same and nor should it. If we can manage the transition without war or wheelbarrows (to carry the worthless £ notes) then we will be lucky. Weimar Germany is instructive. Zimbabwe less so.
Watch the money supply figures for us please.
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Part Four:
To the capitalists it does not matter that people need things.
Exchange-value rules use-value.
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Excellent.
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my real concern is not with the pain of the downturn and the adjustment itself. it is that the pain will be politically destabilising for some countries and this could lead to a much more dangerous world for all of us. after all, let's not forget that the worst thing about the 1930s was that they led to the 1940s.
my biggest fear is china. everyone still talks about a "slowdown to single digit growth" in china, but i think this is horribly optimistic. china's exports are collapsing, but along with exports goes a lot of collateral industry. it has a massively overbloated construction and manufacturing sector that also faces collapse. it is way overinvested in these sectors, meaning china could now experience its own homegrown financial crisis. investment has been a huge share of gdp, and is inevitably the most volatile part in a downturn. the legitimacy of the chinese regime rests on maintaining high growth. so a recession in china could lead to serious civil unrest (considering the number of migrant labourers in big cities) and to factions within the government resorting to nationalism as an alternative source of popular legitimacy.
i think a very likely outcome is a trade war with the usa and europe next year. china is already boosting export subsidies and devaluing its currency against the dollar - i.e. exactly the wrong policies to address the global imbalances. if this continues, i fully expect the usa and europe to respond in kind next year. the resulting collapse in global trade (a la 1930s) would be devastating for big exporters like china, who would be the ones left with enormous output glut and deflation problems. ironically, it might actually not be such a bad outcome for the usa and europe, who do not suffer from an output glut so much as from an import glut. instead, i think the real risk to the west from a trade war lies in the potential political instability and nationalist backlash that the resulting severe chinese recession could cause in that country.
russia is also a big worry. if oil remains significantly below $40 throughout next year, it will devastate the russian economy. putin's reputation has been built on stability. a return to 90s economic instability could put paid to him. he and his associates are widely seen in russia as just another bunch of gangsters, but better to have one gangster in charge rather than lots of gangsters competing. if putin's power base (which is based on his monopoly of oil and gas revenues) is broken, things could get ugly very quickly. again, i would fear a revival of nationalism (i.e. the expansionist variety, as opposed to kgb authoritatianism).
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"There's next year and then there's the next decade...."
No..... not if you really learn to count! As there wasn't there year 0 AD, then there is another year to go before the next decade......
:-)
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@147
By golly you've got it.
We are repeating the late 20's early 30's with a war to come circa 2015-2020.
the only real question is who will start it and how will it finish with Nuclear, chemical and biological weapons now readily available.
Don t think for one minute that the Russians have forgotten how to make nerve gas. Or how to infect water supplies. These are much more effective global takeover weapons than nuclear ever was.
Consumption needs to be increased and the most effective way to do that is to burn it all off in a big war.
Bio weapons are likely to be the first strike weapons of choice and the losing side will use Nukes as a last act of the desperate
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#125
I think you're just jealous of my sunny and optimistic outlook (!) and have therefore missed the point:
As an habitual creator of jobs, entreprenuer and successful businesman I always recognise and reward positive, creative thinkers. Robert would not, in my humble opinion, fall into this category.
Mr Peston, with all due respect, is a hack whose scribblings are ubiquitously negative, undermine confidence and ultimately destroy jobs out in the real world. I'm sorry if this sounds harsh, but I suspect that Robert would agree that he is not the sort of person who would start a business from scratch, risk all his worldly possessions to expand it and create jobs in the process.
I stand to be corrected, but I suspect Robert is a sort of "glass half empty" man...... which is not what is needed at this juncture.
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Good stuff Robert. Good analysis. Looks like there's a book in the air? How about a few more like this?
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#41 "I would like to see you come down harder on Globilisation. In my mind it is bad for jobs and for the countries the global corporations sometimes control (with none of the responsibilities of government). Global corporations seem to be good only for a handful of already wealthy individuals and a nightmare for everyone else."
I think you are mixing up two different things !!
Globalisation is the making of trade globally available at the same price. Global fair prices are *GOOD THINGS* since it stops countries from unfairly subsidising their own ineffective producers at the expense of poorer but more efficient producers !! Please look up the FairTrade organisation !! They are doing very good work and are making a positive impression !!
Global corporations, aka MNCs (Multi-National Corporations) are totally different animals all together. They are often the villains of the piece. It is they who insist that goods be produced at the lowest possible labour costs while selling the produced goods at the highest possible price for little or *NO* benefit to the producers !!
Please do keep these two things separate in your mind as one has a positive influence and the other has a negative influence !!
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If you stick your neck out, in what we loosely call the capitalist system, it is possible to have your head chopped off.
Which, for example, is now happening to many of those buy-to-let jackals/leeches (recent MoS and Times columnist comment).
I hope that in the era of 'new capitalism', that there will be room for a greatly expanded model such as that pioneered by John Lewis.
That is, genuine partnerships between all participants in a business enterprise.
There is something very wrong in a country such as England, where apparently 1% of the population own 50% of the wealth (Martha Lane Fox comment on Newsnight yesterday).
That sort of thing greatly offends this Englishmans sense of fair play.
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#101. BasaltRocky
"The bankers are to blame, yes......
That is, except for the.....
Accountants and Auditors (who nobody has mentioned !!)
The Accountants and Auditors have sold their profession to the devil. "
Do not forget the Credit Rating Agencies are in this as well - or does one include them with the Faustian Accountants?
There must be an INQUIRY to see why all the worthless Derivatives, SIV, CDO and other toilet paper were valued as AAA or higher.
RP : I certainly do not think we were all to blame in any of this. I relied on the Regulators to oversee the financial operations.
What were the SFA doing?
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This cant be true Robert we have been told that all will be rosy in the garden next year.....
or are you implying that we have been told another load of bull by our PM and chancellor.
Whilst it looks good to blame thatcher , there have been many years since that people could have reversed the trend.In fact less than 12 months ago our Prime minister was adamant that he and he alone had stopped the return to the boom and bust Thatcherite times, a statement as ludicrous as Neville Chamberlain and his "peace in our time".
From your pdf it would appear to get countries finances back ,that people have to be encouraged to save,we are being told to do the opposite??? who should we believe.
Until we create more industry,and buy British we are condemned to years and years of misery,but first and foremost we have to have new faces telling us that .
The people who presided over this god forsaken mess will never be believed and confidence has to be returned to the system.
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I have just heard the ex-spin docter now leading the Tories making his speech at the LSE. Listening to Mr Cameron on economics is like listening to King Herod speaking on the issue of child care. The future for the Tories is becoming increasingly clear. Go back to your constituencies and prepare for another five years of opposition. As someone once said 'its the economy stupid'
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#123 Pot_Kettle
"whereas MCSE people are dime a dozen."
MCSE are not as cheap as that but I now you can buy an MCSE.
Non IT readers: MCSE = Microsoft Certified Systems Engineer.
- Widely interpreted as: Must Consult Someone Else (when they cannot fix it)
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There is a natural way in which debts are wiped out, it is called bankruptcy. The banks should have been left to go into administration thus wiping out all debts apart from the 35k guarantees to personal savers.
At least the western governments should have refused to bail them out, leaving it to the Chinese to do so if they wished to save their money.
This would have been tough, but the recovery would probably have been quicker. Banks could have been bought from the administrators, privately or by governments, without the debts and toxic loans.
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Final Part:
As businesses go bankrupt capital is devalued.
Hence the organic composition of capital falls (in value terms) and profitability is restored and the GDP grows.
Hence no one as such is to blame for today's crisis. It is inherent in the capitalist system.
But the system is a set of social relations, it is not nature.
It hasn't always been this way & probably will not always be this way
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The funniest thing ever from Cameron that the 20bn spend up is putting everything at risk.
Is this person serious? Has see seen the national collated debt? 20bn on that lot is like buying a packet of fags with a credit card with a few hundred quid already on it.
Will the real future leaders please stand up instead of clowns and puppets!
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Hmm. More depressive talk. You know you can physically change your brain so you have a depressive groove.
------
Somebody puts a high risk, high return product on the market.
People stroll and have a look. Those used to the market place say looks too good to be true.
A few numpties say Its an enormous return I have a little bit spare I'll buy a small bit.
A few more walk up and given time they nibble. The price goes up, ie the return drops.The perception of risk drops.
A few more say oh look there is movement something is up. The so call pundits say this is an opportunity. The perception of risk drops again. Actually the risk is exactly the same.
More people buy in. The price goes up. Those holding early buys say wow I'll get some more.
Suddenly the numbers of buyers give it credibility. The pundits trumpet how clever they were to advise a buy opportunity so early. Strange isnt it how few pundits actually trade in the marketplace. Its because on the whole they are no use at it. Check a few comments before an event and after and see what I mean. You wouldnt believe it was the same person talking.
Anyway back to the numpties. Movement quickens, it is now see as gold plated. Risk still the same
Sales paperwork printed showing growth.Its not fiction, its fact. The herd motto holds good. When everybody is rushing one way it is the time to go the other. Sell.
Oh dear adverse projection. Bad news travels fast. Looks risky. Perception as at the start but worse, its coming thru.
Very rapid, and I mean very rapid sale, Price collapse. Panic mindless sale.
Happens every day. In lots of markets. This is not new. It is just new to some people.
You can make money on the way up even if there is nothing of substance at the end. Even if you believe there is nothing at the end you can buy in and get out before the peak. This happens everyday. In this case there is something at the end, a house and it is still worth something. In fact it still represents a good return if bought early enough and an immediate distress sale can be avoided which is the case for a lot of people.
But what is the key issue. It is not money. It is confidence. It is a huge variable and is massively levered by small things.
Most posts on this site are by people who do not go anywhere near a marketplace and have little idea what they are looking at. However if the panic does go on it will make it worse there is no doubt about that. Panic can not go on for ever, excess panic just pushes the overshoot lower.
There also seems to be some distaste at the idea that actually the sustainable economic activity in this country, which has been exposed, is lower than many would like. The economic growth in the UK was flat and was propped up by a bubble, therefore there was decline. This is government failure exposed by the banks practice.
Many of the 'jobs' which will go should in reality never have existed they were bubble jobs.
Oh car sales are down, kitchen sales are down. etc etc. Those are spin-offs to house sales, so what. You dont need a 20 or 40K vehicle to get about. Or to throw away a 5 yearold granite kitchen because it is the wrong colour.
I still find it remarkable that the countries so keen on war are those in the worst position. Could the eye have been off the domestic ball. Could it have been helpful to funding the war. Did Osama win.
There will be a new stability and it will be lower than now and growth will be low because it was in decline entering this. I've got news for you there will still be money made in this environment. It will just be harder.
Please stop having this love-in where it is 'everybody to blame'. It is not. It is pitiful baloney.
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An interesting essay, Robert but you don't really offer a vision of the new capitalism. I think I understand your central thesis. We will need to relate to each other as humans in an entirely new way. Immoderate short-termism is out. Maturity, cooperation and common sense are in. Wars over food and energy might eventually have levelled human society but it seems that capitalism and unfettered free markets have beaten them to the punch.
I was a lone voice two decades ago in Business School when I mused out loud that rapid globalisation would lead logically and quickly back to local markets and that manufacturing and agriculture, mining and nuclear energy production were therefore critical to the long term wellbeing of the UK - not banking. The cost of rebuilding the UK as a producer of food, manufactured goods and power will be mind-boggling.
Globalisation of markets leads inevitably to global currency convergence, hence purchasing power parity. What costs a dollar in Indianapolis will cost a dollar in London, Moscow, Beijing, Mumbai, and Buenos Aires - eventually. Why buy a toaster made in China if it costs more than one made in, say, Chingford? What we are living through is the wrenching and tearing of economies as we level down (and up) across the planet. Imbalances caused by cheap labour in China and oil stocks in Saudi Arabia are plainly temporary. Similarly, the US's inevitable pulling up of its drawbridge and retreat into isolationism won’t sustain.
It doesn't matter what triggered the current spasm, though the monumental failure of our politicians to recognise the danger of a bank bubble and legislate appropriately has brought upon the precipitate nature of the change. I don't blame the bankers entirely either - because that's a bit like saying that lawyers in practise are the cause of bad legislation by governments. If the rules of the game are badly drawn, clever players will find - and take - advantage for themselves. In the years ahead, some people will make fortunes, many will suffer and some will perish in futile conflicts between obsolescent "states". We might come out of the other side, a sadder but wiser species.
That there will be much sadness, there is little doubt. The attainment of wisdom is a very different matter. I fear that the immature and undereducated will gravitate to one of two poles: survivalists at one, armed with guns and fear, hopeless hippies at the other, armed with reiki crystals and psychobabble. Both will probably become deeply religious. There might not be enough grownups left in the centre to work through the problem.
Stoicism, deferred gratification, the acceptance that "sh!t happens" and it's no-one's fault, the ability to appreciate life itself are all attributes of mature humans, so sadly absent from our culture. I always felt that shopping as a leisure pursuit was over-rated but it seemed to become a mechanism to foster a temporary "happiness" amongst my peers. Regrettably, maturity was not on sale in Debenhams, neither were humanity and courage.
Our humanity, courage and wisdom will now be tested to breaking point. Many of my detractors at university were those who left to work in banking and insurance, accounting and finance. These very same now stare unemployment in the face without savings, with a (third) mortgage worth more than the house, two cars, a conservatory and the "holiday of a lifetime" they bought with it and £10k on credit cards to boot. They and their ilk took a lot of other people down with them. The rising tide that was supposed to lift all boats has now deposited many beneath a clinging mire of debt.
The collective foolishness of my generation (I was born in the '60s) is quite simply breathtaking. Cosmopolitan, that iconic symbol of '70s consumption had it almost right: You can have it all - but only for a fleeting instant. I hope everyone enjoyed the party - the hangover will be a belter.
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#165
"The banks should have been left to go into administration thus wiping out all debts apart from the 35k guarantees to personal savers."
In a way I'm slightly suprised that that wasn't allowed to happen - it would of been a socialist's wet dream noone left with savings of more that GBP35k - destroy the rich in one afternoon!
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Interesting article. Surely the fact the government's line for 11 years of sustainable economic stability, end of boom and bust, low inflation etc lulled everyone (including the government) into borrowing more than they may have otherwise done if a more cautious line was taken? The danger signs were apparent with routinely missed growth predictions and underestimation of the risk from global economics. This is one reason the impact of the global recession will be greater in the UK.
The so called housing bubble was not a UK-wide phenomenen driven by easy credit. In part, prices were driven by land prices and regional supply and demand - with mass immigration driving demand and a shortage of affordable housing driving prices.
I agree with your point that any recovery would simply release pent-up demand and once distressed sales - which are creating the "house price crash" headlines (there is otherwise no normal housing market to calibrate asset value) - have ceased, prices must take off again - simple supply and demand. Link this with last summer's unprecedented oil prices now locked-in to domestic fuel bills, the need for ever more taxation, retirement surge over the next 7 years then the burden on the recovering UK economy looks unsustainable. The components for undermining recovery are all in place.
One measure is to dramatically cut costs now - starting with the cost of government, its costly projects and of course fuel prices.
Affordability has to be re-defined in the context of the newly structured UK economy you describe.
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Thanks for the pdf Robert, very interesting.
I agree with several of the commentators here citing Peak Oil as a major part of the mix in what follows the Credit Crunch.
The IEA World Energy Outlook 2008 contains a graph of projected year-on-year decline of existing oil fields in production. It shows a drop of between 4 & 5% per year for the next 2 decades or so. Call it 4.5%, and the consequent halving time is 70/4.5 = 15.6 i.e. about 15 years to replace half of current oil output from existing fields in production. The global peak in oil field discovery was in the '60s.
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Thank you Robert for your clear and concise thoughts on "The New Capitalism". You are performing a great service.
If the new capitalism benefits the many equally and not just the few, if it can incorporate fairness and respect for our fellow man, the environement and the other creatures that share this earth with us and keep the destructive forces of human greed in check, then I for one will be pleased.
A few people have reaped vast fortunes from the era of casino capitalism. Now, the rest of us, who have enjoyed only modest increases in our standard of living, will be paying for its collapse.
And, finally, did Gordon Brown really believe that he had ended the cycle of boom and bust?
