In These New Times

Christopher King

Redress

2nd May, 2010

Christopher King argues that Britain’s leading politicians lack the courage to acknowledge the only moral conclusion to the Afghan fiasco – withdrawal – and lack the vision, integrity and competence to tackle the country’s economic and banking crises.

Our politicians are trying desperately to convince us that they know how to run the country. Well, we’ve been listening to them and they’re rubbish. Their entire economic argument chases its tail around how much public expenditure each party will cut, how much we will be taxed, what and when. It’s all about the deficit and a mythical economic recovery, the basis for which or the possibility of it not occurring were never mentioned. And recovery is doubtful. In parallel, the Institute for Fiscal Studies says that there are massive spending holes in all their published budgets because they’re concealing how enormous the government’s deficit is. Call me a prophet of doom – I don’t care. Doom is on the horizon.

The Afghanistan test

We have to remember that both Gordon Brown, David Cameron and most of their Members of Parliament voted for the Iraq war. They and the Liberal Democrats are also colluding happily with America in wrecking Afghanistan to no good purpose. The Liberal Democrats voted against the Iraq war so there was some hope that they would undertake to leave Afghanistan this time around. All parties failed the Afghanistan test. It’s a test of morality – and ability to think independently, both of which are in desperately short supply as the leadership debates show.

The only mention of Afghanistan by all the parties is out of concern for UK soldiers’ equipment, but none out of concern for Afghans. There has been no debate whatsoever on the legality or even reason for the war despite the British public’s overwhelming wish to have our troops leave Afghanistan. I have been told that Gordon Brown banned discussion of the Afghanistan war from the television debates but do not know the details. Possibly he refused to participate if the war itself was to be discussed.

After 13 years of Blair-Brown government and brain-dead collusion from the rest of our body politic, the UK’s economy is in ruins. We’ve been involved in wars for most of that time and there’s a connection. As I’ve said before, people whose mentality is to pursue wars of aggression are not going to be oriented to developing science, manufacturing and the economy.

From what is well known of America’s atrocities in its illegal wars and the behaviour of its Central Intelligence Agency, those who collude with it are utterly without morality. They should not be running our country.

The economics test

Our politicians are being paid to run the country. That means monitoring the economy and detecting possible problems. Everything rests on the economy. They are supposed to have access to the best information available but somehow didn’t notice that we had a gigantic credit bubble, our banks were engaged in practices that put the state itself at risk, including, I understand, lending far outside the Basel II criteria for reserve assets. Our manufacturing base was disappearing fast and is now nearly vanished. No-one noticed.

These people are supposed to notice such things. That’s the job – running the country. So what is the prospect for the future of the UK economy? Appalling. As I’ve said before, the country is on a permanent downward economic trend for the first time since about 1700. Why don’t our politicians know this? Because they’re stupid. I mean it. Its not even that they’re hiding the facts from us – they really don’t know. They’re genuinely stupid. Here’s the answer to the economics question that they were supposed to answer:

The agrarian and industrial revolutions gave Europe and America sharp increases in agricultural and industrial production with an upward trend in prosperity from about 1700 for 300 years. During that time it appeared that the free market was beneficial to these economies because they competed between themselves in production while using the rest of the world as sources of raw materials and markets for manufactured goods. Anglo-American economic doctrine, based on Adam Smith’s 1776 observations, was that the free international market benefited the world. In fact, it only benefited Europe and America.

Free markets benefited Europe and America because they had a monopoly on science, technology and capital. During the 20th century other countries industrialized, commencing with Japan. At the present time, the Asian economies possess technology and capital to rival Europe and America. They also have the advantage of a critically important factor of production – a vast pool of cheap labour. The free market is still working as it theoretically should in allocating resources to the most efficient producers. Now, however, these are located in Asia. Continental Europe has always been deeply suspicious of Anglo-American economics and with good reason. It is now time to adopt a European-style social-democratic political/economic model in the UK and America. There is no alternative.

In practice, action to restore our manufacturing base would require an “industrial policy”. It is doubtful that any of our useless politicians have ever heard the expression. Such a policy involves industrial-sector development by government. Neither our politicians nor our bureaucrats could manage such a project as neither has the capability, so I do not know who would do it. They cannot even induce our criminally-greedy bankers to lend to small and medium businesses even though one of the major banks (Northern Rock) is completely publicly owned and two are substantially publicly owned (Royal Bank of Scotland and Lloyds). That is true incompetence.

About 15 years ago I brought the economic-industrial situation to the notice of my member of parliament, Richard Ottaway, who was in the Department of Trade and Industry as personal private secretary to the minister. I gave him an outline industrial policy, hoping to get some discussion going. Mr Ottaway didn’t have a clue and passed it to his bureaucrats who said that it was all wrong, that my predictions of doom were ill conceived and everything was wonderful. Well, here we are.

