Gloom and Doom: Kick It Out

In my last blog (Urgent Action To End Recession) I pointed out that most of the forecasts for 2008 were widely inaccurate. So what notice should we take of what they are predicting for 2009?

It is obvious that we are in a recession and almost all the news is bad: indeed, it sometimes appears that the media has resolved to report only bad news. So the forecasters join in, with most of them predicting that things will get either worse, or much worse.

The underlying belief is that market forces beyond our control will continue to cause havoc and hardship. Governments, most commontators believe, can do very little to end the recession.

When the government takes action, the standard response of the Conservative opposition, and in much of the media, is to claim that it will not work. What they do not explain is what will work.

The impression they give is that they do not believe any government action will work - so do nothing, and leave it all to 'market forces'.

'Doing nothing' cannot be regarded as an acceptable response of politicians who are elected to serve all members of society. It is likely that over 70% of the population will survive the recession largely unscathed: it is for the other 30% that urgent, and radical, action is required.

The relevant criticism of the government is not that it has taken too much action, but too little. What it should do is outlined in my previous blog: Urgent Action To End Recession.

Pessimism will continue to reign if it is believed that government will allow thr recession to take its course. The challenge is that the action required can occur only with radical policy changes; changes which not only stimulate economic recovery, but also create a more fair and equal society.

Although there is no objection to government borrowing in the short term, a convincing strategy for repayment is essential. As I have argued in previous blogs (see The Current Crisis: A Layman's Perspective) , the resources can, and must, be acquired from:

(i) a windfall tax on excessive profits;

(ii) closing tax loopholes used by companies and wealthy individuals;

(iii) progressively higher rates of tax for incomes over £100,000 a year;

(iv) heavy cuts in defence expenditure (including Trident), based on a policy of not getting involved in wars.

This is not only the appropriate and necessary action but it would, I am convinced, receive widespread public support.

Urgent Action to End Recession

A continuing recession throughout 2009 is inevitable only if the government fails to act decisively NOW.

The predictions of the majority of experts for 2008 were wildly wrong. For at least half the year they failed to grasp what was happening - apart from the honourable exception, David Blanchflower, a lone voice on the Bank of England's Monetary Policy Committee.

The government was slow to act (it took over four months to deal with Northern Rock), and the Bank of England even slower. The failures of the high street banks, and the tardiness of the government and the Bank of England, are the reasons there are now predictions of up to another million unemployed in 2009.

This must not be allowed to happen. All three owe it to us to act, urgently and decisively, in January 2009.

(i) Banks The banks must move to a reasonable level of lending to businesses and individuals - if necessary as a result of nationalisation. In any case, the government already controls (and, therefore, can act directly with) Northern Rock, Bradly and Bingley, Royal Bank of Scotland, the Post Office.

The freeing up of credit is urgent to keep people in jobs and in their houses.

(ii) The Bank of England Apart from further cuts in interest rates, which are expected, the Bank of England must also make significant funds available to support lending by the the high street banks.

(iii) The Government The government must ensure that (i) and (ii) happen quickly. Gordon Brown and Alastair Darling must show the same urgency when people's jobs are collapsing as they did when the banks were in danger of collapse.

The new USA President is, we understand, poised to introduce an economic recovery package of around £700 Billion (perhaps more). The UK must act at the same time, with at least £50 Billion - to reduce taxes for the lower paid, and to increase benefits for families and pensioners.

Obviously, this will mean additional borrowing in the short term but it is sensible to show the means of repayment. The repayment strategy should include:

(a) closing tax loopholes used by companies and the rich £20 Billion
(the trade union UNITE estimates £30 Billion could be acquired);

(b) a higher percentage tax on higher income earners £5 Billion
(over £100,000 a year);

(c) expenditure cuts, mainly defence £25 Billion

Without prompt action along these lines, no significant number of jobs will be saved.

BROWN GOVERNMENT: GET OFF THE FENCE:

£ Billions have been provided to support the banks. Northern Rock and Bradford and Bingley have been nationalised; a majority share-holding has been bought in Royal Bank of Scotland; the government will be the largest share-holder in Lloyds/HBOS. In addition, the Post Office is publicly controlled.

The current policy is to sell the government's stakes to the private sector at an appropriate time, which means, presumably, when taxpayers' support is no longer needed.

This policy is seriously mistaken. Instead, these banks should (in combination) be developed as a People's Bank to provide services in accord with government policies - to increase lending, provide financial services in areas where they do not exist. The latter applies particularly to the post offices - an alternative to closing them.

In addition, there should be negotiations with banks not controlled by the government, backed up by regulation to ensure services in the public interest.

Urgent Government Action December 2008

the Current Crisis: A Layman’s Perspective

The media is awash with experts, especially economists and financiers, telling us what to think. Although we are grateful for their specialist knowledge, there is an important distinction between technical expertise (how banking works, or doesn’t work. for example) and a perception of the economic and social reality experienced in communities.