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@165
Not quite true
THe loans including the toxic ones are the assests and they would have been sold on so the debt would not have been wiped out.
The banks debts in the form of savings would have been wiped from the banks books and paid by the deposit insurance scheme up to 35K as you say.
I agree that this is what should have happened because the loans including the toxic ones would have been bought up by whoever at a truer valuation.
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If it was not serious it would be comical. Cameron stating that the 20bn spend up is putting the economy and the pound at risk.
Has he seen the national collated debt? The 20bn would be like buying a packet of fags with credit card that has a couple of hundred quid already on it.
Please bring on the real future leaders and let punch and judy fight out their political clap-trap
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Well done Robert.
Ive been saying this for years,most live
today MERCHANTS looked at me as if i
was mad.
So if we escape war,anarchy,famine and
rampant inflation,it will take 30 plus years
to sort out.
ROBERT will you join the REBUILD BRITAIN
PARTY??
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@165 and 170
The Vision of the wealthy losing all but 35K of savings is also a long way from the reality of what would have happened.
Only a mug would have had more than 35K in one institution. last night I outlined a way to my wife of how to have £1M split between enough accounts that it would have all been protected.
Anything more than that would tend to be invested in other financial vehicles anyway.
SO much for the socialist equalisation dream eh?
Why do you think they say money comes to money.
Its precisely because they have money that they dont put it into a bank in the same way that yo or I would
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#45 "Nick Mathiason, business correspondent of The Guardian, reported on 6th December that pope Benedict attacks tax havens for robbing poor and contributing to international financial crisis. The Pope points to estimate that the global fiscal deficit caused by offshore activities cold amount to US$255bn."
Pope Benedict has also carefully *NOT* pointed out that the Vatican has enough treasures stored up on Earth to help those millions of poor when they (the Vatican) should be "storing up treasures in Heaven where moths and rust cannot corrupt" as the Bible says !!
Is the Pope a Christian ?? Should he not sell all he has and minister unto the poor as the Bible teaches ??
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Various comments have been made as to what economic state various places are in.
Slump, Recession, Depression, Squeeze, Downturns, Crisis
Is there a Richter-type scale for measuring these?
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Thanks for the pdf. Finally a response to my request for light on what's happening: an explanation that makes sense and that I can accept (i.e. understand).
However, who says we are going to come out of the present mess? I think the whole system is bankrupt ( in many senses) and corrupt. I'd put my hopes on a return to "national fortresses", simply as the least bad option, although it may be too late.
Globalisation is a massive scam. It is totalitarianism in disguise. A few people (giant corporations) will turn themselves into a global elite. The rest of us will be their slaves. The EU is a good example. With globalisation, the future is Orwellian
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The problem is that this probably an over simplification of just one aspect of our current problems. While bank funding is critical you need to look into the detail of where that extra wholesale money from international markets went. The council of mortgage lending statistics show Q3 2001 mortgage total was 29448 million was lent while in Q3 2007 mortgage totals were around 40000 million. So of the 750billion extra that banks borrowed some 40 billion went to us in mortgages. There were similar amounts for buy to let and unsecured loans. The British bankers association and indeed the bank quarterly statements give a clue about where that extra money was spent and it looks like it went on big company takeovers and invested in emerging economies. The implications of this may be surprising.
While I liked the article as far as it goes there is no real meat on the sovereign trade deficits and how the UK, US and some European governments have conveniently ignored these and are continuing to. You make no reference to the unwinding of the carry trade and some of the perverse affects that being a reserve currency has on the dollar. There is no mention of the monoline business that the banks relied upon to hedge their risks or the rating agencies. There is no mention of how farmers around the world are failing to secure prices in advance of production due to hedging problems and how lots are going out of business. There is no mention of how international trade flow is being disrupted by lack of credit. There is no mention of how pensions schemes and insurers are being hit by certain interventions.
The story that concerns me most at the moment is that US Treasury bailouts and lending facilities don’t appear to be performing due diligence in assessing risks when lending money. The global company I work for has seen one of its major competitors loose more than 40 percent of its market share over the year. Our competitor’s actions have been to reduce prices all funded indirectly from the US Treasury. By bailing out uncompetitive companies government could be damaging the economy by harming successful businesses. The UK government should think very carefully about bailing out industry and where their money ends up. Our democracy will loose its electorates backing if politicians favour particular industries and companies or at least bow to lobbying as in the US without rational rigour.
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#166
"But the system is a set of social relations, it is not nature. It hasn't always been this way & probably will not always be this way."
How did these set of social relations come about? They did not evolve in a vacuum they are a product of nature. Human nature, for want of a better term, and although political and economic scenarios change human nature remains very much the same.
Which is not to say it is inflexible, rather it is exceptionally facultative, which will always allow people to exploit others for their own perceived gain given a level starting point. I am not saying this is right or desirable in any way, merely that it is 'natural'. Almost all of our laws are designed to prevent people from acting in a way they find 'natural' within a given set of circumstances.
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#55 "2000 AD - sun in Aquarius - the great leveller"
It feel more like "pouring the p*ss on the poor, unsuspecting populace" !!
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Robert, well done, at last a main line commentator getting close to the truth as to why we are in our current hole.
GDP pumped up by 1.5 trillion pounds of private debt and hundreds of billions of public debt over the last decade.
A chronic systematic balance of trade deficit.
An economy based on consumption fed by ever increasing debt.
An assumption that wealth is debt, that can be maintained indefinately by more debt.
A real wealth producing sector that has shrunk over the last decade.
It is telling that the prime minister repeatedly asserted that he had abolished boom and bust as this indicates that he bought into the illusion and based the countries economic strategy around it exaserbating the problem with over reliance on a now imploding finance and service sector.
GDP will now revert to its level stripped of the debt supercharge and our balance of payment deficit is likely to deteriorate further as the invisible exports by the finance sector, so important in narrowing our monthly deficit, are seriously reduced.
The UK is structurally bankrupt. This has been clear to many people for some time and is becoming more apparent daily. Current govt policy will speed our demise over the cliff edge.
We are seeing policies engaged that are purely concerned with boosting consumption by an already maxed out consumer. Basically the consumer is unable to borrow more, therefore the govt does it for them. What kind of policy is this!! it doesn't begin to address the serious issues and merely seeks to prolongue the party.
We are about to witness a massive contraction of the economy, carnage in the retail sector that feeds consumption and upon which 60% of the economy is based and the enfeeblement of the finance industry. As recent figs have indicated, there will be no boost from manufacturing as demand plumets internationally, and the sector is of insufficient size to make much difference.
Where is the growth going to come from to maintain our lavish public spending, a public spending we could not maintain at a time of record tax reciepts and global boom, without recource to growing public borrowing. How are we going to repay a trillion pounds+ of public debt, how are we going to finance a trillion + of unfunded public pensions, how are we to pay back the billions of PFI loans and how are we to fund the transformation necessary to run a b of p surplus.
The answer is we cant!
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Your articles, Robert along with the blogged-replies give seriously interesting reading. Shame that no-one of any bloody importance reads them!
Does anyone remember one of David Attenbrough's episodes showing a little island of moss that delicatley began to grow in a small stream flowing through harsh volcanic terrain? Where flies then came to lay their eggs. The maggots the grew fat eating the moss and to a point when the whole mass tore away and was washed away downstream.
There's your model of man's social and industrial behaviour! Maggots or humans, just obeying instinct - ever heard of maggots sharing?
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#182
One of the points Marx wanted to get across was that the economy wasn't given, like the weather, it wasn't (shouldn't be) outside of humanity's control.
It is a man-made system.
"Men make their own history, but they do not do it just as they please, they do not make it under circumstances chosen by themselves"
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Bert - did Nigel Lawson not spend £5bn in 1986 to get a feel good factor
be interesting for 'no idea' Cameron to have one of his spinners work out what that would be worth in today's money
he was much more proactine when he had disappeared and said nothing a while back
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Robert,
The options for massive construction projects in the UK as proposed by Obama are pretty limited as you need to spend 30 years fighting Nimby's before you are allowed to build anything. A pity as now we are nearing the point where the existing rail network will be as good as it can get expanding it with new lines would provide jobs and give us a better infrastructure for the future. There is also a need to sort out known problems on the existing road network such as upgrading the A34.
Regarding the US motor giants what would be best I am tempted to suggest Chapter 11 to get rid of all the accumulated welfare debt. how would the European arms of Ford and GM fare if they were sold or became independent entities? Both have modern ranges to offer.
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#60 "Free up the markets, but strengthen regulation - the only way."
It seems to me that that is exactly what the Chinese are doing right now !! And what the Singaporeans had done these 30 years past !!
Unfettered greed combined with bleeding-heart politicians in desperate need of the funds from the greedy is what caused the current problem !!
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I've looked high and low but nobody has mentioned cocaine in relation to the current financial bust. Not that I know anything about such things, but I have been told that the current financial disaster has 'cocaine assisted' written all over it.
I would add drug testing to any new set of conditions laid on the banks.
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Interesting pdf. If only we were self sufficient in food production and had built some nuclear power stations. Perhaps even had saved some manufacturing industry.
Then we could have 'slowed down' our foreign debt repayments and eschewed luxury items, increased (significantly) import taxes, introduced foreign exchange controls, prevent British companies taking profits out of the country - in fact de-globalised.
And then fillibuster with the EEC (as the French do, and as Russia did when it 'withdrew' from Georgia on TV but actually strengthened its positions on the ground). Ten years later, agree that we should soften our approach but actually do nothing.
It will be interesting to see whether the EEC (and the euro zone) withstand the situation when the first EU country declares war on someone. France on Algeria or UK on Falklands or whatever it happens to be....
Sorry I forgot, declaring war on someone *used* to be the way to sort out such an unbalanced foreign indebtedness...
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All very well in terms of how we got here. Some will argue over who is more culpable but frankly it is a moot point. More significant is where we go next and I don't get much of a clue from your article.
If excess debt is the problem, the answer must be either reducing the debt in absolute, or relative terms, i.e. pay it back at today's prices or reduce the value of it, either through increasing the level of output, so it becomes a lower proportion of GDP, or "quantitative easing", so we inflate it away.
Clearly paying it back can't be done. Government may have repalced the banks as the debtor, but the debt still exists, it has simply replaced bank debt with government debt. Even China's dollar reserves at GBP1.4tn doesn't come close to clearing the deficit. The idea that a massively increased share of annual production should go to paying off the debt pile, with the resultant reduction in demand across the world (and unemplotment, etc.) is simply too unpalattable for any government to take.
Reducing debt relative to GDP through growth ain't going to be easy in a world recession and the truth is, if left unchecked for too long, it may represent an insurmountable obstacle to a return to growth at all.
So that leaves inflation, and no matter how you look at it, there is no alternative and there isn't a government (or an Opposition) in the world willing to face up to the alternative.
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As I couldn't see what the other posters were saying about the mid-90s in this series, let me expand on old Malachy. After all, there's other posts here making less sense than this does, so at least you know.
Malachy was an Irish abbot who got friendly with St Bernard, the founder of the Cistercians in the 12th Century. Now, to establish the relevance here, Bernard and the Cistercians were the roots from which the Templars sprang, and they were the first Pan-National Banking Institution known of - OK, the Romans had something, but we don't know what for sure.
Now, the Templars, Malachy and Nostradamus all had something in common - they got started in the old Abbey of Orval in Belgium. Nostradamus painted a bit too wide to be certain, Malachy however set himself a narrow task, and has been spectacular in his prophecies accuracy, way over the 60% success rate used in banking, describing the future Popes. I picked up on him around five years ago.
Now, Malachy's prophecies disappeared into the Vatican archives, putatively never to be seen again, not long after his death. However, they were rediscovered in the early 1600s, and caused a furore, as they fairly accurately described the recent boss-men - for instance, he described a Pope named Piccolomini as "The Little Man". Anyway, they set it aside as a forgery - until someone noticed that he kept ticking all the boxes. And still kept ticking them.
Now, his original list of Popes ran out with JPII, who he called the Pope of the Eclipses. In the nineteenth century, however, the Benedictines proves their founder way back in the fifth or sixth century had prophecied the last pope would be a benedictine. That was the situation as things stood when I started studying this possibility. JPII was born during an eclipse, but the Latin's in the plural, some people said the Latin might apply to his work as a youngster in a quarry, but it didn't really fit - until the moment of his death, when there was a eclipse in South America. Moreover, his successor, Ratzinger, took the name Benedict, and refuses to associate that with old Malachy - which rather proves than disproves the case.
What's Malachy got to do with us lot? He reckons the clock stops - dead - never to go again - with this old Pope dies. Some say there's scope to add a few more, but be worried. Be very worried. Because that Mayan prophecy also looks for an end of an era, in 2012, and their era ends are earth-shattering ones. And there's no serious possibility of collusion, either.
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#150 ishkandar
"Civil service jobs (and jobs in other pseudo-private organisations) will be to first to be massacred !! Unemployment benefits will be cut to barely survivable levels !! Illegal immigrants will be deported without delay and any jobs that fall vacant as a result will be filled from the dole queue !!"
It seems inevitable.
There will be an almighty wailing from the do-gooders and the PC shower.
It will need a DECISION MAKER.
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It is now seemingly accepted that the problems are a consequence of debt and asset price bubbles that are now deflating.
Responsibility is (unsurprisingly) allocated to everyone. However the average man in the street can do little other than to operate in the macro environment in which he finds himself.
Principal responsibility for managing and manipulating the macro environment must lie with politicians, officials, regulators and business leaders. If this is not the case then what is the function of these people? and why have they progressively aggregated more and more power for themselves?
Self evidently this collection of the "great and the good" did nothing to head off the inevitable end result of these bubbles. (It is not hard to predict the end, no great intgelligence or insight is required). Plenty of people warned about where we were heading but were routinely ignored or smeared.
The key question is - if these people and organisations did nothing to prevent the creation of the problem on what basis is it to be supposed that they now have the capability to manage the problem that it is before us?
Why should their assumptions today be any more credible than their assumptions of yesterday?
Most of the ruling classes still seem unable to recognise that they did anything wrong or that they have any responsibility for this crisis. If they believe this then how are they to be expected to adapt to the new reality that is announcing its presence on a daily basis?
The future does not look bright.
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Given that the sheer size of these debts damages our economy and hence our country in a way not seen since world war 2 what is to be done about these sub-prime bond pushers and others?
When Hitler did this much damage (fiscally at least) we were prepared to try and even hang him.
While I do not suggest capital punishment I do feel that custodial sentences would have a uniquely effective deterrent to fiscal crime. Maybe we should consider an international finance crimes court along the organisational lines of a war crimes tribunal?
Certainly there is a real need to restore a proper sense of ethics in this industry and in the end a proper code of conduct really respected by those who work and innovate in it will be more effective than reams of legislation. Especially if the ultimate sanction is that these people would have to answer for it and the penalties would include incarceration for those responsible. Fines yes, but those don't deter people willing to bet £100's of millions, its just another bet they lost to them.
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New Capitalisim! not being religious I'm quite prepared to pray to whatever higher being to protect us all from another meltdown, because all the so-called experts & pundits have not got a clue. De-nationlisation / mutalisation etc etc, have left this country bare and exposed, with a bleak future for all. Yet the 1% group that own 99% of the worlds wealth remain inflation proof! If one group was ever in need of a radicle shake-up its this one. Unfortunately this one group defies the odds and continue to survive. Other past opposing groups aka the Red Brigade and the likes are confined to history, at least for the moment...
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Interesting article.
What do you think to the idea that "the powers that be" are quietly happy about GBP weakening against just about every other currency but especially the Euro? Once the markets have decided that £1 = €1 (next 6 months?), how much easier is it going to be for them to say "Why not adopt the Euro? Now it's at parity, what's the difference? And we'll be much better off inside a stronger, larger community won't we?"
Discuss.
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#71 "The three Horseman of the Apocolypse are due, according to Nostradamus, allegedly, if you believe that sort of thing...
Drought, Famine & War..."
...and he opened the fourth seal.... and behold a pale horse and on it sat one called Death...
The pale horse and his rider had been around for quite a while now !!
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#150 ishkandar
"Civil service jobs (and jobs in other pseudo-private organisations) will be to first to be massacred !"
