Tuesday, 3 March 2009
The Real Income Scandal
Sir Fred’s Pension
A £650,000 a year pension for ruining a bank is clearly a scandal. In perspective, it is about 100 times what an old age pensioner gets. As Gordon Brown says, we are all entitled to be angry.
But what can be done about it? There is, the lawyers tell us, very little chance of any legal challenge succeeding. In reality, talk of legal action – or even M/s Harman’s act of parliament – is really a diversion.
The Real Scandal
The real scandal is that Sir Fred is not alone. Dozens, maybe hundreds (nobody knows how many) in the last ten years, have received similar awards. Indeed, we now learn that some (including at least one from the Royal Bank of Scotland) have been awarded much larger pay-offs.
To receive a large pension, you need a large ‘pension pot’. In Sir Fred’s case, this is said to be something over £16 million. In other words, without this, it would have cost the taxpayer (you and me) £ millions less to bail out the Royal Bank of Scotland.
£10 million, £20 million, £30 million ‘pension pots’ have been accumulated, significantly from tax free contributions. The first step in action to be taken is to impose, by legislation, a wealth tax which includes pension pots.
Wealth Tax on Pension Pots
In would not be at all unreasonable to levy a tax rate of 40% on that part of the pot which is assessed to provide a pension above £100,000 a year. In Sir Fred’s case, this would mean a one-off payment of around £4.5 million.
However, this would still leave him, and his like, with annual pensions of around £500,000. – still grossly over generous when an old age pensioner receives little more than £6,000 a year.
Higher Rates of Tax
These scandalous payments draw attention to the real issue – that the UK is a grossly unequal society. Because everyone is now aware of this, the government should act immediately.
Higher rates of tax (the existing top rate is 40%) on all incomes, including pensions, should be introduced along the following lines.
Incomes over:
£80,000 45%
£120,000 50%
£150,000 55%
£200,000 60%
£250,000 70%
These rates are not unduly punitive. I, and I suspect many readers, would support higher rates.
However, the above would make it possible to take a million of the lower paid out of tax brackets – a significant first step towards a more equal society.
And, as I have argued in earlier Blogs, more income for the poor would help towards economic recovery.
A £650,000 a year pension for ruining a bank is clearly a scandal. In perspective, it is about 100 times what an old age pensioner gets. As Gordon Brown says, we are all entitled to be angry.
But what can be done about it? There is, the lawyers tell us, very little chance of any legal challenge succeeding. In reality, talk of legal action – or even M/s Harman’s act of parliament – is really a diversion.
The Real Scandal
The real scandal is that Sir Fred is not alone. Dozens, maybe hundreds (nobody knows how many) in the last ten years, have received similar awards. Indeed, we now learn that some (including at least one from the Royal Bank of Scotland) have been awarded much larger pay-offs.
To receive a large pension, you need a large ‘pension pot’. In Sir Fred’s case, this is said to be something over £16 million. In other words, without this, it would have cost the taxpayer (you and me) £ millions less to bail out the Royal Bank of Scotland.
£10 million, £20 million, £30 million ‘pension pots’ have been accumulated, significantly from tax free contributions. The first step in action to be taken is to impose, by legislation, a wealth tax which includes pension pots.
Wealth Tax on Pension Pots
In would not be at all unreasonable to levy a tax rate of 40% on that part of the pot which is assessed to provide a pension above £100,000 a year. In Sir Fred’s case, this would mean a one-off payment of around £4.5 million.
However, this would still leave him, and his like, with annual pensions of around £500,000. – still grossly over generous when an old age pensioner receives little more than £6,000 a year.
Higher Rates of Tax
These scandalous payments draw attention to the real issue – that the UK is a grossly unequal society. Because everyone is now aware of this, the government should act immediately.
Higher rates of tax (the existing top rate is 40%) on all incomes, including pensions, should be introduced along the following lines.
Incomes over:
£80,000 45%
£120,000 50%
£150,000 55%
£200,000 60%
£250,000 70%
These rates are not unduly punitive. I, and I suspect many readers, would support higher rates.
However, the above would make it possible to take a million of the lower paid out of tax brackets – a significant first step towards a more equal society.
And, as I have argued in earlier Blogs, more income for the poor would help towards economic recovery.