I am not an expert. My perception of the 2008 crisis is shaped by a life-long interest in politics and world affairs; perceived as a member of the Labour Party for over 50 years. In a genuine democracy it would be accepted that the thousands with experiences similar to mine are able to make a useful contribution to the debate on what is to be done.

In our, increasingly undemocratic, society voters’ views are considered less relevant than, for example, the pontificating of the Governor of the Bank of England. For months we have had to listen to his increasingly obvious nonsense about interest rates, without any possibility of calling him to account.

The government, and the Bank of England under pressure, have taken decisive action in October and early November. But many of us, as well as some experts (for example David Blanchflower, David Smith, Larry Elliott and Will Hutton), saw the need for urgent action more than six months ago.

The October/November action, including the government’s fiscal measures, should have been taken earlier and it is certainly not sufficient. The focus, now, must be on countering the recession with measures which create not only a stable society, but also a much fairer one.

On responding to the crisis, how have the various ‘responsible’ parties performed?

The Bank of England

By refusing to cut interest rates until compelled by international and government pressure, the Bank has landed itself in the category of those who have acted irresponsibly. If David Blanchflower, the only member of the Monetary Policy Committee (MPC) to vote for interest rate cuts for 6 consecutive months, could see what was coming, why did the other members fail to notice?

The Governor’s advice was clearly wide of the mark. He should, at minimum, apologise and act quickly to compensate for his ineptitude. The 1.5% cut in November (again, strongly influenced by outside pressure) is a belated recognition that decisive action is required: it must be followed by two more cuts in December and January. Without further reductions, there is still a high risk of a long recession, with the likelihood of deflation.

The Bank of England’s inflationary fears of the past few months were unrelated to reality in the world outside. Recent inflation was the result of the rising costs of energy and food, where the Bank has no control. Rising prices were not the result of excessive wage settlements, and related UK factors - factors which can be directly affected by our interest rates.

These failures demonstrate the dangers of giving to experts powers which are not subject to any kind of democratic influence or control.

The Opposition Parties

The proposals of the Liberal Democrats’ Vince Cable have been more relevant than anything from other front bench persons this year. His criticism of the government is not for the action it has taken but for the delay in taking it. Incidentally, his excellent performance appears to have done his Party little good in the opinion polls.

The Conservatives, however, have appeared to be completely at sea (which, we now know, is where George Osborne actually was this summer). Everybody knows that the problems (especially in the City) originated with the Thatcher deregulation and privatisation; although it must be accepted that the Blair governments were remiss in allowing the markets to continue to enjoy their excessive freedom.

The Cameron Opposition appears to support the part nationalisation of the banks, while claiming that they oppose state intervention. On Channel 4 news 20 October, the Tory spokesperson claimed to be opposed to borrowing and tax increases but argued for the postponement of VAT payments and the reduction of national insurance contributions to help struggling companies.

When asked by the interviewer where, if not to be borrowed, the money was coming from, the interviewee replied ‘corporation tax’. It was pointed out to him that his Party is pledged to reduce corporation tax. This interview is typical of the Conservative’s contribution to the debates on the crisis.

Although the Blair governments (and the Bank of England) should not have allowed house prices and consumer debt to rocket, there is scant evidence of the Conservatives advocating alternative policies. They continue to criticise Gordon Brown, without offering any solutions of their own, and they appear to have little understanding of the international dimensions of the crisis.

The Conservatives’ opposition to borrowing to counter the recession obviously implies that their ‘remedy’ is to allow the market to take its course - with unemployment continuing to rise, as under the Thatcher governments of the 1980s.

Government Borrowing

First, it necessary to recognise that the £ billions made available to the banks is not public expenditure: it is investment, which could, and should, result in a profit. Of course there are always risks with investments, but the reasonable assumption is that there will be a positive benefit from the interest the banks pay on loans, and from a rise in the shares the government holds when normality returns to the markets.

Second, although rising (e g as a result of falling tax receipts) as the recession starts to bite, our government borrowing, as a % of Gross National Product (GDP), is lower that all G7 countries - with the possible exception of Canada.

Against the G7 average of around 80% of GDP, the UK’s borrowing is around 50%. Japan is almost 200%, Italy 100% and the USA, France and Germany in the 60%-70% range.

This means that the option of borrowing short-term to counter recession is available to the U K government. It is the only realistic option if millions are to be saved from the misery of long-term unemployment and its crippling consequences.

However, it is essential (i) to target expenditure to create a fairer society in the longer term, and (ii) that there is a strategy to repay the borrowing (say, to a national debt level of 40% of GDP) over a 5-7 year period.