Walesonline.co.uk:
'In two areas of Wales, Torfaen and Ceredigion, more than 40% of the jobs are in the public sector. Across Wales the sector accounts for 54% of GDP, a higher proportion than in England or Scotland. Prof Ferguson said: “Wales can probably rely on its large public sector to maintain employment levels.'
So, Ishakandar, either Prof F is right or you are.
I am backing you on this one.
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SSbaned.
#169 + others.
''...you can have it all,...but only for a fleeting instant,...''.
Surely one of the key phrases that brought about ''The Great Delusion'' of recent times.
_____________________________
PLEASE REPEAT AD NAUSEAM:
Genesis.1.1. In the beginning there was... rebellious matter.
Genesis.1.2.''You can never have it all, because there is always an opportunity cost.''.
_____________________________
formerly,
mindthegjc,
idonotknowyournamr,
IDNKYN.
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what with all this doom and gloom I am seriously worried re my savings. If our country goes bankrupt what happens to all the promises of guarantess up to £50000.00. It seems that many countries will turn to the IMF and Central Banks etc for help. Can someone please explain how guarantees are guaranteed if money runs out due to so many countries needing help and bailouts. This cant go on indefinately....Hopefully someone out there can shed some light on this for me.
Thanks.
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The engine room of the economy (Housing market, money supply and retail) has run out of steam and manufacturing is on its knees.
The pound has devalued at alarming rates to record lows against most currencies and only those with equity can get credit.!!!
Why would anyone wish to borrow
Barack obama says that he will spend the US out of trouble and stock markets around the world rejoice and everything is rosy in the garden.
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The new dimension that globalisation has brought to the situation of a nation in debt is important.
West Germany sorted out its reparation by hyper-inflation only because (i) the idea of reparation, a weak and defeated country supporting a stronger, victorious country, was foolish anyway; (ii) sensible people quoted the reparation in Marks (perhaps us?) to keep the stupid (French) happy but be harmless and (iii) thealternative of war was still fashionable as a fall back.
Presumably some of the UK's foreign debt is not actually specified in sterling. Perhaps we should unilaterally respecify it now. Then push up interest rates and raise them further (as necessary) to make sure that interest rates net of tax stay about 3% above RPI at all times. Then those with savings are protected and those with debts will see their debts reduce in real terms as our friend inflation becomes the popular solution to our problem.
Fiscal drag can be used to help moderate wage levels and benefit payments to a level the company and country can afford.
Utopia!
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I am alone in thinking that the ONLY way to stop this happening again is to jail the folk who caused the problem in the first place?
Jail is an effective deterrent in preventing Bankers from being er Bankers!
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the latest retail figures show that the governments reliance on spending /borrowing our way out of trouble isnt going to work. i run a small electronics company,iam trying to keep 6 people who work for me...busy. its like a grave yard out there. we need a change of direction..we have the same people trying to get us out of this mess that got us into the mess in the first place. get rid of king the whole mpc, the fsa, and treasury officials..and call a general election before any more damage is done. encouraging more borrowing isnt the answer..people are scared to spend....people dont trust this government.....there must be a better way forward than this.
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It is to be hoped that if a socialist government ever comes to power again in this country that the fact that the tax payer owns the banks will make them realize that wealth has to be created and not just spent as the incumbents have.
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Good analisys, Robert.
One additional though: the political systems in most Western countries when a country is governed by a group of people just for 4-5 years is a bad system. It is bad because people in power come for a short time and they are interested in results now. They are not motivated to care what will be in 10, 20 or 30 years. This attitude goes down to many aspects of our life, to management of companies, etc.
Maybe Chinese and other Eastern countries are right. They have Communist party forever that is not afraid not to be elected in several years. Hence, governing group of people are interested in long-term benefits and sustable development of a nation.
So, Western countries sometimes should learn from East and not always criticise somebody who have different political system.
It would serve well if goverment of Western countries too have stability and are interested in long-term projects and development. 4-5 years is just too short.
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190. At 12:18pm on 09 Dec 2008, JohnSaxby wrote:
I've looked high and low but nobody has mentioned cocaine in relation to the current financial bust...
Dope House breaks records
Dope sells itself
If you got a strong family
Come and join them
Don't hate the Mex
It's obvious
you don't want
to see them prosperous
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#186
"One of the points Marx wanted to get across was that the economy wasn't given, like the weather, it wasn't (shouldn't be) outside of humanity's control.
It is a man-made system."
I totally agree with the point that the economy isn't a given, and is within our control.
However, I think that is precisely the problem. An economy controlled by man can only function within the limits of our nature. My point is that our nature is not well suited to the self-imposition of a system that will breed equality of opportunity.
Communist states interpreted this to mean that the only way to bring about such a social, economic and political system was to impose it through totalitarian state control.
Western 'liberal' democracies took a rather different approach, giving the individual and corporation primacy over state.
The failings of both approaches are now plain for all to see, and what we seem to now be witnessing is the evolution of some middle ground. With the USA of all people taking on shades of a command economy, and the Chinese embracing aspects of the free market.
It is now clear that an economic system that attempts to ignore or crush human nature is doomed to fail, and equally that a system (the old capitalism) that celebrates the worst facets of human nature is also doomed to fail.
With reference to Robert's essay, I'm not sure the economic framework that will emerge after the current debacle will bear any closer resemblance to old capitalism as it will to socialism.
There needs to be a middle ground, something that both acknowledges the inherent variation between individuals but also acknowledges that we have collective interests that must be protected at the expense of natural individual greed.
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Robert,
I think you have missed the main culprits here. They are fund managers. They are the people who invested my savings and pension and often lent my shares out to speculators without my permission. They often voted for the status quo. They voted for a system that supported their bonus culture and not for my best interests.
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The publics' loathing of the super-rich banking elite must be addressed in future.
As far as most people are concerned, these reckless, greedy people have stolen their money and their future.
So far no action has been taken against them, but this must surely change.
"Masters of the universe"? No, the biggest thieves in history.
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200 toldyouitwould
It depends if there is a gap to jump or a cliff to jump off. The public sector is likely to be propped up for a year or two and then drop if the gap is not jumped. There seems to be a great reluctance to admit a step discontinuity is in process and the public sector has to shrink. In Wales they implemented a council tax rise based on the rise in property values, and quite punitive it was too. It was ducked in England. They do not seem to have realised that if property prices do drop for good that every house can request revaluation and a drop in council tax. Thus increasing costs and reducing income for them in one stroke.
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To the many well intentioned and intelligent people on this blog:
A healthy number of people from this blog have joined a googlegroup under the name Rebuild Britain 2010, and are discussing core principles and strategy. A website for the group is in development and will go live just after the Christmas period
If you are interested, even in only the most casual of manners, in having some input on effecting change in our political/economic system, we have a grassroots movement going and would love for you all to get involved.
The main intention of this movement is to work with or pressure politicians into rebuilding a better Britain, such as many people on this blog have called for, for the good of the majority of people in Britain, regardless of class, gender, race or any other demographic, denomination or affiliation.
For anyone else who is inclined to do more than just comment, google ardent industrial recruitment, send an inquiry, they all hit my inbox. I will respond and send you details of how to get involved.
Get involved in Change!
Or not, its up to you. Either way, Merry Christmas one and all
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Thanks for setting out clearly the root cause of our problems in a way that even Gordon Brown could understand if he cared to.
What you do not say, although hint at, is the inevitable conclusion that we cannot possible hope to repay back this debt.
Therefore the only options are either to default or to start printing money. Both will lead to a complete loss of value in the pound.
I just cannot see any way out of this - can you?
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@197
Sorry to dissappoint you but praying to any higher being wont work.
All higher beings are united against the greed system that fueled this latest bubble.
All higher beings are united that when you make wealth you should share it with those that cant make wealth.
Higher beings only answer prayers that are in line with their will
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Reply to No 205
You should put in jail then about half of the country )))) Goverment, financial regulators, bankers, people who borrow too much on their credit cards and for their houses, managers of companies who borrowed heavily.
Good idea - you should fence off the whole Western world (US, UK, etc.) and call it "Prison" ))))
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#207 coastwalker
"It is to be hoped that if a socialist government ever comes to power again in this country"
Are you saying the incumbents are not socialist?
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@208
Could you imagine this lot in forever.
There would be a revolution before Christmas if they announced that little jape
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190. At 12:18pm on 09 Dec 2008, JohnSaxby wrote:
Please stick to what you know.
All front office banking staff are subject to random drug tests and all investment banks do it.
The Americans, where all this originated, are even more fastidious in this regard.
You've just taken some of the whack-job uninformed opinions on this forum to a whole new level.
Sensible debate and finger-pointing is all fair play but your statement is just ridiculous.
Stick to the football pages.
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198 SirBarneyMcgrew:
The old chestnut of Euro entry at parity. Why would the current Euro club members want us to join at parity? Permanently locking in a value much to the advantage of the UK. We'd have the cheapest labour and production costs - boosting our job prospects a the expense of every other Euro member.
Of course that wouldn't be the case if
a) we could controllably inflate our prices where theirs remain static (whilst maintaining aligned currencies)
b) we had signed some devils pact which allowed other Euro club members to buy all of our industries and repatriate the profits.
Entry at parity could be greatly beneficial to us. What is in it for very other Euro member?
All discussion of this just seems to be a lazy shorthand for something I just cannot grasp at the moment....
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I have one response to this which has troubled me in regards to my political research, which you may have not considered. That is that globalisation is utterly unavoidable within existing or new capitalism and self-sufficiency is difficult to achieve. The issue is that financial value of an item comes before the necessity and importance of the item. There will not be a new form of capitalism in my eyes, it is more likely to for the capitalist cycle to re-begin (if you understand what I mean here - hard without using great detail). I believe that it is unrealistic to expect capitalism to allow equality and to protect those who are at the bottom of the rung. Those at the top wonder why they should help them. They have worked hard for their money etc. A stably economy and equality rarely go hand in hand as you already began to infer in you're Who runs Britain book.
The unemployment will rise and will exceed all overstated expectations as simply put, our technology is too good. We don't need to work so hard. To satisfy a satisfactory quality of life (food, health, police, fire etc) we only need about 12,000 people working 5 days a week per 50,000 people (work it out for yourself and you will see). Simply put we have a workforce of twice that so we need twice employeed in making other things. Cars, computer programs, advertising.. anything that is popular in a strong economic society. But in a ecnomic crisis these are no longer desired in the same way. But if they go, half our people could lose their jobs. Half won't as people will still retain money and there are the wealthy to consider, but I'd guess it could even reach 20% unemployment maybe higher.
One solution, is to work less hours and bring in government legislation to ensure that our country is self sufficient etc so that we don't have to fear economic crises. Though people will still struggle to afford food in the economic crises.
The solution I back which I feel we should at least consider, is to take on a new political theory: necessarianism. Within this, you have socialism for necessary items and captialism for luxury items. A basic study of socialism and capitalism will tell you why I recommend this, as it gets rid of most of the drawbacks of both systems (requires too much detail to write here). Half the week free labour to ensure you get all your necessaries free of charge and the rest of teh week to do as you wish be it relaxing or capitalism. Only socially responsible solution. Allows self-sufficiency and protects people from not being able to buy food. It would also allow people to potentially only work 2 and a half days a week, which would give people more free time and reduce stress and stress related illness in this country. Those who desire luxury goods and want holidays, private schooling, luxury items etc, are free to earn money at low taxation for 2 ½ days. Those who work will be able to get a lot for their money, as all necessary items will have been paid for. So this money earned under low taxation will be only used for luxuries, so will be able to buy a lot, also may be used for imported goods if wanted. Requires a lot of mangerial skills in government, but that could bring a success to the government.
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A weak pound is alright
If you got euros to cash
100 EUR = 80 GBP
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Part of the problem today is that, as we try to think our way out of this mess, we are seriously handicapped by our own memory of our economic history. Perhaps the best example of that is the resistance exhibited by the MPC during the summer to calls for rate cuts, the result no doubt of a belief that any recession would be a stagflationary episode. After all, that's what we remember. But we have had in the past periods of deflation accompanying economic slowdown (in fact 'cycle for cycle', that is far more common!).
What is now needed is unfettered thinking about how to put this mess right - from a new regulatory system that works in roughly the same way in all national systems to 'market confidence giving' measures for recapitalisation. National governments have to think outside the box and tackle BOTH the recession AND the gummed-up financial system.
My prescription for both would include:
* more tax holiday options for firms
* extensions to a range of incentives for investment in the economy (including raising the limit for ISAs, extending R+D tax credits etc)
* new 'capital projects bonds' for new community capital projects from local authorities, central government and private sector projectors, with no taxation of private gains until 2012
* a requirement that the trading licenses held by financial firms under SFA supervision allow them to work with only approved financial products (zap those mad debt derivatives!)
* a requirement for open reporting of risk decisions by financial firms in ways similar to those used by the SEC
* a revision of the GAAP to incorporate risk reporting in company reports to shareholders, and to enshrine this in the next Companies Act
* an export credit guarantees system that is more generous in supporting export-dependent medium sized businesses.
....and much much more.
How far are we likely to move toward thinking outside the box? (e.g. granting 'government companies' status to prevent liquidation; procurement from the public sector to target businesses in difficulty as preferred suppliers; new government-backed instruments for direct investment in businesses, avoiding the equities market...) Probably not very far. HMT is a conservative place, and it won;t want to rock any boats.
However, that won't do this time. Now we need a bold prescription and some new thinking. You may remember James Meade's stunning little two volumes on stagflation from the 1980s. It's that sort of radical thinking we need now.
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Ok if you can’t beat them……re- end my post 73
Yes post 161 the authorities we have like the FSA and its associates have little teeth.
A bank employee of a global bank that had been find for miss-selling told me the 600K fine was less than the money they made in an hour from miss selling.
{Now that’s what I call a real deterrent]
It’s like the fines we give our footballers for atrocious behaviour
Problem is we have no real appetite to take back control of society’s morals or ethics.
This then looks like we reward [even secretly admire] antisocial behaviour and our actions against it is interpreted by every street yob as actually covertly encouraging it
If we don’t stop a banker from being a bullying, loutish, self serving, greedy person taking money as he or she sees fit with total disregard for the community and getting away with it even being rewarded. How can we condemn our street urchins or even our middle Englanders when they imitate them.
Perhaps as often is the case we are looking at the wrong thing maybe it’s not a fiscal system that has more or less served us well for a thousand years but maybe the way we have run and managed it for the last ten years that is wrong
Maybe we did not modify it in line with the new world technologies and global shrinking but.....
Fact is though clear if we abandon the moral fibre and the ethical approach and the cohesion of society then we can only expect those with less whit to imitate our leaders.
Even if they wrongly interpret our confused messages they will never misinterpret the actions of those who lead or are roll models and weren’t we all told as children study hard and become an accountant, a lawyer, a banker or a civil servant and you’ll never go short.
But at what cost [what price the roll models now what worth to society]
Now that has reminded me you see there is on thing that we all have difficulty with – price - we believe price is an indicator of value not cost e.g. If a watch is priced at 10K then its very valuable to some, but to a person who only needs the time its worth no more than a watch costing 3 pounds likewise anything else.
We continuously confuse, cost – price – value - worth - need
Now can we decide what type of society we want to live in and bear in mind the one we choose will have to suit the entire world for with the possible exception of North Korea there are few places you can go to live in a different one and the internet nor the plane is going away.
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i was just reading an article in the "Times" and thought this seems familiar........scrolling up i see the byline, guess who, robert peston! is this a new career move, has the BBC decided your delivery pattern is best in print?....
seriously "we are all to blame"...can you tell me how i am to blame? worked hard, employed people, paid taxes, never claimed a single benefit........what was i doing that created this mess? oh i know i never spent more than i could afford, paid off my credit card every month and bought a house to live in not as an investment vehicle! of course it is all my fault!
By the way Robert next time you are having tea with your friend GB can you ask him, why, if UK is in the strongest position to ride out the global turbulence, it is only the pound that is devaluing against all major currencies....
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210 UltraTron
There is a middle ground. It has always been there. It is the government actually doing its job. Spending the 43 to 46 pence in the pound collected from your pocket in total indirect and indirect tax properly and regulating the marketplace. There were plenty of tools to do the job, just a lack of will to use them. The money spent by the government outweighs any other sector. The regulations the government can apply can control the lunatics, providing the government does not bend to short term income flows to curry favour with the electorate and business. It is not rocket science and those who chip in about the pressure on a government miss the point. That is the job. If the job is not done this is what you get. Inventing another system is ducking the issue and lettingb the government off the hook and just weakens the position. This is the result of 5 years mismangement that is all.