Thursday, 26 February 2009
THE FAILURE OF CAPITALISM
The global economic crisis is the strongest evidence of the failure of capitalism. It reveals the nonsense of the oft-made claim that only a free market can lead to prosperity and higher standards of living for everyone.
In reality, unregulated capitalism has always resulted in higher and higher booms, followed by deeper and deeper busts. The most serious consequence is persisting inequality with, worldwide, hundreds of millions living in poverty.
When the rhetoric is swept away, and the evidence examined, it becomes all too obvious that capitalism has failed even to provide stable economies.
The issue of inequality, and the determination of the establishment to maintain it, is the subject of the three publications described below. They provide the background to the articles on this Blog.
Capitalism in Crisis: a Socialist Solution
This pamphlet analyses the current economic crisis in the UK and demonstrates that a solution will emerge only when a socialist strategy is adopted.
Further Education and Democracy
This book illustrates inequalities in the further education system in the UK. It explains how more than half the population aged 16 and over (‘The Neglected Half’) are denied the education they need - to obtain jobs, and to become fully participating members of society.
Who Killed Bilston Community College?
Bilston Community College, the most successful in the country for creating new opportunities for working-class (especially ethnic minority) citizens, was closed illegally in 1999. The government’s decision to close the college resulted in the denial of opportunities for tens of thousands.
An appeal against the closure, supported by over 50 voluntary community organisations, was completely disregarded by the then Secretary of State for Education and Employment.
All the above are all available on ebay.co.uk, or from keithwymer@blueyonder,co.uk
In reality, unregulated capitalism has always resulted in higher and higher booms, followed by deeper and deeper busts. The most serious consequence is persisting inequality with, worldwide, hundreds of millions living in poverty.
When the rhetoric is swept away, and the evidence examined, it becomes all too obvious that capitalism has failed even to provide stable economies.
The issue of inequality, and the determination of the establishment to maintain it, is the subject of the three publications described below. They provide the background to the articles on this Blog.
Capitalism in Crisis: a Socialist Solution
This pamphlet analyses the current economic crisis in the UK and demonstrates that a solution will emerge only when a socialist strategy is adopted.
Further Education and Democracy
This book illustrates inequalities in the further education system in the UK. It explains how more than half the population aged 16 and over (‘The Neglected Half’) are denied the education they need - to obtain jobs, and to become fully participating members of society.
Who Killed Bilston Community College?
Bilston Community College, the most successful in the country for creating new opportunities for working-class (especially ethnic minority) citizens, was closed illegally in 1999. The government’s decision to close the college resulted in the denial of opportunities for tens of thousands.
An appeal against the closure, supported by over 50 voluntary community organisations, was completely disregarded by the then Secretary of State for Education and Employment.
All the above are all available on ebay.co.uk, or from keithwymer@blueyonder,co.uk
Wednesday, 25 February 2009
WILL APRIL BE THE CRUELLEST MONTH?
Inexcusable Late Start
The Bank of England did not spot the recession until October 2008: the warnings of David Blanchflower (a lone voice on the Bank’s Monetary Policy Committee) were ignored for more than 6 months. Interest rate cuts, October-February, should have started at least 4 months earlier.
We cannot know how many lost their jobs and/or homes as a consequence of this delay. Whatever the number, it was unnecessary and in excusable.
The government, despite its many advisers and consultants, was also a late starter. Thousands had been made redundant, and tens of thousands more were facing redundancy, when Alistair Darling launched his, extremely modest, Autumn Fiscal Package.
‘Too little, too late’ is the, not unreasonable, criticism levelled at both the Bank and the government; although the situation is rather more complex. The Bank was certainly a late starter but, apparently not knowing what else to do, has continued to cut interest rates beyond the point of their effectiveness.
It would have been much more sensible for the Bank to start its ‘quantitative easing’ (pumping more money into the economy) in December rather than March. Late again! Incidentally, the public would be much better informed if the Bank, and the media, explained, clearly, what was happening, instead of using obscure terms like ‘quantitative easing’.
Full-Hearted Recession: Half-Hearted Response
The criticism of the government is not so much that it has failed to act but that it has acted half-heartedly. A string of minor initiatives to halt the recession do not amount to a convincing strategy. What should have been done (e g a much larger Autumn stimulus) is described in detail in my Blog: March 2009? It’s too Late.