I advised Mr Ottaway not to vote for the Iraq war in three letters and emails, but of course he took no notice of me or a million other people who marched in London alone, and voted for the war. After Anthony Blair’s lies together with Iraq’s devastation became known I wrote again and told him, “I told you so.” Well Richard, if you should see this, I told you so on the economy too. You may think that petty but in a disaster one must get one’s satisfactions where one can.

Apart from the free market’s invisible hand that mystically develops the economy while everyone scrabbles for personal gain, its great attraction to Anglo-American politicians is that they and government need do nothing whatsoever. Private enterprise and the market will develop the economy. All government need do is tax and spend. You can see how this view of economics has bred a race of stupid politicians and incompetent bureaucrats who believe that merely by accepting their salaries they are governing the country well.

Let us also examine the current fashion for Keynsian monetary stimuli. This idea is that by injecting money into the economy the government can stimulate spending and recovery of industry. A monetary stimulus was half-heartedly tried in the USA around 1937, with indeterminate results. At the time Keynes proposed this idea, during the Great Depression, Europe and America still controlled the industrial base and capital of the world. Markets for their products still existed in countries that could not produce them themselves; moreover raw materials were in abundant supply. At the present time, as outlined above, Europe and America no longer monopolize the means of production, and resources are expensive and increasingly scarce. The free market is working against us.

In the case of the UK the 18 billion pounds cost of the Iraq and Afghanistan wars does not help, nor that North Sea oil production is declining. We have little industry left and few markets that are not now dominated by Asian products, including our domestic market. For these reasons, Keynsian stimuli are useless. This is a short term shotgun technique at best. One shovels money into the economy – the useless bureaucracy in the case of the Brown government – and hopes for the best. For useful long-term results any stimulus should be focused through an industrial policy in order to achieve specific developmental objectives. “But we have Regional Development Agencies!” the politicians and bureaucrats will cry. Yes, they have these completely ineffective bureaucracies and will claim that they are effective because they have neither integrity nor knowledge of economic fundamentals.

The banking test

All parties fail the banking test. Although they promise many things, such as to cap bankers’ bonuses, tax bankers’ profits, make the banks lend, regulate them etc, they will do none of them effectively. Since this government has had about two years following the banking crash in which to implement reforms and has not done anything to control the banks or even make them lend the public funds they were given, it is certain that it would never do anything effective.

To appreciate the problem that our banks pose, we must envisage the capital of the whole country. Although we individuals each own a small piece of this, we do not possess it ourselves. It is all in one place. In the banks. The banks hold all our money except for a tiny proportion of cash in our pockets. From the viewpoint of the country as a whole, the primary job of the banks is to keep the country’s capital safe. The economy depends on it. In principle we could pay the bankers to hold our money but in practice, we permit the banks to lend this money out. They pay us interest for the privilege and charge a higher rate of interest to borrowers. The difference, or margin, is used for their expenses, a profit that they pay to their shareholders and a bonus tied to profitability to executives.

You can see that the temptation for bankers is to use every means possible to earn profits so that they can gain big bonuses. In the absence of any scrutiny or monitoring by the government, this group of people, who have control of the whole country’s funds, have been using them contrary to good banking practice in:

• Purchasing fraudulent high-interest-bearing derivatives that they did not understand

• Trading in currencies, commodities and derivatives, i.e. gambling with the nation’s capital

• Creating off-balance sheet companies in other countries in order to hide losses and undertake improper activities

• Lending outside the reserve asset ratios of the Basel II protocol

• Using very short term money market borrowing to boost cash availability and fraudulently conform to reserve asset criteria

It is absurd for Prime Minister Gordon Brown to claim that he, as chancellor, did not know what the banks were doing. It was his job to know what the guardians of the country’s money were doing.

Because of these practices, based on irresponsibility, greed and bonuses, the banks incurred enormous losses triggered by America’s sale of fraudulent derivatives.

The British government’s response was to make up these losses with public funds, so acquiring major shareholdings in the banks. At this point the government might have taken those banks which could no longer function into public ownership. It did not choose to do this and I will return to this grave error.

We note that the banks now contain not only all the country’s money, but an additional rescue component of taxpayer funds created by the Bank of England. The government’s position is that the banks must give this money back in due course. How will they do it? Their only source of income is the public. They have therefore increased the margin between savings deposited with them and lending to borrowers. They are therefore extorting additional funds from taxpayers in order to repay the taxpayers’ funds that have rescued them. Alternatively, the government intends to sell the taxpayer-owned shares in these banks generated by the bailout funds back to the taxpayers who provided the funds. Well, not exactly the same taxpayers. As noted above, people with capital can exploit those without so that other city firm and investment funds will buy these shares. Nevertheless, in principle, the funds for purchase of the banks’ shares will come from the pool of the nation’s capital.