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It looks that policies of Bush + Blair Goverments & Co over last 10 years gave us the following:
1. Stupid, unfounded wars in Iraq and Afganistan that literially ruined millions of innocent lives.
2. Financial unsustainable pyramid that is now collapsing.
Are they going to be held responsible for the global mess? Unfortunately, not a chance .......
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Robert,
Very well put. Thank you for the clarification.
What I wonder is, where does 'social behaviour change' come in. We are all facing recession and everyone speaks about savings, but does everyone want to stop consumerism? It’s not what I see and I think governments want to continue with this model, as all political and financial changes proposed are here to keep the same system to strengthen consumption (and guarantee their re-election in the short come).
Usually people are more conservative in their behaviours and a lot is required to change it. Maybe severe times will come to make sure there is a change of habits.
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Swept Aside
A little result from the old economy.
The phone or doorbell rings, I walk away
From the debts that call or knock.
In equal measure fortune's whim
Joins forces with my fiscal sins
To hunt me down.
God only knows how I became so poor
At mortgaging fun for safe expectation.
Bad decisions often smile when made:
Smile cars, meals and foreign holidays.
Smile and snigger.
I thank the luck of history's draw that
Workhouse and prison are past, only ignominy
Remains. Each domino that tumbles will numb
My family's love I fear. I failed to make a
success of life.
In five tough years half a million
Pounds of tax and wages paid counts
For nothing. Hopeless bitterness and
Anger at those helped are poisonous
Rewards for those
Who are the human costs of greed.
I was greedy and I had hubris too
Qualities that some have put to use.
Their gains and my losses coincide,
I am swept aside.
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The analysis is very good. The crisis has exposed a fundamental weakness of the democratic system: a Government unable to find the political will to act in the national interest against the wishes of a "feel good" electorate. Unfortunately the last time the Government tried to overcome this weakness it backed Bush on Iraq. Let's hope they get it right this time.
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The problem might be manifesting as an economic crisis but it is also an intellectual and cultural crisis.
We need not be where we are and we wouldn't be where we are if we had used our brains to think rather than our crotches.
All institutions are indicted in this sin of utter incompetence. For as long as the happy procession of leveraged debt continued anyone who asked when the party would end was cold-shouldered from the room. The state, the banks, political parties, local councils, businesses and all were seduced by the fantasy of easy money.
Why did they choose to become lotus-eaters? Surely, they understood that at the foot of the superstructure they enjoyed, value had to be created by the sweat of brows? Did they? I think not.
The persistent demand that cheaper solutions or products be found became puzzlingly impossible to resolve. The market - if it was such - had become to consume itself. The signs were there but even then the reality was denied.
It is not a case of simply rebuilding. Our institutions have failed. Our politics has failed. The standards by which we conducted our lives have failed. All is now in flux and once we are over the very worst then the real change will set in.
None of us can know now what that change will embody.
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Okay the numbers are mind boggling, but to whom do we owe this debt? Why is it being called in now? Any chance of a payment holiday of say 100 years or so?
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Lots of issues raised but the big inevitable issue to be managed whoever is to blame is how we handle the effects of the transfer of wealth to the East from the West.
Easy enough to sacrifice big cars, big holidays, trivial expenditures and big rewards to entertainers, sportsmen, bankers etc, but how do we react to cutting the lifestyle of those lower in the pecking order? This obviously raises the issue of where taxes might fall, the future of universal healthcare and of course pensions! Given that research suggests individual wealth does not at much to happiness beyond a certain point maybe we should all be more content to "cushion the blow" to those less well financed and raise overall tax levels? - And pigs might fly!
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Savings rates in China are huge (on average 40% of income per person) because the Government pursues anti-consumption policies to boost exports. It's astonishing people arn't aware of this.
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Okay, so the polls are showing Brown and Darling trusted more on the economy than Cameron and Osbourne. Whilst I don't really trust that the Tories are the right people to sort out this mess, I am totally gobsmacked that the ignorant public believe the tripe that Brown and Darling are spitting out. I am staggered that the spin is working. How on earth can people possibly believe that the govenment who contributed to this mess can be our saviours?
Brown and Darling's pathetic attempts to fix the economic meltdown are just contributing a to more prolonged and painful existence for all of us.
And, yet, people trust them?
Please someone tell me what the hell is going on in this country. Is it that easy for people to forget the monster that Brown has created? The monster eating away at our livelihoods?
There will only be justice if Brown's name is tarnished forever following this crisis. He deserves to go down in history as a complete national disgrace, a total failure. His lies and mis-management have fuelled an economic timebomb that only the intelligent and inquisitive few realise is about to explode.
I fear for those still blinded by the Labour spin machine.
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#222
Very interesting post, I for one would certainly join you in advocating necessarianism as an antidote to blank-slate socialism and ultra-deterministic unbridled capitalism.
Giving people more free time could have many more far reaching benefits than reducing stress. The benefits to social cohesion could be enormous as people spend more time with family and out in the community. Giving people a bit more time to think and reflect might turn up some interesting developments in science, the arts and philosophy too perhaps.
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#210
I think you are rightly touching upon an important point and a common misunderstanding of what Marx stood for because of what happened in the last century, i.e. one-party dictatorships.
Marx was a democratic extremist.
He wanted people to be free from wage slavery, i.e. having to work for those who controlled the means of production.
He wanted production (and so humanity's reproduction) to be under our collective control, i.e. democracy.
He would never have wanted a one-party state that dictated to everyone else what was good for them.
Human nature as it is, that will always be a problem.
The middle ground of social democracy was possible last century because the increases in productivity enabled the capitalists to buy-off the workers (I'm guessing, I haven't the facts to prove it).
I don't think social democracy has a solution because there seems fewer opportunities to increase productivity, particularly with energy price (in the longer term) going up.
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The sad thing about this article is that I have no debt, some savings and a declining pension pot. I am 50.
I have tried to be cautious (against the trend) and where has it got me? Certain higher taxes, a pathetic pension (I am in the private sector) and the likelihood that my savings will be inflated away. What do I do, Robert? Put it all in the stock market? Under the bed?
I should have spent the lot and worked in the public sector.
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Totally unhelpful article; the media talked up the boom and now you are talking down the recession.
The media have power with no resonsibility; as Robert demonstrates.
Normality gets us back to banks that do risk management, interest rates at a reasonable level, no Merchant bankers getting paid daft amounts of money and a government who governs.
All the government borrowings are doing is to soften the landing - otherwise the economy will over-react.
We all seem to be paying for the BBC to deepen the recession with irressonsible reporting.
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I just love the free market bullshit that attends this blog. It's free market bullshit that got us into this mess in the first place or has that FACT escaped everyone? There is no mystery here - all you had to do was think how does somebody on #25,000 a year borrow five times their salary? Also, how did someone who knew jackshit about banking, Sir Fred Goodwin, earn #4.5m+ for recording the first loss in the history of RBS whilst lending more than the company's total assets and bringing it close to ruin? I'm no banker (I was) but even to me this seems a little on the wrong side of crazy.
New capitalism? Who needs it? I'd settle for properly accountable state banks, utilities, insurance companies, public transport and telecoms which are regulated not just by the prevailing international market but by the electorate. Also, new capitalism for whom? The stupid, greedy and acquisitive who would commoditise everyone and everything? Who needs that? Also, I'm tired of the mantra of choice and competition when I know from personal experience that corporations value competition like a beggar values a Bell fruit token. Whether regulated or not, they set sail directly to an anti-competitive position with or without regulation. The only time competition matters is when you want to buy a product or service where prices are genuinely different (i.e determined by cost and desired profits margin). Tinkering with this or that for short-term market gain is not about serving the consumer, it's about short-term differentiation from the competition - it's a marketing ploy. Try changing your telecom provider and watch what looked cheap, creep up on you. The same applies to the banks and insurance companies.
We're in a classic Keynesian thrift-credit bind with almost no room for maneovre and this was brought to us by 'the people who know'. These same people will be constructing the new capitalism. Forgive me if I feel alarmed. This is no share-owning democracy! The average salary in the UK is around #25,000 per annum and you don't rack up major shareholdings on that especially if you're on a five-times salary mortgage and like having something to eat at dinner.
I agree with the posters who are asking you (Robert) to outline what you think is the way ahead. We all know what's happened, what we are less clear on is what is going to happen next. How do you get out of the Keynesian paradox? Do you have a sliding scale of interest rates dependent on deposits, assets or status (e.g. whether you are an employer or not)? You have to get money into the system and you have to deal it out. We cannot have any progressive economic system unless there is access to credit but if no-one is prepared to save where is that credit going to come from?
If this recession continues we are going to be removing a decimal point from the price of houses, salaries and everything else.
I also believe that any new capitalism, to be sustainable, cannot have the 1:100 or more ratio between average and top salaries. As things stand people in employment maybe facing the prospect of Hobson's choice - a reduction in salary or redundancy (as happened after the Wall Street Crash).
The system requires a better distribution of equity. More, in a credit-fuelled dystopia, is not just unfair, it's totally insane. Don't believe me? Look around you. Some spotty ignoramus can get a #1m bonus at Christmas (last Christmas, sorry) playing pass the parcel with debt but the person teaching your children gets #25,000, where is the sense or reason in that?
As for David Cameron, he hasn't a clue. He's worse than the incumbents. All that blithe talk about getting in the private sector for their expertise. Oh, please! When they were last in office the Tories topped up the NHS with useless bums who added to the bill. Why doesn't he stop the drug companies, BUPA and co (who use state trained doctors and nurses and contribute nothing towards it) from ripping off the NHS (pound for pound the cheapest health system on the planet)? He'll have to do better than that. He also fails to explain what he would do in the present circumstances. He wouldn't borrow, apparently? Wouldn't he? Well, how on earth would he be able to finance anything? Sure, he can cut the DWP budget, the NHS budget, the education budget and slaughter local government but he'd do better having a NI holiday for employers. At least employment initiatives would offer the chance of boosting tax receipts (income tax and VAT), would alleviate the short-fall in consumer spending and reduce the DWP bill. He won't. He won't get passed first base - major redundancies and budget cuts disguised as 'new efficiencies'. Result: more people claiming benefit.
We've only just finished paying off the US for Lend Lease. Debt even of the order we have it at the moment, isn't surmountable. However, we're not going to do that on financial services, we're going to have to start making things that people want to buy. Similarly, our currency might need to disappear in favour of the euro. It's going that way anyway, so what are we waiting for? Parity? Unfortunately, Blair/Brown's predecessors, the Tories, if I remember rightly, didn't see the importance of Britain's manufacturing sector. I think we need to amend Keynes' thrift-credit paradox. What do you do when your stymied by the desire for thrift, the need for credit and you have the prospect of a much reduced income?
So Robert, what's the deal? What is the new capitalism?
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While you are on the list of people to blame, what about the FSA?
What about Hector Sants? He was head of CSFB Europe, from which he made millions and, lo and behold, ends up running the FSA. How on earth has this happened?
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#154 benagyerek
So it seems we are all in this together. On the bright side it could bring disparate nations together for the benefit of each other.
We must avoid the outcome of the Depression by minimalising unemployment globally by continuing the concept of global free trade (as opposed to protectionism) and accept the role of the State to keep people in employment and accept the 'partial nationalisation of capitalism' for a while. At first sight it looks contradictory but is very much achievable in a climate of dialogue and mutual aims.
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Excellent article - insightful and well put. Two omissions:
1. The role of computers. In old fashioned dealing rooms decisions were individual; more recently they have been automatic by computer programmes so complex even the heads of the banks who ran them didn't know what was going on. This led to swings being much larger than expected as everyone's computer had the same parameters programmed in.
This is common in a Mk1 computer world and these programmes will get better.
2. Gordon Brown's funding programmes for health and education were based on totally unrealistic tax revenues and he fuelled the boom to pay for them. On current figures they are hopelessly overfunded and need to be scaled back fast or they will become simply unsustainable. The impact on jobs must not be allowed to prevent this or we will have a second crash.
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227 Glenafon
Yes actually I totally see your point, very well put. As you say, the lack of will to use the tools available has led to this current farce. And the government(s) have behaved like fools, as have the bankers.
However, not wanting to sound fatalistic, although what I am about to say is clear fatalism, but I honestly don't think that the current system could ever ensure there was a will to use the checks and balances that are in place.
I think although Robert's analysis of the causes of this are correct, they are only proximate causes. And while you are correct in that the lack of political will in this and other countries is key to understanding the crisis, we need to ask what it is that erodes this will.
I think this all has as much to do with the way Western democracy works than anything else.
In these systems those that crave power will rise to the top, but it is unlikely that the attributes that enabled them to get there will serve them so well once they have reached the final destination.
Contrast, a politician such as Vince Cable, or commenters on this blog. They combine fore site, empathy, self-knowledge, some open mindedness, acknowledge their own limitations and value the input and crticism of others to varying degrees. All of these qualities would equip them well for head office, almost all would ensure they never got there.
Add to this the time horizons imposed by the electoral system, which reward short-term part-political orientated thinking above long-term strategic thinking.
Please don't take this as an advocacy for a benign dictatorship, as that is very much the thin end of the wedge. I have no idea how Western democracy can be improved, perhaps an extension of terms to reward greater forward planning?
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Robert
Brilliant though process, all highly probable.
As an aged entrepreneur now totally internet based, I relish the changes and challenges ahead and see nothing but growth.
This economic sort out comes as the internet reaches youthful maturity and is at long last becoming trusted.
High streets and newspapers must be both under serious threat.
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I thank Robert for his account of how we got here, the lesson bubbles end in tears should have been learnt from history and I guess big picture economics largely consisits of the interpretation of history but were there any economists warning before 2006 that we could be heading for banking colapse and the depression type mess we are in? What fed the boom before the thirties bust, I guess it wasn't the Chinese? Did the New Deal work? and in what sense and how on earth could a world war correct the world economy even with the Marshall plan tagged on? I think Robert is right we do need more global regulations and so some layer of global governance whilst clinging on to the principle of subsidiarity and democratic accountability a tough unshirkable task, as he says.
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Thank you for the pdf. Many interesting thoughts that have led to a far more profound and constructively provocative series of comments than have followed anything else I have read that you have written.
The western world has a system that over the years has become perceived to be too sluggish in its real economic advancement to attract the undivided attention of its people to its nurture. Gradually, almost unnoticed, we have peeled away from constructing the next stage of the system in favour of gaming the one we already have. With notable exceptions, we have seen the route to personal prosperity lying not so much in innovatively improving the quality of the processes we use, and therefore the value we create, but in devising more and newer ways of leeching off product already created by someone else. Ways that are ingenious only in their deviousness.
I'd suggest that this gaming rather than nurturing of the system has become of epidemic proportions in the western world; so much so that it can only really be reversed by the rest of the world refusing to carry on playing. It's no good looking at western politicians to reintroduce nurture - they're active players in the game who long ago subordinated the general good to their own welfare. Even if one believes that, say, Obama is a force for general good, just how possible is it to believe that he can make much of a dent in the defences of the Washington self-interest colossus? And if he's just a well-dressed version of what we've already got ...
There are several worrying thoughts about what might happen when the developing countries call for a more equitable distribution of the world's right to consume, not least of which is that powerful nations who are denied what they see as an inalienable right to exploit their hegemony can often resort to unattractive ways of enforcing their will.
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Excellent document Robert, well done. It neatly summarises what I’ve been reading and talking with people about for weeks and weeks now.
Two things to add – firstly a typo at the top of page 6 (too hard by far).
Secondly, one very senior banker recently had to explain to their mother what the losses in their exposure to the US mortgage market meant for her son’s Bank. He thought for a while and said “Well mother, it’s pretty much the same as us burning 100 million dollars every day in a furnace.”
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196. Astillsmallvoice wrote:
"When Hitler did this much damage (fiscally at least) we were prepared to try and even hang him."
Mr Hitler only did the damage to British finances that "we" forced him to:
"Germany`s unforgivable crime before the second World war was her attempt to extricate her economic power from the world`s trading system and to create her own exchange mechanism which would deny world finance it`s opportunity to profit"
Letter from W. Churchill to Lord Boothby as quoted in Sydney Rogerson`s "propaganda in the next war" 2001
The answers to today`s problems are to found by finding out the truth about the past.