The £14 Billion for Northern Rock to lend (announced 23/2/09) is a case in point. The figure should be at least £56 Billion: £14 Billion each, for lending, for the other institutions owned by the government – Bradford and Bingley, the Post Office; Royal Bank of Scotland.
The £14 Billion is intended, particularly, to help first time buyers. Yet, coinciding with the announcement, Gordon Brown wrote an article in the Observer arguing that a 10% deposit should be a minimum requirement. Although this is clearly sound in principle, it is no encouragement for first time buyers - until the government explains how it intends to help them to acquire such a deposit.
The government is unable to act on the scale required because it has boxed itself in. It is afraid to launch a £100 Billion expenditure plan because it lacks the convincing repayment strategy I described in my last Blog.
Will April 2009 be the Cruellest Month?
With the exception of a few ‘Blanchflowers’, experts failed in their predictions. While the sun was shining (people in jobs, house prices rising etc) they, in broad terms, predicted that the sun would continue to shine. Now, when all is gloom and doom, they predict more gloom and doom.
Because the downturn is global, it is impossible for the UK to recover in isolation. However, it seems likely that the action taken by USA’s new President, and his decision (implied in Hilary Clinton’s comments last week) to work more closely with China, will result in greater stability in the next few months.
It is in this context that the UK’s prospects must be considered. My view is that, if the Bank and the government had acted when Blanchflower gave his first warning, the bottom of the recession would have been reached January/February 2009. Their tardiness makes it look more like April/May 2009.
This prediction is made on the assumption that the belated action taken by the government, and the Bank of England, will begin to have an effect from March. The bottoming out of the recession is not, of course, the same as recovery.
The downturn would have been worse without the action taken but it is difficult to see significant recovery without further action.
Action for Recovery
I have been assisted in my predictions by an excellent article by Kevin Daly and Ben Broadbent (Goldman Sachs economists) in The Sunday Times (22/2/09); although the judgements below are, obviously, my own.
My view is that the situation in April will be ready for recovery but that this will not occur without a government expenditure stimulus of, at least, £100Billion, along the lines outlined in my last Blog. As I emphasise there, the key for the government to get out of its box is a convincing repayment strategy.
Providing the government acts now, the factors which will assist the recovery (as Daly and Broadbent point out) include:
(i) the reduction of interest rates (from5% t0 1%);
(ii) the fall in sterling, which makes exports cheaper;
(iii) import substitution – for example, people taking their holidays in the UK, instead of overseas.
In the current global crisis, the fact that the UK relies less on exports than, say, Germany and Japan means that government action can be more effective. It can be more effective because government expenditure can support the production of goods to replace imports, and also because governments can give people money spend.
With regard to ‘import substitution’, Pontins and Butlins are creating new jobs in anticipation of expansion of the home tourist trade. In the retail sector, a number of companies (including Asda, Tesco and Morrisons) have announced the creation of thousands of jobs.
The bringing forward of a number of government capital projects, and the boost to green energy will also create jobs.
Although these are ‘green shoots’, significant reduction of unemployment depends on further government action – quickly, and on a large scale.
For a more detailed discussion of these issues see me two previous Blogs: March 2009? Its Too Late, and A Clear and Convincing Strategy is Required – Gordon.
The Bank of England did not spot the recession until October 2008: the warnings of David Blanchflower (a lone voice on the Bank’s Monetary Policy Committee) were ignored for more than 6 months. Interest rate cuts, October-February, should have started at least 4 months earlier.
We cannot know how many lost their jobs and/or homes as a consequence of this delay. Whatever the number, it was unnecessary and in excusable.
The government, despite its many advisers and consultants, was also a late starter. Thousands had been made redundant, and tens of thousands more were facing redundancy, when Alistair Darling launched his, extremely modest, Autumn Fiscal Package.
‘Too little, too late’ is the, not unreasonable, criticism levelled at both the Bank and the government; although the situation is rather more complex. The Bank was certainly a late starter but, apparently not knowing what else to do, has continued to cut interest rates beyond the point of their effectiveness.
It would have been much more sensible for the Bank to start its ‘quantitative easing’ (pumping more money into the economy) in December rather than March. Late again! Incidentally, the public would be much better informed if the Bank, and the media, explained, clearly, what was happening, instead of using obscure terms like ‘quantitative easing’.