Strategy for Recession

The government has already recognised that the appropriate response is to increase, not reduce, public expenditure. It is bringing forward projects, especially in construction. This is a modest step which will save some jobs; although it is likely to take time for any significant impact.

However, the urgent need is measures to make an immediate impact. The obvious answer, to stimulate the economy and create a fairer society, is policies for a redistribution of wealth. This implies radical policy changes, likely to cause the government to hesitate, but they are the only sensible and fair way forward.

More money must be put into people’s pockets - because they need it, especially for food and warmth, but also because it will have a positive effect on the economy. People struggling to make ends meet will spend any money they receive, with an immediate stimulus to retail sales.

In addition to the steps the government has already taken, I envisage something along the following lines:

(i) taking one million of the lower paid out of tax brackets;

(ii) doubling the winter fuel allowance;

(iii) a scheme to guarantee new mortgages, especially for first time buyers.

It appears that the government has already decided to invest in green energy projects, which will create some new jobs in the medium term.

Paying For It

It would be irresponsible, as well as damaging to the economy, to take these steps without a strategy to repay the borrowing – over a period, say, of 5-7 years. The policies for funding should include a windfall tax, a more progressive tax system, and a drastic reduction of public expenditure on defence.

The windfall tax should be levied on companies making excessive profits, especially the oil companies and the utilities. A major benefit of such a tax is the speed with which the income could be available to the government. It should be levied on profits 2007/2008 and paid 2008/2009.

People at the lower end pay a higher proportion of their income in tax than any other group, which is the main reason for taking at least a million out of tax brackets. If the means used were to increase allowances for all tax payers, the majority of working people would benefit.

I leave to the experts to cost the programme I have described. If my estimate of £100 billion is too low, the answer is not to reduce the programme but to increase the income to fund it.

Most of this funding must come from a windfall tax and from reducing expenditure on defence, including abandoning Trident. However, more must be acquired from a more progressive income tax system, with, instead of the proposed 45% rate, new rates along the following lines:

- a 50% rate for incomes over £75,000

- a 60% rate for incomes over £95,000

- a 65% rate for incomes over £120,000

This would raise some of the revenue to pay for the tax reductions: equally important, it would also be a first step towards the fairer society the Prime Minister is committed to create.

Tinkering Had To Stop

Brown and Darling: The First Step

It was bolder than many of us expected. Give Gordon Brown and Alistair Darling some credit but its a pity they are so reluctant to exert public control.

Because it is clear to everybody that the banks cannot be relied upon to act in the national interest, part nationalisation is second best to proper democratic control - in the long-term, not just in a crisis.

The issue is not saving bankers but providing a reliable service to all members of our communities.

The Next Step

Stabilising the banks is only the beginning. Without delay, the challenges in the wider economy must be addressed. There is no need to 'wait and see', which has made the situation so much worse with the Bank of England's dithering on interest rates.

A minimum of £500 Billion (Stage I) must be made available to support employment and housing. Keeping people in work, and in their homes, is the key to economic stability and enhanced quality of life. This should be announced, along with a .50% cut in interest rates.

Persisting recession is not inevitable but avoiding it cannot be left to the market forces which have got us into the current difficulties. It is likely that it will require 4 stages (4 x £500 Billion), with proper planning and democratic control, to restore growth and prosperity.

Greater equality, green energy creation, adressing poverty here and internationally, must be the priorities of the evolving programme.

Policies For Funding

Funding the 4 stages, and paying back what the government borrows (including for the commitments already made) requires radical policy changes.

These include cutting expenditure on defence (e g wars and Trident) and introducing a tax system to increase government income from the wealthy.


There is detail on the above in Capitalism in Crisis: A Socialist Solution available on ebay, or from D J Kyte, Flat 27, No 1 Parkhill, Moseley, Birmingham (£4, including p&p).

Stop Tinkering: Govern and Inform

Who is in charge?

The government is so poor at communicating that we have to guess what is going on. Gordon Brown and Hilary Benn tell us that there will be no immediate cash payment (£100 was floated) for pensioners - because the priority is long term measures (10 year,20 year) to save energy. This is likely to be of small comfort to people in their 80s and 90s.

From press reports, we learn that the reason for the non payment is that the energy companies will not play ball. The foreign controlled companies (French, German) fear that, if they agreed to the £100 payment, their own governments would demand the same.

All of this, of course, demonstrates the folly of privatisation. The position would, clearly, have been very different if energy companies had remained under public control.

Does Democracy mean anything?

We do not elect energy companies: we elect governments. We expect them not only 'to feel our pain' but to do something about it - and to remember that our gas and electricity bills have to be paid NOW.

The finance to support people, and the economy, at the level required (£20-30 Billion) could be acquired from two sources - and the action would receive overwhelming public support.

The first source is a windfall tax on companies (especially energy companies) making obscenely large profits. The government, we are told, hesitates because this would upset the City of London and result in companies moving their bases to other countries.