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I was making enquiries this morning at a banking establishment and was told to expect an interest cut tomorrow. I double checked with the bank employee and they were quite adament , word coming through the grapevine. We'll have to wait and see. A bit odd , I think .
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Finally. The main stream media are catching on.
It's not going to be pretty. A lot of posters on here have known this for while.
The problem is, if a politician was to echo your thoughts in public Robert, they'd be accused of "talking down the economy" rather than telling the truth.
So the debate can not take place.
We need leaders who care more about the long term good of this courty rather than their short term rating on opinion poles. From ALL parties.
Until the real debate takes place, we're going to continue to hear about how how hard working families are being helped, or how MPs offices shouldn't be searched by police.
Oh, and there's always someone ballroom dancing or stuck in a jungle to take our minds of things.
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"The third trial in the case of an armed robbery of a cash depot at Heathrow Airport has collapsed after five months.
The February 2004 robbery at Menzies World Cargo netted the thieves £1.75m, which has never been recovered.
Judge Jeremy Roberts told the jury at the Old Bailey the move could not be avoided, despite the estimated £22m prosecution bill so far
"
Sound economic policy by the CPS here expend 22M failing to prosecute some guys that netted an unrecovered 1.75M
You wouldnt mind if they had actually got a conviction but to spend that much getting it wrong doesnt seem right to me
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The cause of the present crisis is the unsustainable boom that we have had over the last more than a decade, both here in the UK ("no return to Tory boom and bust" said Brown) and in the US. As with previous unsustainable booms, they always end in bust. Like Nigel Lawson's boom when he was "shadowing the Deutsch Mark" in the late 1980s. Only this time it's more than just the UK.
The government's response is yet more discredited Keynesian nonsense about "fiscal stimulus". If it works at all, the fiscal stimulus will only do so by causing inflation and therefore reducing real incomes. And it turns the government finances into a disaster zone from which the government doesn't even have the shadow of a plan to recover. In a short time we will be faced with a Sterling crisis, roaring inflation and rampant unemployment. We've (sadly) seen it many times before in the UK.
No, it won't lead to "a new capitalism" (for which read "the return of socialism"). It will, once again, lead to another generation learning that governments can't "spend their way out of recession".
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This is an excellent piece of financial jounalism spelled out in easy to understand language.
Every bit is true and it is high time it was spelled out to this government that they are going down the wrong track.
Gordon Brown wants every country to sign a global agreement before the end of the year to prevent protectionism
This is impossible until every country who takes part is able to put its own house in order first. This could take many years.
Trading still continues in a fashion and gradually countries and companies will find a better way to proceed as economies improve.
I think people are being misled into thinking that this crisis is only a temporary blip.
It is high time we had more honesty and less garbage from this PM.
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Robert,
Do you think Bob Geldorf could team up with the Saudi's and China to release a new version of do they know its christmas time........?
All proceeds to be sent to Europe & the States please!
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New Capitalism? Shouldn't we try the old sort 1st?
Up until now all we've tried, since the end of WWI, are either command economies aka Communism, or heavily regulated markets, aka Fascism. What we most decidedly have NOT tried is Capitalism.
All of the current problems, without exception, have been caused by government interference in the economy.
If government running the economy is such a good idea then the Soviet Union would be with us now and Zimbabwe would be the richest country on the planet.
Also we are not all to blame. The government encouraged borrowing beyond our means by lowering the interest rate far below its market value thus encouraging debt and discouraging saving , the real engine of economic investment.
If the government tries to inflate its way out of debt, as suggested in your PDF, it runs the very real risk of hyperinflation. Its policies have already brought a Depression on us that will last for decades.
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VinChainSaw
Re : Drug testing
You mean they were all thinking clearly when they were causing this financial mess!
Somehow I find that very disturbing.
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154 is right - the big question is what happens in China. The dream of China growing fast through exports then gliding smoothly into a balanced economy and equal trading partner with the West is not going to happen - the credit crunch has happened too soon. Next year things will be terrible - massive reduction in demand, possible tariffs to prevent 'stimulus' leaking away into buying Chinese exports and depreciation causing loss of value in foreign exchange reserves.
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Robert Peston's blogs always bring clarity to an often difficult and involved subject, and I am grateful for that. However, his articles, being restricted to the economics of the situation in which we all find ourselves, don't take into account other changes that will affect how we will manage this crisis: socio-political and environmental concerns will undoubtedly affect the final outcome.
Forty years ago, it was almost unthinkable to have the consumer goods we take for granted manufactured many thousands of miles away on the other side of the world. Yet now we do. We want a TV, so we buy one that has been manufactured and shipped over huge distances so we can buy it cheaper; trouble is, though, is that this costs us all in the long run with the amount of carbon dioxide created in the shipping process - never mind that created during manufacturing and use of the product.
Looking at things in this context, it seems almost ridiculous that we don't manufacture goods locally, yet globalisation encourages this madness.
There will come a point in the not too distant future when it will become simply unacceptable to trade goods in this way because of the environmental costs of so doing.
This is one of two reasons, in my honest opinion, why things aren't looking good for China. The other reason why I think they'll have problems is that China simply cannot innovate because to do so means that people will have to think freely - an anathema to the Chinese government. Creative people need to have freedom of thought. Without that, no creation takes place, no value is added to the economy, and China will itself decline.
I think the future is a good deal more unpredictable than you may think.
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Reading this I think it might be a good time to switch on the Hadron Collider!
How negative like a lot of the irresponsible reportage on the BBC
Why is it that the BBC chooses to hammer the graphic downturn symbol relentlessly every hour of the day and night?
No other tv channel does this .Why?
How many jobs is this doomster approach costing ?
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#232 It seems like the reality is still being denied, judging by what many politicians and even RP seem to be viewing as a good outcome: a return to the status quo.
As you say "Our institutions have failed. Our politics has failed" but where do we look for an alternative? The system is so entrenched.
My fear is that with voter apathy at all-time lows the BNP could make huge gains next election in the UK. Particularly in old Labour heartlands.
I suspect the recent outing of their membership might have been a ploy by Labour and Mandelson, hoping that the derision heaped on the BNP by the press in the wake of the fiasco would dent their appeal.
For once I hope Mandelson got it right, but fear it was a tacit acknowledgement that political extremism of all colours will flourish now that the utter failure of the three-party system has been exposed.
#238 thanks for that, I need to read much more Marx. I've always been too lazy and also put off by the preaching of patio-heater Islington socialists. The more I hear from people like you the more it sounds as though Marx was misinterpreted and corrupted for devious ends the same way Darwinian theory was by the eugenics movement.
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Robert Peston,
It’s a good pdf however I take offence to what you are saying about it being my fault! You know the bit when you mention that we were too busy reading about house prices going up instead of reading your articles about the impending debt bubble collapsing.
Can you provide me with any links please? I don’t recall any such stories / blogs etc……….
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Excellent Robert,
I took the trouble of saving the .pdf on my desktop just in case you get censured.
Lets just say your thesis is right (fundamentally it is in my humble opinion) - this means that the measures being taken by the government will have absolutely no impact whatsoever on the outcome, apart from shifting the contingent liability of the last 10 years of bad credit off the balance sheets of banks to the taxpayer (in whole or in part)
The banks are saying, right if were going down were taking you with us (us being the taxpayer)
The best survival tactic is to sell everything you have for whatever price you can get for it (including liquidating your pension) - move all your cash (what's left) legally out of the system, probably open an account in China (seriously). Live a humble existence in the UK for the next few years, move out if civil unrest breaks out and start a new life.
New capitalism probably will not be born for another 3-5 years so save what capital you can til then!
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#250. uttercantfromGB wrote:
"Mr Hitler only did the damage to British finances that "we" forced him to:"
We did not force him to invade Poland.
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Perhaps a re assessment of what qualifies as fair competition is in order.
If one countries wages are substantially below anothers, then they have an unfair advantage, and true free trade cannot work.
Perhaps protectionism is the only way forward.
Unless the Yuan will be fairly valued against the Pound?
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#266 Supercalmdown
The above post is under moderation still but I will use my Nostradamus like powers to prredict a clarion call for a 10% pay increase for public sector workers.
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Lets get things into perspective
1. the stinking rich lose millions (Not a big deal)
2. unemployment goes up (Career out the window)
2. the middle class and poor payer higher tax (Not right)
3. every one becomes bankrupt and poor (Great leveler)
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i forgot to read the pdf
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#242. Financehero
"While you are on the list of people to blame, what about the FSA? "
My #161
'What were the SFA doing?'
-Should have been SFA but what they were doing was SFA.
There is another team who need to answer. What about the Risk Management Departments in these banks?
They were not earning their pay, were they?
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It is interesting to see some posters referring back to Germany before and after WW2. I wonder just how close the UK could go to repeating the German experience if we are going to suffer the full force of this global slump.
Even the most optimistic commentators are now forecasting 3 million plus unemployed in 2009. Therefore we will probably find our levels closer to 4 million! At that point economic activity almost grinds to a halt. What a fertile ground for the far right to blame the whole thing on the Arabs, Chinese and Indians - after all they have all the money. In fact they 'stole" it!
they will have the answer. They will put Britain back to work - the fact that this work will focus upon building up our military strength to secure our borders will pass without comment. In fact as the US retreats and Russia returns to a communist command economy this will appear justified.
Can't happen here? Don't believe it! We already search for targets both political and financial who we can demonise as being responsible for our predicament. When social unrest reaches crisis point the fields will be ready!
This scenario scares me but our reluctance to even contemplate it scares me even more
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Re 177
Word to the wise..
If you have 1 million to invest and split 35k(or is it 50k) between various institutions- can you imagine what the political economical situation would be if the govenment had to stand by its obligations and actually cough up- your 35 or 50 K would be worth bog paper.
PS from one who has learnt to his cost-dont start discussing your finances with the missus-it will come back to haunt you like a 1930s depression.
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@265
I could almost hear John Clease in that one
You started it
now we didnt
Yes you did you invaded Poland
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#1sums it all up the problem is the compound way derivitive products have got totally out of hand, with warrants for options on derivitives of derivitives!!
The continuous movement of paper that no one wants and the singular inability of bank executives, regulators or politicians to realise the gravy train could not continue is why we are in the bind we are now.
With all asset classes down we need to still address the issue of the circulation of money to stave off the resurgence of inflation not compound it.
To stop a bubble deflating by creating another is not prudent, sensible or realistic just pure insanity.
We need to lolwer our expectations so they are reasonable and possible. We can live well without having to replace shoes or shirts every other week.
Kids have lost their youth and apprentices think they should be CEO's within a fortnight, its mad and if it takes the Chinese to tell teh Americans the party is over then you have to hand it to the Chinese. They are no more inscrutible than anyone else just more savvy and for this they should be commended.
The first 3 months of next year will be awful and we will go through hell but we will realise Labour has it wrong and a misture of Lib and Conservative new thinking is the answer.
We just don't have the ability to burden the next generation with ever more debt and then top it off with the ridiculous comment that extraordinary times required extarordinary measures!
Its about time politicians started being quiet and thinking before they opened their mouths.
What should be asked in regards to assets is why bank Chairman and CEO's think they deserve £1 or £2 million salaries and huge pension benefits when they have successfully shown a level of incompetence second to none.
If the belief is they are the only ones capable that can't be true particularly given the continuous turnover of so many CEO's.
We need stability nd it may sound boring but with it comes strong foundations and the prospect of growth. What we have is the reverse compounded by those who are still running the show who haven't a clue.
There are many like me ywho would be only too happy to be given the chance for sunstantially less salary but because honesty is not yet the best policy we are viewed as outcasts watching the demise of this once great Country.
Whethr
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#266
If you want the Yuan fairly valued against Western currencies, then you'll need to stop the Chinese buying Western government debt. Which means you need a big cut in spending by Western governments.
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@272
Luckily for me it was hypothetical
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Sterling - The Real Issue
What you seem to be missing / ignoring is the impact of the collapse in the value of Sterling.
For some reason this is reported as being helpful for manufacturers - but of course we don't actually have any of those left. What we do have are thousands of businesses which import products into this country, and they are seeing huge increases in cost prices due to the fall in exchange rates. Let's look at Toyota for example - the Yen rate has fallen 40% this year, so to maintain margins they will need to increase the price of their cars by a similar amount. Good luck with that. The same is true, of course, for any business which imports products into this country. I guarantee that unemployment will soar on the back of this, as there is no possibility of passing on price increases. yet the government seems happy to let Sterling weaken further.
Stop cutting rates as it is having no positive impact. The lucky few who have tracker mortgages are (based on my peer group) simply maintaining monthly payments at the old level, and thus paying their mortgages off faster. So no fiscal stimulus at all then.
Please *raise* rates next month BOE (I do have a tracker mortgage by the way) as it will help us all in the long run. You heard it here first.
I run a small business and have an Economics Degree, so this is not the ranting of a madman!
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Not sure why people are blaming the SFA for the mess.
Even with Alex McLeish & Walter Smith resigning they came very close to qualifying for the Euros.
They beat the French in Paris, that has to be in part to the sterling leadership shown by the SFA. Get off their backs people.
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# 266
Protectionism isn't the answer to anything. Never has been, never will be. Here's an example why not. Let's say I can buy a shirt made in China for GBP 19.99. Let's assume UK workers won't work for Chinese wages (about 80% less than UK ones). Let's assume labout costs amount to 50% of the cost of a shirt. My GBP 19.99 shirt made in China now costs me £59.99 made in the UK (tell me if you can't work out the maths and I'll prove it) I'm assuming the same profit margin). Let's also assume I don't get a pay rise. So, if I want my shirt, I now have to divert GBP 40 from other things I would have bought. Or I do without my shirt. If I don't buy the shirt, then no jobs are created in the UK, and jobs are lost in China. No loss to the UK but a loss to the global economy overall. If I buy my shirt, then whoever is currently working in the industries from which I divert GBP 40 is now out of work because they've lost business (revenue) in order to pay for my UK shirt maker. Probably a net loss of jobs in the UK, but certainly highly unlikely to create any jobs (net). We're always better off operating an open trade policy, even if others adopt protectionist measures against us.
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My Post 27-
Sorry Typo again!
Meant to put:
Should have been FSA but what they were doing was SFA.
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An excellent report by RP - makes compelling reading. The following paragraph sticks out:
"This trend tells two stories. It shows the massive and unsustainable growth in the City of London and our financial services industry - which is now shrinking with a
vengeance, at the cost of massive job losses and evaporating tax revenues (perhaps £30bn to £40bn of income for the Exchequer gone forever)."
The trade unions and others who contend that public spending must be ring fenced really do not understand what has happened. The loss of a third of our tax base means that the bloated public sector created by Brown during the boom years, must inevitably be cut down to size to match our straightened circumstances going forward. As Lady T. was fond of saying - there is no alternative!
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#278 reforse
Apologies, I meant FSA.
I must be suffering from Big C (dyslexia).
Dunno, maybe it's dementia.
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Incidentally, FTSE is currently up another 2% today, which suggests the worst is over. Also suggests the idea of recovery in 2H:09 is plausible. If so, RP's suggestion that we need a New World Order is maybe misplaced. The old one, tweaked, looks fine. Yes, we'll see lower consumption and higher saving in the US/UK. But we won't need the nightmare scenario of GB and Ally D (or Dave and Georgie O) micro managing our entire economic lives.
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@ #166 duvinrouge
I've never read Das Kapital, so found your summary helpful (though I obviously can't judge how accurate it is!)
I have two questions, one specific and one general:
First, you say, "Prices diverge from values because of the tendency for profits to be equalised between different capitals."
Could you please expand on this? I don't understand what the second clause means at all.
Second, what role did Marx say bankers play under captialism? Is the banking system creating capital (in Marx's sense of the word) when it loans money (i.e., creates debt) under the fractional reserve banking system?
Thanks.
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@283
That 2% doesnt even cover the loses from last friday
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If as you assert that you raised your various causes for concern over 2 years ago, should we have confidence in the Government or more particulaly The Bank of England ,which has only acted in the last 6 weeks. Dramatic debt reduction and arresting asset price decline require low interest rates....clearly The B of E have only just realised this fact.....safe hands or the blind leading the blind!!!