Full-Hearted Recession: Half-Hearted Response
The criticism of the government is not so much that it has failed to act but that it has acted half-heartedly. A string of minor initiatives to halt the recession do not amount to a convincing strategy. What should have been done (e g a much larger Autumn stimulus) is described in detail in my Blog: March 2009? It’s too Late.
The £14 Billion for Northern Rock to lend (announced 23/2/09) is a case in point. The figure should be at least £56 Billion: £14 Billion each, for lending, for the other institutions owned by the government – Bradford and Bingley, the Post Office; Royal Bank of Scotland.
The £14 Billion is intended, particularly, to help first time buyers. Yet, coinciding with the announcement, Gordon Brown wrote an article in the Observer arguing that a 10% deposit should be a minimum requirement. Although this is clearly sound in principle, it is no encouragement for first time buyers - until the government explains how it intends to help them to acquire such a deposit.
The government is unable to act on the scale required because it has boxed itself in. It is afraid to launch a £100 Billion expenditure plan because it lacks the convincing repayment strategy I described in my last Blog.
Will April 2009 be the Cruellest Month?
With the exception of a few ‘Blanchflowers’, experts failed in their predictions. While the sun was shining (people in jobs, house prices rising etc) they, in broad terms, predicted that the sun would continue to shine. Now, when all is gloom and doom, they predict more gloom and doom.
Because the downturn is global, it is impossible for the UK to recover in isolation. However, it seems likely that the action taken by USA’s new President, and his decision (implied in Hilary Clinton’s comments last week) to work more closely with China, will result in greater stability in the next few months.
It is in this context that the UK’s prospects must be considered. My view is that, if the Bank and the government had acted when Blanchflower gave his first warning, the bottom of the recession would have been reached January/February 2009. Their tardiness makes it look more like April/May 2009.
This prediction is made on the assumption that the belated action taken by the government, and the Bank of England, will begin to have an effect from March. The bottoming out of the recession is not, of course, the same as recovery.
The downturn would have been worse without the action taken but it is difficult to see significant recovery without further action.
Action for Recovery
I have been assisted in my predictions by an excellent article by Kevin Daly and Ben Broadbent (Goldman Sachs economists) in The Sunday Times (22/2/09); although the judgements below are, obviously, my own.
My view is that the situation in April will be ready for recovery but that this will not occur without a government expenditure stimulus of, at least, £100Billion, along the lines outlined in my last Blog. As I emphasise there, the key for the government to get out of its box is a convincing repayment strategy.
Providing the government acts now, the factors which will assist the recovery (as Daly and Broadbent point out) include:
(i) the reduction of interest rates (from5% t0 1%);
(ii) the fall in sterling, which makes exports cheaper;
(iii) import substitution – for example, people taking their holidays in the UK, instead of overseas.
In the current global crisis, the fact that the UK relies less on exports than, say, Germany and Japan means that government action can be more effective. It can be more effective because government expenditure can support the production of goods to replace imports, and also because governments can give people money spend.
With regard to ‘import substitution’, Pontins and Butlins are creating new jobs in anticipation of expansion of the home tourist trade. In the retail sector, a number of companies (including Asda, Tesco and Morrisons) have announced the creation of thousands of jobs.
The bringing forward of a number of government capital projects, and the boost to green energy will also create jobs.
Although these are ‘green shoots’, significant reduction of unemployment depends on further government action – quickly, and on a large scale.
For a more detailed discussion of these issues see me two previous Blogs: March 2009? Its Too Late, and A Clear and Convincing Strategy is Required – Gordon.
Tuesday, 10 February 2009
A Clear, and Convincing, Strategy is Required - Gordon
The Brown government took decisive (if belated) action when banks reached the point of collapse last October. Hundreds of £ Billions was provided, mainly as loans to be repaid over years. It is important to emphasise that this is not expenditure – in the longer term, there could even be a profit for the taxpayer.
The banks have been ‘saved’ but they have not kept their part of the bargain - to increase lending to the level the economy, and individuals, need. The reasons for this must be addressed urgently. Steps are likely to include extending the period for repayment to the government, and perhaps a lower interest rate on the loans.
If the privately-owned banks do not co-operate to the full, they must be nationalised. In any case, the banks already controlled by the government – Northern Rock, Bradford and Bingley, Royal Bank of Scotland (and the Post Office) - should be developed as a People’s Banking System.