In short, the banks are extorting money from the public in order to recover their losses and either a) pay back the public for the bailout with the public’s own money or b) the government will sell the publicly-owned bank shares back to the public who already own them. It’s outrageous. The only solution is to retain the banks partly or wholly in public ownership in order to control lending policy and manage industrial reconstruction.

The net effect of this swapping of funds around within the nation’s capital pool is to remove money from savers and borrowers and concentrate it in those firms which possess capital. The banks will be recapitalized, i.e. their losses will be made up through this extortion of super-profits from the public. Gordon Brown has said publicly that he will punish the banks by a special tax on their excessive profits. This is a little joke between Mr Brown and the bankers since it will do them no harm if he skims off a little of their loot. This is a tax on the public since it will prolong the period of extortion through which the banks recover their losses from the public. Rather than be confiscated by the government which will waste them, these super-profits should be returned to the individuals from whom they were extorted.

The banks are able to behave in this fashion because, firstly, the recent mergers of failed and weak banks has formed an oligopoly, i.e. a small group whose members no longer compete but work in concert to increase profitability for the group. Secondly, the Brown government maintains the fiction that because these are private firms, although capitalized by the public, it cannot intervene in their interest rate policies. It is for this reason that the government should have wholly nationalized the banks that were no longer able to function. If it had done so it would have been in a position to set interest rate policy for the country through its banking operations and lend to business as Gordon Brown has been unable to make the banks do.

Mr Brown did not take over the banks because, firstly, he does not understand economic fundamentals and, secondly, he is a man of humble background, modest intelligence and no economic knowledge who has been over-awed and bamboozled by the bankers. These rich, sophisticated men with their esoteric jargon have simply steamrollered him. They extracted everything they wanted from him – and the taxpayers – and continue to do whatever they want.

More than the immediate supply of capital to the banks, the Brown government has undertaken some sort of guarantee against banking losses in the future. This is necessary because the banks carry so much complex debt that it is not known what their future losses might be. Using public resources to guarantee losses suffered by private firms as a result of their improper practices is outrageous. If the public should supply capital or make up losses, that is the process by which they should gain shareholdings in the banks. Nothing else will do. The bankers have proven themselves to be irresponsible and should lose what they have failed to use properly. This is entirely normal practice in the case of companies’ calls for capital or takeover in the event of insolvency.

Indeed, where irresponsible banking practices, false accounting or concealment of transactions and losses has occurred, e.g. through off-shore dealings and off-balance sheet transactions, criminal charges should result. Since it is evident that the nation’s capital is liable to misuse and the welfare of the economy itself is involved, a new category of economic crimes should be defined for the future. The remedy to bad banking practice is prison.

We may see from these reflections that the banks are now far from the secure guardians of the nation’s capital that they would be if they were acting in the public interest. They are acting in their own interest and are in fact dangerous parasites on the economy. There is no possibility of any economic recovery occurring while the banks exist in their present form. There is a myth extant that the banks provide a valuable contribution to the economy in the taxes that they pay. It will be evident however, that such taxes merely pass to the government a portion of the funds that they have extracted from the wider public. It is an indirect tax on the public, not the banks. It is not confiscation of wealth that the banks have created. It is true that a well-run bank such as the Cooperative Bank, which was completely untouched by the banking meltdown, can facilitate wealth creation. That is a valuable service, but it is not wealth creation as such. Wealth creation is carried out by manufacturing and its associated activities.

Bankers of course, have a fearsome threat to wield against the country if they do not get their own way. They threaten that if they are not permitted their buccaneering methods, business will go elsewhere and if they are not paid multi-million pounds bonuses they too will go elsewhere. I would urge them to go, and the sooner the better. Let them preferably go to New York. The sooner they assist Wall Street to bankrupt America the sooner American war crimes in the Middle East will end and we can get down to prosecuting the perpetrators who are simultaneously ruining our economy.

A salary of, say, 250,000 pounds is more than enough for anyone. We might bear in mind that these bankers are not entrepreneurs, adding to the nation’s productivity. They are gamblers and extortioners of the public from a risk-free position, using money and resources that are not their own. The bonus culture and gambling with the nation’s capital must end. We need a different sort of bank and banker to go with a different breed of technically-competent politician. As for businesses that wish to float financial instruments of dubious value, let them go elsewhere too.

These are the reasons why our politicians have failed the bankers test. They are unable to understand and therefore to challenge our bankers much less take remedial action. They are technically incompetent and the prime minister who took credit for the boom years fuelled by borrowing, now blaming “world conditions”, is worst of all.

In the very near future it will become clear that radical changes are needed in political philosophy, economics, government and what we might call the objectives of life. It will no longer be possible to continue as we have until now, basing our ideas of happiness on money and consumption. There will soon be much less of both. We shall have to think instead and the exercise will be good for us