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An interesting moral dilemma,
As the bank of England continues to make huge cuts in interest rates without any real evidence that this will stimulate our flagging economy. What will happen when interest rates reach 0% as is predicted? One must remember that savers outnumber debtors by a ratio of 7 to 1 so in theory seven people will be worse off for every one who gains. This then removes far more spending power from the economy than is in reality put in. One could argue that the debtors on average gain more than a lot of the savers lose but I would imagine that most debtors spurred by their own risky situation will use any relief that interest rate reductions give to their finances to reduce their present exposure. Whereas those with savings who have used their interest as a form of income will have a greatly reduced spending power. On balance then one could reasonably argue that such a scenario would shrink rather than stimulate the economy.
Faced with this cut in income it is unlikely that savers who rely on this money will leave it in the banks and will no doubt look for alternative ways to invest thereby reducing even further the banks ability to make loans, for their depositors base will have shrunk considerably. I for one would rather have money in a safety deposit box at 0% than have it at 0% in banks that under such circumstances would all be vulnerable and I fear many would do likewise.
If or perhaps more likely when we arrive at this point in the economic downward spiral there is plenty of evidence to suggest that house prices will have slumped an unimaginable amount. However banks will be in no position to lend for mortgages to any who do not have an excellent financial history plus a very large cash deposit. At this point those savers earning 0% on their savings will snap up cheap properties without mortgage to rent for a sustainable income and who could blame them for doing it.
The government seems to overlook the simple fact that those who have considerable financial commitments are hardly likely to take on more debt and those who are solvent are not in need of sudden purchases for they are in a position to have purchased whatever they want when they wanted it without the need for credit.
We are in interesting times, how will it be resolved that is the issue?
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#283, not sure that the FTSE is the best indicator by which to measure our prospects. It is based on emotion not knowledge. The large declines in manufacturing, house prices, and retail sales announced today would suggest current optimism is misplaced.
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Robert,
Congratulations on an informative and unbiased piece of analysis.
Worth every penny of today's licence fee!
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The reason why the FT Index is up is that many investors are looking for bargains and also for companies that may still pay out reasonable dividends on their shares i.e. a better return that money on deposit in a bank.
Also have a look to see the balance of trade deficit. It widened last month to £3.9 billion (£7.8 billion in goods) - which means that every person in the uk has £600 less to spend in the economy than last month, £1200 less to spend than the month before etc.
Certainly puts the Chancellor's £60 a year increase into perspective.
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# 285
FTSE is over 600 points higher than its low on 20 November (or over 15%). It's 100 points above its last-Friday close.
If you relish a world of perpetual gloom, you're in good company with Mr Peston. The rest of us look for balance.
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The New Capitalism:
(Quote) "This is the big explosion, detonating right now," LaRouche warned. "And so far, I am offering the only coherent solution—bankruptcy reorganization of the entire global financial system—starting with the cancellation of all derivatives obligations. My solution poses an existential threat to the entire Anglo-Dutch financial system of globalization. I know it, many leading bankers and government officials around the world know it, and, of course, the British know it. This is why the fear has turned to outright panic. We are nearing the showdown moment."
Similar quotes to the above are found by google 'outstanding derivatives bubble'
I guess this is why we are not hearing much from GB & AD. Why do they not tell us about it?
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258. At 3:08pm on 09 Dec 2008, JohnSaxby wrote:
Lol. Punch drunk off all the money they were making maybe.
It's a human nature thing. We gorge and then we purge. People get caught up in the moment where, if you're not in the markets, you're not making money. Financial markets are still one of those places where you can measure your performance against your colleagues/competitors in pound and pence. If they’re trading and you’re not they’re doing better than you. So you trade along the trends as the herd normally makes money or loses money together.
Why do you think it happens over and over and over again?
Very rarely do any traders/financiers see the bigger picture of where we as a society are headed - they're just looking to make money in their own little 2metre by 2metre world and keep their job. Loads of finance professionals knew the crash was coming – everyone could see that house price growth was unsustainable. Every single one of you reading this blog must’ve had an inkling that the average salary could no longer buy you an average house. Yet everyone still piled in and bought, bought, bought.
Easy to point fingers, easy to blame “greedy” bankers and “incompetent” politicians and it is human nature to apportion blame, more so if you’re British. But even if we had the most competent politicians and bankers on the job it would still happen. It still has happened – 5 times in the last 100 years. In supposed responsible economies and reckless ones.
And for heavens sake, can everybody please stop calling the games Brown and Darling are playing Keynesian economics because they aren’t. Keynes’ idea was not to cut VAT by 2.5%, it was to build roads and dams and schools and infrastructure during a downturn. It provides jobs when there are none and builds infrastructure to boost the economy when it recovers. But that would take decades and would simply not suffice with an election around the corner. The Americans are following Keynesian economics to a larger degree – we certainly are not. Cutting taxes is not spending, it’s wasting. Spending is when you take these taxes and embark on ambitious projects and emerge on the other side with an improved infrastructure
Keynes’ idea was that you save the building industry and emerge from the economic downturn with tangible assets. Where’s the legacy in the 2.5% VAT cut? All it has done is left 4000 unemployed migrant Polish builders living on the street as they can’t find work and can’t afford a ticket home.
Wouldn’t a better idea have been to pour the £20billion into the perennially overcrowded London transport system? (Keynes specifically mentioned transport including building a thoroughfare through London running parallel to the Strand). At least in 5 years we’d have a decent transport system along with a £20billion debt and not just the £20billion debt all by itself…
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re 279
this shirt you are buying at 19.99
the store will pay about 2 quid for this from china- the wages element would be so minimal as to not even register.
if a uk worker was getting 2 quid for making each garment i would be surprised but stay with me on this one.
incude and exclude additional/ reduction in transport cost and assume the raw materials were the same- a uk made shirt would cost about 2 pounds more.
additional benefits accrue cos of uk workers getting paid, tax revenue etc and the tree huggers get a kick back with the reduction in carbon emmissions.
Start asking for british goods and someone will make them.
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283. At 4:13pm on 09 Dec 2008, JayPee28bpr wrote:
In the 20s there were plenty of supposed recoveries. One even lasted for 3 months...
How does a 2% rise give an indication of a recovery?
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Invest in cardboard &
take it home with you
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262 UltraTon
You don't need to look for the alternative. This will derive from your experience of everyday life in Brown's Barmy Britain.
The influence of BNP, SNP and other fringe parties will be at best marginal.
The big battle will be between Labour and the Conservatives with the Liberal Democrats trying to get the odd word in edgeways.
Both Labour and the Conservatives are beginning to define their policies. These will be refined as time and experience passes. Neither will have the solution.
We need a national government from which a new consensus can evolve. We will eventually get one.
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Cheer up, they said, things could be worse.
So we cheered up and, sure enough, things got worse.
Just thought I,d mention: Precipitate action relies on luck, not judgment.
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Well done Robert,
An excellent piece of analysis pulling together the big picture.
So good to see that it has generated a vg response from your blog watchers!
Question
What are the leading signs that our current recession has turned into depression?
What level do economic indicators have to hit to qualify as a depression?
Industrial output at ?
Manufacturing output at ?
Retail sales at ?
Unemployment at ?
House prices at ?
Tax receipts at ?
etc
Anyone with an authoratative view?
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#202 gaynor11 wrote "Can someone please explain how guarantees are guaranteed if money runs out due to so many countries needing help and bailouts."
If the taxpayer guarantee cannot be met by borrowing (which must be repaid with interest by someone), it can be met by "printing" the nominal sum, although its purchasing power will be diminished. So if you have £50,000 protected, you will get it back but it may spend like half the amount. There is always a loss somewhere, the only thing guarantees change is the distribution.
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#166 and the rest, duvinrouge,
Marx was a stooge for "international finance".
You are either aware of that fact and think it is unimportant,or you need to do some more study of history(non-court historian) and economics.
Marx does`nt go into the role of the banker`s usury swindle in "capitalism" does he?
Consider the following remarks by an acknowledged financial expert. In a circular letter written in July 2003, the President of Glenview State Bank in Illinois wrote:
"The Great Depression of the 1930’s saw falling prices, staggering unemployment and shattered stock markets all over the world, and the world’s leading statesmen seemed helpless to defeat it. Except for one. His name was Adolf Hitler. Unlike France and Britain, and unlike the United States, Germany spent most of the 1930’s growing economically, not declining. If we can understand why Depression-era Germany resisted the disease, we may better understand how alarmed we should be today in the 21st century." (Chicago Sun-Times, 30 July 2003)
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Well DONE Robert. You finally caught up. Well done. New Capitalism though? Not so sure about that. New methods of social control, that's for sure.
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There seems to be a lot of dialogue on this blog about how we got where we are without discussing a vital component.. confidence.
When are we going to start ask why confidence has failed?
Economies turn on confidence and collapse on the lack of it.. nothing to do with anything else I am afraid.
Whilst we continue to accept the negative attitudes people will lose their jobs, their homes, their lives.
When this is all over and the New World appears and we start to look back, one of the major factors that needs to considered will be negative spin by the major press bodies.
The BBC has certainly played its part and Mr Peston has shot himself to fame on the back of a tide of gloom..
I am old enough to remember the deaths of 2 friends due to economic / job loss in the last recession..
This isnt about derivatives etc.. it is about people and the press / BBC seem to have lost track of that.
If the banks behaved recklessly over the last few years then the press / BBC has been behaving equally badly over the last year.
I know increasingly of people who now openly say.. I dont listen to the news anymore.. that tide is growing and that is probably positive in the short term to keep some level of confidence but bad in the long term.. isnt that what a derivative is?
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@ #182, #210 UltraTron (and replies)
Really good posts that have stimulated great discussion.
In #182 you wrote:
"Which is not to say [human nature] is inflexible, rather it is exceptionally facultative, which will always allow people to exploit others for their own perceived gain given a level starting point. I am not saying this is right or desirable in any way, merely that it is 'natural'. Almost all of our laws are designed to prevent people from acting in a way they find 'natural' within a given set of circumstances."
In #210 you said:
". . . An economy controlled by man can only function within the limits of our nature. My point is that our nature is not well suited to the self-imposition of a system that will breed equality of opportunity."
Are people greedy "by nature"? Or do we learn (are we taught) to be greedy, and, believing it is "natural", try to regulate it by our various economic/political "systems", which we hope will allow only the "proper amount" of greed?
This is really the crux of the matter: If we are greedy by nature, then all attempts to "control" this natural impulse will be subject to abuse and ultimate failure: greed will out.
But I'm an optimist. I agree that human nature is exceptionally facultative and believe that greed is an acquired characteristic. It's something for which we are socially conditioned. We aren't condemned to be greedy. However, we have to tackle this problem of how greed is acquired, rather than attempt to create systems to regulate it. If this problem isn't addressed, I'm very pessimistic about re-designing capitalism or replacing it with a "better" system that only tries to control the greed.
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OK so the media have been very succesful in talking the economy and subsequently the Uk down, isn't it about time they started talking positively otherwise we all go down with a sinking ship.
What has happened to everyone are you just going to lie down and die?
you need to start now to back Britain and look at everything you buy and make sure its British. If its not don't buy it.
People power can demand that shops source locally because you are ultimately the customer. It won't happen over night, this is long term but unless we start now and the media get right behind evryone they too will suffer the same consequences.
If you cannot source it, then maybe you will have to accept you don't need it!!
People in most instances have more than they need and could well do with less. People in the war did their bit so why not do the same in an economic war?
Are you going to let it happen or are you at the very least going to do your bit and try.
The media have certainly exacerbated a crisis and possibly have made it far worse.
i guess many companies have used the excuse to get rid of staff they didn't want to keep and the media have made it all too easy for them to do just that!!
You could live in parts of Africa were there is no hope or Afganistan or any number of other deseperate places but you don't. You live in the UK where no one at the moment is starving or dying where they lay down.
So for goodness sake stop the negativity and start being creative and come up with new and inovative ways of sustainable living.
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#226 jolo13 wrote "seriously "we are all to blame"...can you tell me how i am to blame? worked hard, employed people, paid taxes, never claimed a single benefit........what was i doing that created this mess?"
What were you doing to stop it?
Perhaps that is the point. The country acquiesced.
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#303. supaoptimist wrote:
"When are we going to start ask why confidence has failed?"
We do not need to ask. We know.
It is because we have been LIED TO.
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Mr Peston.
The ability to comprehend multiple complex ideas, write about them and transmit those ideas understandably to an audience who are not experts in the field is a mark of intelligence.
No 55.
Interesting. For the last 3 weeks I have had the word 'levelling' running around my brain.
Yes this is a 'recession' (mathematically) but not physically, no this is not a depression this is NOT 1930. But this IS a great levelling of countries. (thats as far as it goes tho).
No. 74
Energy, interesting. The 'great privatisation' was justified by the fact that private finance could invest more into these companies than government.
Looking a bit hollow now isnt it?
I look forward to the 'Big Blackouts' of 2015
No 104.
Mr Peston shallow? he has to tread a fine line, this is the BBC for gods sake.. 'nuff said?
No. 279.
Protectionism.
Well said, the financiers have created globalisation now it will continue to operate (i think) but on more equal footing (i hope).
So, end of comments - off to the vintners.
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Derivatives are unregulated. This offers stupendous free-market opportunities.
Let's regulate them. Trading derivatives is very like going into a casino and placing a bet. Casinos have a maximum bet level (which limits their risk if you get lucky and they cannot kill you before you collect).
So let us place an arbitrary limit on the legal obligation enforceable in UK from any single trade or class of holding of such derivatives of £100k. Also allow higher total liability positions at a one-off registration cost of (say) 10% of total potential liability payable to HMG to register the position (and refundable under certain circumstances that will be published later) plus an annual fee of 0.1%.
Progressively reduce the zero rate band.
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I think I ought to have a word with the bank manager, the one with all the toxic assets. Maybe I can sell him the idea that my assets are far from toxic. Take my garden I shall say, here is an underutilised asset that I can make work for me and no toxidity in that soil of mine either. So hand over some dosh for the tools, for the seeds and the manure...
Next year we shall have new (capitalism) potatoes!
Regards
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306. At 5:35pm on 09 Dec 2008, WerringtonSilent wrote:
It's called the bystander effect - the more people that witness a crime the less likely they are to do something about it.
As for jolo's question... how was he involved.
I see he doesn't mention if he has an investment property or a mortgage...
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#284
Prices diverge from values because of the tendency for profits to be equalised between different capitals
Capital can move out of one capital with a lower than average rate of profit to one with a higher one.
Marx would say that the credit system doesn't create any surplus value. Those involve in the circulation of capital add no real value, thay are unproductive.
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If there is to be a ‘new capitalism’, it can’t be one that we rush into headlong, out of panic. Actions motivated by fear never have good outcomes.
New economic systems ought to come from new politics. Right now we need to be thinking about what kind of society we want for our future, because clearly the one we have is not working.
As a young journalist, I once did a story about the failure of the Russian grain harvest. I was gobsmacked to learn that Russian factories built tractors, not because anyone needed or wanted tractors, but because the government set quotas to keep people in jobs. I remember watching aerial footage of acre after acre of rusting machines. It was called Communism. It didn’t bring order or prosperity to the Russian people.
Last week I watched footage of acres of unwanted cars outside factories in Detroit. The commentary said there were 34 million more cars in the US than there are registered drivers. Yet the car makers go to Washington, cap in hand, wanting bail outs to keep their workers producing yet more cars that nobody actually wants to buy.
The command economy answer to our pain – which is the direction all these bail outs are taking us in - will be worse pain eventually. What we have seen over the last 20 years is the collapse of two opposing systems of thought – communism and free market democracy. And in the process, each seems to have taken on the worst aspects of the other. Strange irony!
There IS no perfect political or economic system. There will always be winners and losers. We just have to try to pick the one that delivers the most stability, prosperity and happiness to the greatest number. We will all have our own views on what that system is.
Personally I believe in systems that favour the individual family over the state. But I believe those systems can work only if there is a strong moral framework regulating individual behaviour. This seems rather po-faced I know. Who talks of morality these days, in politics or in business? But if we had behaved as Adam Smith enjoined ‘ with enlightened self interest’ doing unto others as we would be done to ourselves, there would have been no mis-selling of mortgages to people who could not afford them, no selling on of debt that couldn’t be paid etc… You get the point. Of course, we’re never going to eradicate greed or dishonesty, but we have let these things get out of hand and now we are paying a truly terrible price. And not just in terms of economic pain, but of cynicism and loss of belief in our society and one another.