This would probable not happen on any significant scale. If it did, we should be pleased to say goodbye. The City of London (especially banks etc) contributed significantly to the current economic difficulties. They must not be allowed to govern the country.

The second source is to slash the defence budget, and borrow now against the funds which would become available next year and the year after. This means withdrawing from Iraq and Afghanistan and developing an international policy based on support for the United Nations.

This would, no doubt, upset the USA. But government from Washington is no more acceptable than government by the City of London.

Radical Policy Changes

For detail, including fuller explanation of the policy changes necessary, go to Ebay and buy (at cost £4, including p&p) Capitalism in Crisis: the Socialist Solution - which could be as aptly entitled 'the Common Sense Solution'.

This booklet is also available (same cost) from John Kyte, Flat 27, No 1 Park Hill, Moseley, Birmingham B13 8DU.

Buying Houses and the Government

Government's Small, Faltering Steps

Any help for people struggling in the housing market must be welcomed. It can only be hoped that the measures announced 2nd September will be followed by others in days rather than weeks.

What is striking is the contrast between the seriousness of the economic situation, as reflected in Chancellor Darling's recent comments, and the comparatively minor measures just announced.

The other depressing factor is the continuing evidence that the government is on the side of big business, rather than ordinary citizens.

For example, it appears that the bulk (if not all) of the additional funding for Shared Equity house purchases is to be allocated for new houses property developers wish to sell.

The shortage of funding to help young people to buy (and private citizens to sell) older houses in the housing market gives the impression, again, that the emphasis is on helping developers to sell houses, rather than helping young people to buy them.

If this is not the case, why is there no more support for individual citizens who wish to sell, and buy, houses?

What follows is an account of the experiences of one young couple who attempted to buy a house using the Government Shared Equity Scheme.

The Government’s Shared Equity Scheme and First-Time Buyers

Introduction
A scheme with a government backed loan at low interest acting as a deposit (say 25%), plus a mortgage at a competitive interest rate, appears ideal for First-Time Buyers on modest incomes.

For this reason, we attempted to buy a house for approximately £110,000 – an amount which our joint incomes matched comfortably for repayments.

Unfortunately, although we responded promptly to all requests for information - and met the criteria of the Scheme, when we finally had an offer for a property accepted we were told that the money had run out.

Yet, immediately before we made the offer, we had been told that the money was available for us to go ahead. As any reasonable interpretation of this must be that the money had been allocated, an explanation of what happened to it is obviously required.

The purpose of this report is to draw attention to the difficulties, especially for young people, arising from the way in which the scheme is operating.

Apart from the facts recorded below, there have been innumerable telephone calls and Emails.

There is supporting written evidence for the factors listed below.

Operation of the Shared Equity Scheme 2008

The details which follow show how the scheme operated in our case.

(i) 4^th April MY 4 Walls assessed, and approved, our application for a loan to support (as a deposit) a Shared Equity Scheme purchase.

(ii) 18 April we received a letter from MY Choice Homebuy to confirm notification from our local Homebuy agent.

(iii) We made an application for a mortgage to the Halifax to supplement the loan.

(iv) 20 May we received confirmation from Connells that an ‘in principle’ acceptance had been received from the Halifax for up to £90,000. This was confirmed on a Priority Card.

(v) 23 May we received an Email stating the fees for buying a house for £110,000.

(vi) 10 June we received confirmation to go ahead and make an offer.

(vii) In this context, we made an offer of £90,000. This offer was not accepted.

(viii) We then made an offer of £105,000 for a house in Cromwell Street.

30 June we were informed that our minimum purchase price was £107,000.

This mystified us, as it appears totally unreasonable that there should be a minimum purchase price. In any case, why were we not told this before we made the offer?

(ix) 30 June we received a letter confirming the Scheme acceptance of our application.

(x) As our offer of £105,000 was not accepted, we increased it to £110,000.

(xi) Our offer of £110,000 for 65 Cromwell Street was accepted by the estate agents, Saxon Mee on 11 August.

(xii) 12 August the Scheme administrator was informed (by Email) that our offer had been accepted.

(xiii) 18 August we received forms to be completed from the Scheme Administrator.

(xiv) 19 August the completed forms were returned to the Scheme Administrator.

(xv) During the afternoon of 19 August, the Scheme Administrator ‘phoned and stated that the money had run out.

This was a shock and, obviously, extremely disappointing. We cannot understand how, within days, we were told that the money had been allocated, and then that it had disappeared.

Policy Alternatives: Urgent

For alternatives to the Government's current policies see Capitalism in Crisis: A Socialist Solution. This is available on ebay at cost (£4, including p&p), or from John Kyte (same cost) Flat 27, No 1 Park Hill, Moseley, Birmingham B13 8DU