Anyway going back to the system we now need: I place the individual at the heart of it, because I believe all decent individuals want to take care of themselves and their immediate families and that they will best prosper and grow strong by being allowed so to do. I genuinely believe that self reliance makes us better people, better neighbours and better citizens. (Naturally I exempt children, the elderly and the sick from this. It is for these people that state provision exists).
But if you place the individual at the heart of the system and expect him to care for himself, you have to allow him the wherewithal to do so. The personal tax allowance was designed originally so that people had enough to live on, before they became subject to tax. Decades of inflation have eroded that notion away. No one can live on the £5,000 odd we are currently allowed to keep. A decent government would DOUBLE that amount instantly and promise to raise it in line with inflation in perpetuity. In other words the government would not be able to dip into your pocket until you had housed, fed and clothed yourself at least modestly. And this principle would be sacrosanct.
Beyond that, it is right that taxation is progressive. But nobody, no matter how wealthy, should ever be asked to pay more than half of his or her total income in tax. The society I am talking about is one in which the individual works for himself and pays a tithe to the common good, not one where he works for the state and is thrown back whatever percentage his fellow citizens deem it OK for him to have.
We should not be in the business of judging collectively how much is ‘too much’. We will always define ‘too much’ as more than we have ourselves and that is not economically or politically rational. It is simply the politics of envy. In a properly moral society, those talented and hard working and above all LUCKY enough to have secured wealth would know their duty, in giving a decent proportion back in charity.
I therefore believe that tax thresholds again are badly overdue an upward adjustment in line with years of inflation. When 40% was introduced as the maximum rate on incomes of £38K and above, the average income was around £12K. £38K seemed an almost unimaginably vast sum to most people. The equivalent today would be £100K and I believe that is where the top rate of tax should now kick in. I also believe that top rate should never be more than 40%. The vast majority of us will fall somewhere in between £10K and £100K and tax rates should be graded between those figures.
I also believe in local taxation and in far more services being provided locally. Small communities always provide better for their needs than a large state. The notion of basing that tax on local property values again seems fair with certain adjustments. Corporation tax rates seem to be the fairest bit of our system right now. And as for VAT, I would abolish it altogether. It is a regressive tax and we did perfectly well without it once upon a time. Tragically the EU won’t allow it.
If the government were to introduce these changes tomorrow, in conjunction with sounder monetary policy, so that people could trust again that it paid to save and to borrow, then I believe we would have taken the first steps to what will undoubtedly be the long and very gradual process of recovery. People would know what was theirs and have the confidence to spend it on goods and services they wanted and needed. As opposed to tightening their belts in panic because their savings have been cut, their jobs are on the line and their taxes are to rise.
There’s a big BUT to all this, of course.
There always is. The government will find itself receiving a HUGE AMOUNT LESS IN TAXATION, if the world according to Wharfgirl ever arrives. And that means they’ll be able to do far less. It’s no good talking about ‘efficiency savings’. None of us believe in those anyway. Real, deep cuts will have to be made.
Actually, it’s better to look at the problem the other way round. Not what should we cut but, if we started again with a clean slate, what would be our priorities for collective spending? We need to agree these and LIMIT OUR GOVERNMENT TO THEM.
Politicians for their part need to stop promising that they can solve all our problems. It’s the one unavoidable flaw in a democratic system. People vying for election will always compete in the bribery of promises. And we citizens need to wean ourselves off the notion that our well being is their responsibility and not our own. For we are doomed to be disappointed.
Think about it. There are only 600 odd of them. Some are clever and dedicated. But just as many are stupid or venal and all are motivated by the need for survival and the wish for personal success. How can they successfully take responsibility for so many areas of our 60 million lives? Only one thing is certain: they can mis-spend an awful lot of our money trying, as the last 11 years of labour government clearly shows. In not one single area does the outcome match their investment. I’m not making a party political point here. I voted for them twice. It is the system at fault.
Advocates of Big Government always scream that people like me would cut health and education. WRONG. They would be my priorities.
On health, one has only to visit the USA regularly to know that a system where people lose health care for their children when they lose a job is desperately wrong. Although my health system would be more basic than the one we have now.
On education I would actually be more generous. No tuition fees for university. This is a system which is producing a generation of debtors. In fact I would create a lifelong education system where people could re-enter schooling at any time up to retirement age. Why should peoples’ fates be sealed by the education they receive as kids, when they are often least able to appreciate its benefits?
Beyond that, it’s a case of what money is left and what we can afford. We certainly can’t afford to be in two wars far from our own shores. Especially as those wars are producing the very thing we are trying to prevent. We can’t afford Trident. We can’t afford Crossrail. We can’t afford anyone or anything dedicated to the making of public policy. (There should be far far less so called public policy.) Everyone seems to agree that the benefit culture needs to be massively reformed. But these are only my own thoughts. The point is: we need to decide as a society what we want.
Once we’ve cut back the collective dead wood, there will be the space and incentive for individuals to come forward and creative the wealth we all need. And we will all be the stronger and healthier for it. That, Robert, truly would be a New Capitalism. But I fear it will only ever be a dream.
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# 288
Equity indices are, in general, good forward indicators. Historically they indicate the state of real economic activity 6-9 months in the future, ie improving FTSE now suggests recovering profits in Q2/Q3 next year.
# 294
Over the last 5 years, every time retailers have tried to increase prices of basic goods, such as clothing, sales volumes have fallen. You're probably right about "ask and ye shall get", but nobody is going to ask for UK produced goods knowing they will be more expensive.
# 295
One daily recovery of 2% suggests nothing. That's why I said it's up "another" 2%. It's now up over 15% from its 20 November lows, and we've had only two down days since then. That indicates a recovery. In fact the US is now, technically, back in a bull market, with the S&P having receovered over 20% since its 20 November lows. That doesn't mean the worst is over in the "real world". House reposessions will rise in the short term, house prices will fall, unemployment will rise. However, it does indicate that we will see a turnaround next year, and the indicators now point towards a deep recession for 2-3 quarters, followed by a steep reverse. Where 2008/9 will differ from downturns over the last 20 years is that after the initial strong bounce, we are unlikely to see very strong growth in 2010 onwards. It will be more sluggish (because of less credit availability), and feel even worse as we repair our household balance sheets by saving more and consuming less.
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Maybe there is another dimension to this. Classic XIX century capitalism consisted of employimg labour to exploit natural resources. In the late XX century this became less profitable, partly becuase of increased labour rates in the West, particularly in the EU as a result of over-regulation of the labour market in the name of social welfare. The returns on traditional labour-based industries were no longer attractive.
Sophisticated investors then looked for a new form of capitalism which did not depend on employing labour. In its benign form, you invited smaller investiors to lend you their money for investment essentially on your own behalf, the smaller investors being satisfied by any rate of return that was better than a savings account. In case there was no real return, you reserved the right to charge for managing the funds in any event.
In its less benign form, you attempted to create more money than governments were prepared to print by building structures of debt which appeared to have value. You then speculated on that apparent value as though it was real.
In both cases the sleight of hand was that you could essentially gamble with money which was not your own, and so assign any profits to your own account, any losses out of sight.
It is this model which has failed, principally because speculators have lost the ability to distinguish between real and virtual assets.
Do we return to XIX century labour-based capitalism? I doubt it. No-one would now be satisfied by the returns. We do need to re-learn to recognise which assets have real value.
An example would be to make contracts for commodities non-negotiable. Anyone who bought a contract to supply copper ore would be required to take physical delivery. This would stop speculation in commodities overnight. But it would need international co-operation, as a single market which introduced it would drop dead overnight.
As a second step contracts with consumers could then become non-negotiable. Lend on a mortgage which might not be repaid until the end of the term, and you immediately become careful of your security.
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Worth remembering that Will Hutton warned about the inbalance in the UK economy because of the dominance of the financial services industry in "The State We're In" published in 1994!
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Robert,
An excellent piece, just one point - "in 2006 and 2007" you apparently noticed the "malfunctioning in the markets".
Could you please provide some evidence of this foresight, such as an article or blog published at that time...
Many thanks.
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245 Ultratron
Hmm. At the end of the day somebody has to work the economic and government rulebook and democracy is the way used in the western world.
The problem seems to be the development of the two party political system and convergence in policy. The two party system essentially means that a party stays in power until it cocks it up. Then the other party has a go.
Bit like the mechanical weathermen rotating out of the house in turn. As each party knows if it waits it will get in there are not interested in changing the system to say, proportional rep.
On top of that you have the fantasy wealth economy which was introduced by Thatcher. Get everybody in debt thru house ownership and at the same time tell them they are wealthy because they own a house. Then restrict supply of housing thru planning and make money available and bingo - housey housey, you have a boom and those owning houses feel wealthy even if they really are not. Very clever. The willing enslavement of a population, because as Bob Dylan said, 'If you aint got nuffin, you got nuffin to lose'. Tell them they have sumat to lose.
Because they feel wealthy they spend and the economy expands and government revenues boom.
Nu Labour have continued with this very basic policy. Both political parties are actually very similar.
In fact Blair made it very clear that NuLab would stick to the Conservative fiscal rules at the start. As the Conservatives shifted progressively more Right NuLab took the centre ground.
Very recently pressures were building up in NuLab to shift Left in the face of what they saw as centrist policies failing. Brown immediately brought Mandelson back in order to try and keep the centre ground and stop the move to the Left. It would seem reasonable to suggest he thinks a Left biased Labour party will not survive a GE, which was the starting point for Blair, Brown and Mandelson in the 1990's.
Meanwhile DC is struggling not to go too far right and is trying to take the central ground. Part of his problem, and it is a major one, is that Brown is trying to hang onto the centre and there is little difference in policy. DC cannot go too far right in a financial crisis,it is like asking turkeys to vote for Xmas.
DC is likely to get in at the GE because the public will dispense with Brown as yesterdays man linked with this financial slump. A fresh start. The momentum behind Obama in the US seems tohave been lets have a chnage.
Howver the result is that there is little evidence that there is going to be any really significant change in policy in the UK, both parties are very similar. There is no striking difference.
Downstream the most obvious area to cut costs for any government is in the public sector and it is extremely hard to see how the public sector cannot be hit, again it probably will have little impact who is in charge.
So we are quite possibly moving to the situation that it makes little difference who is in power unless the political system changes. And as mentioned earlier it is difficult to see the political sysytem changing.
Under that circumstance it is probably a good thing that there is little room for manouvre and public pressure provides resistance to the same thing happening again.
The biggest problem is that with a 43 to 46 pence in the pound take of taxation the economy is damped down so growth is limited. That tax take cannot be reduced much without hitting welfare and health and those are sensitive issues to the electorate. It is to Blairs credit that he brought the UK health spending in line with the rest of Europe. Other policies best not mentioned.
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There is much in your piece to question. Firstly, where were you when the present situation was developing......hinsight is a little too easy.
"New Capitalism" can only come about when those that have destroyed the old are no longer involved. As it is, although you say that the Financial "Services" "Industry" is being depleted, those losing their jobs, in the main, are only the pen pushers (keyboard bashers / screen readers) not those inventing derivatives and "products" which allow them to extract cash from those with capital without adding value.
"New Capitalism" can only come about when the concept of adding value returns.
"New Capitalism" can only come about when it is not permissible (illegal) for "service" providers to gamble with their clients' capital for thei own benefit when the bet comes off but for the clients' loss when it doesn't. Although abhorrent to democrats, it might actually have to become essential for capital to be safe guarded by the State (making it available at x% pa and taking it in at y% pa) with the banks and financial institutions only providing the administrative services at normal rates - no bonuses!
Where were you when our politicians and economists were spouting about our low inflation? The UK economy has not had low inflation for a very long time - what we were being told was low inflation was low prices out of the tiger economies.
Where were you when we were being told that our economy was strong and successful? The Financial "Services" sector (supported by the politicians) were conning us that the cash being pulled out of the economy was wealth - not so, it was and still is cost!
I coul expand........
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Once again Robert an truly impressive overview of how we got here. Below are a few ideas (some radical) on how to create a reasonable future it maybe not as conservative or cosy as we may want but perhaps the only way.
A quick introduction
There is so much bad news in the economy that I for one have almost been paralysed over the last few weeks and concentrated on writing about technology which on the whole tends to be pretty black and white. But the future in terms of economic and to be frank World stability seems very grey rignt now. It seems that even the politicians who normally have plenty to say are just concentrating on arguing what should or should not be done to take away some of the pain right now. But pain is not the biggest problem it is fear. When everyone seems to have got it wrong over the last 5 years across the whole world and no one seems to have any answers to where the bottom is, what the landscape will look like and when we are likely to get there, what can we do?
David Cameron speaking today is just undermining Brown's quick fixes and blaming him for creating FUTURE problems. He does not appear to understand basic economics, and by the way I not sure I do either, because it seems the old rules have failed. Robert Peston as written a brilliant piece on his blog outlining the past 6 months and almost making sense of the whole sorry mess. It does appear, however, that our elected politicians have not yet read this inspired overview.
But tinkering with deck chairs, reducing VAT and fiddling with tax and NI is not the answer.
So this is my candidate idea for a plan:
I think we need a snap general election in January, as low cost as possible and we then need a coalition government of the best brains all working together. We need to join the Euro currency immediately and start working more closely with Europe on everything.
Starting with energy. We need a European energy plan and policy to create a European Grid linking up all the nuclear power stations and building a new age of sustainable solutions covering wind, wave and solar.
We need to give power to a new central European Super bank and change the rules on debt financing. E.g do not allow it unless the source is known verified and controllable from a European Bank perspective.
Armed forces should become a European controlled solution with a all resources shared and each country contributing to a single managed budget.
The car industry should only be supported if all R&D stops on everything except non fossil fuel based solutions across the whole of Europe
The airline businesses should have pricing controlled and the actual cost of a flight calculated in relation to the true cost of fuel, staff, asset. Any airline that cannot remain competitive should be allowed to fail. There should be one class and one price based on the above. Emmission and noise control should be servere to ensure old planes are taken out of service at the earliest opportunity. No new airports or new runaways should be planned or built- period.
Shipping. All new ships should comply to a european emissions standard and size controlled. A European law on obsolence should be put into law and any fleet owner not complying should not be allowed into European waters.
Railway system should be nationalised and a huge electrification project put in place to remove all diesel locomotives within 5 years.
NHS should remove the Trust system and return to a centralised command and control model with General practitioners paid a fixed salary and the pharmaceutical companies nationalised if they refuse to sell drugs at a price which is deemed unfair.
Schools and further eduction. We should return to a two tier systems rather like the old CSEs and O levels and ensure that students are streamed correctly and given the opportunity to learn pratical skills in more technical based colleges and get away from this idea that every one should spend three years studying for a degree... this is has been nonsense.
Windfall tax. The oil industry should be taxed to return all the money created due to the artificial price increases over the last 3 years. A new European central oil company set up and each country should nationalise their largest oil supplier to join it. This then will have the power to join with the super Euro grid to provide a mixed source energy solution controlled centrally.
Farming and food production. Tesco should be nationalised and profits ploughed back into food production and farming. All packaging using non sustainable materials made illegal.
Housing. Mortgages will be made illegal to purchase without a 25% minimum deposit and a government verified income controlled by a new department. All mortgages must be repayment and linked to a central European controlled rate.
Minimum wage and benefits should be set across Europe and based on regional climatic and food availability criteria.
OK - this is an incredible list of changes and may look like a new Socialist World but the USA will also have to acknowledge the new Europe as will the middle east and China/India. What it does acknowledge is that Thatcherite ideals of market forces and no Government intervention has not worked and we need democratic central and apolitical management to create a fair and sustainable future.
The first step is to remove the current Governement and start communicating with Europe.
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It apears to me that economists memories are very short. When my wife and I bought our house 33 years ago, we had a subsidised option mortgage from our local council. It meant that with a relatively small deposit, we could afford to buy a sensible 3 bed semi in North West London. As things improved, we changed to a more normal mortgage and were able to offest interest charges against our tax. 33 years later in response to the most dramatic banking crisis since the South Sea Bubble (never mentioned anywhere but why not?), I see this government reducing VAT in the pathetic hope that this will stimulate everyone to rush out and buy Chinese and South Korean TVs, or encourage me to buy a new Vietnamese made shirt. This may do wonders for the Asian economies but it won't help anyone other than importers in the UK. And when we talk about a government bank, how many of us remember that the Giro Bank was taken over by Alliance and Leicester. I have fond memories of Alliance and Leicester as I look at my new Banco Santander shares.
So here are a few of my suggestions for getting the economy moving again.
1. Tax relief on mortgage interest for first time owner occupiers up to 300,000 purchase price - none on buy to let.
2. Introduce low start mortgages for first time buyers if they are married couples or civil partnerships.
3. Start a state controlled savings bank available through the Post Office. we could call it the Giro Bank.
4. Scrap business rates totally for the next 3 years for unoccupied buildings.
5. Give 150% or more tax relief on any car being swapped in for a low emission car. If we can have tax bands for car emissions, we can certainly have tax relief bands for makes and years of cars. And if you don't earn enough for the full tax relief then you can have a cheque towards your new purchase. This will mean that we won't have to import so much oil so the price will go down and then, shock and horror, so will the gas price because that is tied to the oil price.
6. The compulsory introduction of Economic History as a GCSE subject for every inhabitant of the UK. After all, if you don't read history, then you are bound to repeat the same mistakes agin. And we have.
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To offset the effect of financial institutions deleveraging, would it not be a good idea to encourage individuals and cash-rich companies (there must still be some) to pay off debt? This might be done if the government provided an incentive for a limited period, for example if it sold special bonds which could be used only as currency to pay down debt and which were sold to the applicant at a discount or providing a credit to offset a proportion of the capital gains tax incurred on selling an asset to repay the debt. This might get nearer the root of the problem than dropping cash from helicopters or some of the other desperate measures being trawled to avoid depression.
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Comment 279 : JayPee28bpr
Are the costings of your 19.99 shirt remotely realistic? How much of the 19.99 actually derives from China? I'd be surprised if it's more than about a fiver, at most, of which, let's say, half is labour.
So on this basis a fivefold increase in the cost of manufacturing labour would lead to a cost increase of a tenner, thereby allowing your shirt to be manufactured in the UK and retailed at 29.99. And this allows all the post-production leech-feeding that went into the 19.99 price to remain in place at the 29.99 one.
But not, of course, if everyone along the chain expects to make a X% mark-up on the buy-in price, as opposed to an X pound mark-up. It's difficult to get this idea across to people who are not accustomed to evaluating the level of their mark-up by the amount of added-value they contribute to the product. Because most of them find it hard to come to terms with the fact that the added-value of their part of the process is, in brutally honest terms, very close to zero. Shipping 5 pound shirts half way round the world into glitzy expensive-to-rent shops may enable the construction of a selling price 300% above productive cost, but at the end of the day the customer's still just getting a fiver's worth of product - less in fact, if he were to decide to try to re-retail it.
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#306 "what was i doing to stop it?"
good question, i voted tory but too many of you were seduced by the smoke and mirrors of new labour......and by the look of the l
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Wharfgirl - great piece, many good points touched upon. And to anyone else interested in a better, fairer Britain for the common good
(and there are a good many wise, well thought out posts today and I thank Mr Peston for kicking this fantastic debate off with an excellent piece for us all to discuss)
Check my posts. Join us in discussion, and I hope action.
Especially you Wharfgirl, as we are currently male-heavy and can only benefit from further female perspectives
There are already many people involved, all from this blog, from all over this sceptred isle.
Join us. Or not. But a pleasant evening to all regardless
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if only Robert could have been on the ball a little bit more 7 years ago, to raise the warning flag about high borrowing and Mortgage Backed Securities, with financial experts like this who needs enemies
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ooops... to continue
according to the latest polls you are still being seduced by the spin, wake up!
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Comment 294 : jezzasclose
Sorry, hadn't read your comment before I wrote 323 more or less along the same lines.
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Comment 304 : papanca
Extremely well put. I agree wholeheartedly.
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The fall of the Roman Empire was due in part to fiscal errors, primarily taxation. Any clues there!?
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Not taking anymore comments? Posting but they won't show up in the queue?
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Housing bubble toxic debt: $1.5trillion?
Derivatives toxic debt: $500trillion!
Still not talking about it?
Pensions?
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I agree with the article. I don't think confidence will return until there is recognition from Government that the country has over spent, personally and collectively. It would be easier to gain support for massive bailouts if these were accompanied by an understanding that we have to change our ways long term and that inflation is still rampant. Those that have been financially prudent are being hammered at present. You won't get people to put their own finances in order with puny savings rates and encouragement for banks to let us keep on borrowing.
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Interesting article but still no mention of Fractional Reserve Banking. And that last paragraph soundsabit like New World Order propaganda.
Hands up if you want to be ruled by a bunch of bankers?
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Good piece Robert!
My plans are this:
1) Pay down debt (I've been doing this since April 08).
2) Stop buying things I dont need!
3) Grow my own veg (seeds sorted).
4) Produce my own eggs (chicken coup built this summer, now inhabitated by 12 happy hens and one cock).
5) Shop daily for food, buy only what is necessary for the day's meals; eat what's on offer.
6) Change my car to reduce engine size.
7) Take my own food to work.
8) Take holidays at home.
9) Educate my children as to why we are in this mess.
10) Enjoy my greatest assets; family and friends (those cannot be devalued).
In a way, I'm glad this unsustainable growth has come to an end. Perhaps we can begin to focus on what is really important in this brief time we all have here.
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Re 262:
To help you out a bit, I can give you a summary of what it was that Marx was saying (summary may leave bits out so dont just use it) when he wrote down why he thought there would be a series of economic crises followed by a collaspe of capitalism caused by unemployment and resentment. Also, lack of self sufficiency would cause food shortages should trade decrease. Reasons are:
1. Technology is too good. Less employment. Low skill jobs so low pay. Unhappy workers don't like low pay. Unemployed don't like the fact they can't afford food. Unemployment is inevitable. We are still working the same hours as we did in the stone age and the technology is mind blowingly better. We simply don't need enough work.
2. Land owners in the past got rich. They wanted luxuries. Part of factories were used to make luxuries. Luxuries got cheaper to make as more of the factories were used to make luxuries. Richer workers could buy. Increased market. More factories make luxuries as inc financial gains. Trade luxuries with necessaries from other countries. Soon not enough necessaries are made and luxuries are traded for necessaries. Should trade fall apart, it goes bad. NB: 'Luxury industry' is now the financial industrial, which is more volatile as you cant just use it to make something else like when 'manufacturing industry' was main luxury industry.
3. As normal business' do not have the capital to compete with large ones, the amount of people able to earn more money decreases. soon the amount of rich people dec.
4. Exploitation of other countries just replaces exploitation of local people when local people said enough was enough. (Soon China etc will no longer be willing for us to be their masters - as that is what we really are. they work we benefit from it)
5. Marx felt the workers with their low wages and unemployment would unite (only at this point as before self interest would get in the way - communism was not the general view in china or russia when it arrived, came on top due to civil war. Cuba is similar. marx did not expect revolutions like in russia or china but like UK now). After united he felt they would set up a system that suited them better. (Incidently communism did not serve the workers in soviet union or china very well though that may have been due to the capitalist desires of their governments, whihc is highly ironic - they wanted to be superpowers not simply good servers of their people).
If you want a detailed analysis and have plenty of time read 'Capital' by Marx. If you want a quick summary I would recommend 'The Communist Manifesto' by Marx and Engels. The introduction is a very good summary of Marx's view on the fall of capitalism and is very relevant. A quick read, whereas 'Capital' is only for the commited. If you are sceptical about it, you shouldn't be, he was an economist with genuine concern about the workers he saw. One of the finest analyses of capitalism and does teach you the benefits if you read between the lines.
If you read Marx along side Robert Peston's 'Who Runs Britain?' you'll find some amazing similarities between what Marx predicted and what Robert describes which has happened in reality.
Just to be clear, the main problem people have with capitalism is that it's benefits are never fully appreciated. So much technology had advanced and we are working record amounts of hours a week. That is the concern about it. You never see the benefits of capitalism even though the benefits are great. Another warning is that socialism is also flawed and I personally recommend meeting the two in the middle as I have already said in 222.
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330 starshifter
yes decimation
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stuartgreenfield @ 320
I broadly concur with your thoughts on Europe but then you go and say 'but first, we have to get rid of the current Government'.
Which of course, means that Euro-sceptic 'Dave', by default, fills the boots.
I recently read that President-Elect Obama was deeply unimpressed when he met 'Dave', who at some point launched into an anti-Europe rant.
If true, then it shows a pitiful poverty of vision from 'Dave', which is the diametic opposite of Obamas 'inclusive' view.
England desparately needs better quality politicians.
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267: What a good idea !
Lets inject some demand back into the economy thro peoples wage packets.....
Just like they did in the 1970's.
Of course most Public sector pay rises have been held below Inflation for the last twenty years.
The exceptions being Doctors, Military Officers, Judges, MP's, and up until recently the Police.
However, it remains one of the few options to inject demand into the economy.
As to new Capitalism, well, there is little new under the Sun and there is not likely to be any radical new Capitalism any time soon.
Capitalism's failure is generally down to mad attempts at global freemarkets, when exchange rates are manipulated against various countries.
Or thro great regulatory failures, as with the Banks.
How it can be possible to manufacture a shirt on the other side of the Globe and then bring it to the UK at a lower price than it could be made here, is an illustration of how the local currency where it is made is undervalued.
The workers in the factories abroad, generally can feed themselves have a roof over their heads and clothing for their salaries.
It would be interesting to compare the price of a kilo of Rice in China with the price of a kilo of Rice in London.
If the Yuan was valued on Rice equivalent it would probably be worth more Pounds than it is now!
Food for thought.........
Personally I would rather we could have skilled craftspersons in this country manufacturing clothes, than sweatshops abroad manufacturing clothes.
How many teeshirts and pairs of trainers do we all need ?
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#313 Wharfgirl
Any chance you could start a new political party? I'll join.
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#279 Your example is based on a false assumption. It is not so much that UK workers won´t work for Chinese wages it is that they cannot work in the UK for Chinese wages. If they did then they would have insufficient money to buy food and would starve and then they would be dead and could not work for any wages either high or low.
It is not the case that not buying a shirt would necessarily result in a net neutral position for the UK - you could buy something else instead of a shirt.
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Most disappointing to me is that Rahere and Jaypee have gone all mystic on us ....?
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Re:335
Can I just say for your plans:
1 Good
2 Very clever
3 Good - enjoyable, better food (veg at sainsburys has been poor this year (is true - i go every week. good fruit there tho).
4 Nice idea. Eggs very good from home
5 Good tip here - go in the evenings (7:30 where I am they have a reduced section. mince 25p, pies 50p etc)
6 Calculate how much you'll save compared to cost of buying the new car. Perhaps wait for electric or hydrogen unless you have a gas guzzler. consider the use of a bicycle
7 Good
8 I like this as you have less hassle about airports packing. You just have the family going round each day somewhere near where you live. I love it.
9 Warning: they may get bored. Teach the value of things. e.g. give them a pound for lunch on day. tell them how much things cost and say they eat what they want within that price (this is young children).
10 Very good
People need to learn the value of food. I am living with others (student) 1 lives off £10 a week for food (pays own rent and works for the money) other splash money everywhere taxis buses (£30 a month) and expensive clothes. One knows what value is, the other has an overdraft and is in the fast lane to becoming a typical british consumer. we need to be more like 335 and stop wasting money for our own sakes not for the economies.
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#304 Papanca
I think I arrive at the same conclusion as you, but by a slightly different route.
When you ask: "Are people greedy 'by nature'?"
I would say yes, to an extent. And when you
say "Or do we learn (are we taught) to be greedy," that inevitably gives rise to the question: taught by whom? And from whom did they learn the behaviour from?
By the above I don't mean to say that genetic determinism is all and we are all doomed to greed, but that greed has been a very useful attribute for individual survival in the past, and so we all have an innate capacity for it in situations in which it will be rewarded or is required.
As 293 VinChainsaw said in reference to the latest debacle: "even if we had the most competent politicians and bankers on the job it would still happen. It still has happened 5 times in the last 100 years. In supposed responsible economies and reckless ones."
So in this respect I don't see greed as an acquired trait, is is simply a natural extension of self interest, and those who I call greedy would doubtless not agree. As Wharfgirl alluded to in her excellent post/manifesto, what each of us terms as greedy is entirely subjective.
This is where I think we arrive at the same conclusion, instead of attempting to impose systems to limit self interest, we must instead design systems to nurture cooperation. Someone mentioned John Lewis as an example.
Instead of ignoring or stamping on individual self interest, we need to work to align them. And equally we must not indulge in the fallacy that because wholesale inequality and growing disparity is a 'natural' product of capitalism it must therefore be right.
Wharfgirl was right to mention morality, it is not popular, but we have an opportunity after this modern morality tale to try and claw some back for our society. I was trying to remember that quote from Adam Smith. Another whose ideas are cherry-picked for nefarious ends.
As wharfgirl and Glenafon commented we have witnessed the failure of polarized politics, both globally and nationally. And the depressing irony of the horizontal transfer of all the worst facets of each.
Glenafon said that "it makes little difference who is in power unless the political system changes. And as mentioned earlier it is difficult to see the political sysytem changing." How about the national government as Stanilic suggested. Could be a step in the right direction. The current system of the same faces swapping ties every 10 years surely can't go on.
We need something new. I have no idea what, but something along the lines proposed by Rob22 and Wharfgirl would get my vote. Certainly none of the current shower will unless one of them sees the opportunity this crisis affords us for reform.
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Sorry, that should have said "Rob in post 222".
#336, thanks very much for that, really appreciate it. Seems that Marx might have underestimated the power of reality TV to numb the senses of any potential revolutionaries.
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Robert,
You have to be commended for that piece. Time will tell if you are right, but you have called it pretty well so far.
Lots of good ideas in the blogs too, but not much mention (from my quick reading) of the mindset change that has to happen before anything radical can happen. I'm talking about the greed; the see-want-need-get thinking that has become endemic in the US and UK. That's a bubble that has yet to burst, from what I still see and hear.
If you are in this blog, then you are probably already convinced of that needed change. But 60 out of 60 million is not a good sample. Who is going to try to change the others' mindsets? The governments' (UK, European and US) actions are aimed at slowing the fall, but actually reinforce the mindset of see-want-get. And, by the way, I vote for a slower fall if only so we have time to understand the hole into which we are falling.
There are lots of good ideas in today's blog about the future shape of society.
The BIG question is,
How do we get from where we are, to where we want to be (where ever that is), without society falling apart along the way?
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It's handy that the British ruling class (by that I mean both parties: they both sup from the same cup after all) have spent the past decade covering every inch of UK soil with CCTV cameras, simultaneously stripped away as many as our rights as they could get away with, systematically churned out one draconian anti terror law after another, whilst considerably increasing the amount and variety of weapons in the police and the army’s armouries.
Handy for them. And somewhat prescient as well.
I guess they’ll probably need all the new toys, if they want to survive in power for too much longer.
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Robert, this crash IS the beginning of Communism that has destroyed true non-casino capitalism. We already have half the jobs in the public sector plus a third of the population dependent on state benefits. Now via the bank nationalisation the government already owns half the houses via mortgages.
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I like and agree with #154. I suspect we live in 'Interesting Times' as the Chinese say.
I would be more worried if I was not at least partially self sufficient in fuel & food and when the gravy train really does hit the buffers I will last longer than most of you!
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Moderator, please put down that cup of coffee and get back to moderating, posts are stacking up here and I want to see more
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Thanks Robert, for insightful comments.
I fully agree with main thesis - the old US/UK-inspired capitalism based on unfettered greed, speculation and mindless consumption was doomed to fail. Indeed it should have busted much earlier, had not "frugal" eastern lenders labored and slaved to "save it" (i.e. provide us cheep, plentiful goods). Nothing comes for free though even with "slave labor", and our wasteful life-style has already wrecked irreparable damage to nature and climate.
Surely, the return to old "gilded age" is impossible now. As Robert suggested it will be replaced with tightly regulated, nationalized, government/taxpayer controlled economy.
What name to use is secondary to me, but I'd prefer calling "spade - a spade",
"socialism" rather than "new capitalism"
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I would propose a long term step is to change the brief of the Bank of England in setting interest rates. I would change the goal to being National debt (consumer plus govt) to being a fixed percentage of GDP. L