Make Do and Mend No Good
The banks have been supported with hundreds of £ Billions. In comparison, the rest of us have received very little. Alister Darling’s £ 20 Billion package was woefully inadequate; as are the small ‘make do and mend’ measures to help the unemployed.
The government gives the impression that it believes the financial markets will recover in their own time, and that we shall eventually be back to where we were in 2007. This seems most unlikely and, in any case, this is not where we want to be.
The state, albeit reluctantly, is heavily involved in the financial markets. It must stay there and take the steps necessary to create a much fairer and more equal society. The challenge is not to mend a broken system, which has undermined the economy and caused large-scale unemployment, but to create a new system.
The new system must function in the interests of the whole nation, not just a few speculators.
2009 Priorities and Cost
‘Make do and mend’ will not do. Because there is no convincing strategy, the government is boxed in. It recognises that borrowing is necessary but is afraid to borrow on the scale required because it refuses to make the policy changes required for repayment.
The priorities are to:
(i) keep the elderly alive, by ensuring that they are warm and properly fed;
(ii) keep families in their homes;
(iii) ensure that children have proper care;
(iv) prevent unemployment and to create new jobs.
This requires £200 Billion, rather than the £ 20 Billion of the Autumn Package This obviously requires government borrowing but there must be a clear and convincing strategy for repayment.
Strategy for Repayment
Repayment is a major problem only if it is believed that restoring the old, free market, system is the solution. Even if restored, it would be a pale shadow of its former self – and, even more important, the old inequalities would continue.
Gordon Brown and Alister Darling are nervous about the necessary expenditure because they do not have a convincing strategy for repayment. Without it, they are open to the charge of ‘irresponsible borrowing’.
To repay the £ 200 Billion, the first step is to stop spending on what we do not need and cannot afford. The obvious example is Trident and armed services geared to intervention in the affairs of other countries (e g
The second step is to crack down on tax avoidance (companies and individuals) and to impose a windfall tax on companies which make excessive profits.
The third step is progressively higher rates of tax on incomes over £80,000 a year.
Over a 5 year period, starting 2010, these steps would more than repay the 200-300 £ Billion of borrowing to see the country through the recession. They would also result in a fairer, and more equal, society.
.
Tuesday, 27 January 2009
March 2009? It's Too Late
Action Now
We are told that Alistair Darling is considering further action to end the recession - to be included in his budget statement in March. Why wait until March? It is obvious that people need help, and jobs are needed, NOW.
There is no case for delay. There is much uncertainty about: one certainty is that it is impossible to give too much help to struggling people, or to create too many jobs.
The Banks
In dealing with the banking crisis the government has done only half a job. We all agree we need a banking system. But we need a system which serves the people, not bankers and shareholders.
The banks owned by the taxpayer – Bradford and Bingley, Northern Rock, Royal Bank of Scotland (along with the Post Office) must be converted to a People’s banking system.
Instead of state control through nationalisation, which the government does not like, these banks should be established as Mutual Societies. They would then be owned by their members, which was the position of Bradford and Bingley and Northern Rock before the stupid Thatcher policy allowed them to convert to banks.
In the re-organisation, the commercial bits of RBS should be separated from the domestic bits. It could then operate as a separate company to take the lead in implementing government policies for the commercial sector.
The message from anyone (which appears to include government ministers) opposed to these proposals is that such matters are best left to the capitalist financial markets: this position is obviously out of touch with reality.
Action on Unemployment and Poverty
Some government ministers have made vague noises about measures taken creating a fairer society, as well as ending the recession. This is not true in any significant sense of the measures taken so far. Vague statements about the borrowing being repaid from ‘government receipts in the upturn’ are not good enough.
The vagueness gives some creditability to the Tory’s claim that the borrowing is irresponsible. It is not the borrowing, so essential to ending the recession, that is irresponsible but the vagueness on repayment.
A package to stimulate the economy at the same time (now) as President Obama’s will be much more effective than waiting until March. It should be more ambitious than the November £20 Billion: a £100 Billion, at least, but with a convincing strategy on repayment.
The priorities for the £100 Billion are to:
(i) take at least one million out of income tax brackets and increase allowances, including pensions;
(ii) provide finance for local authorities to support families unable to pay their mortgages (either by offering easier mortgage repayments, or renting arrangements);
(iii) create jobs, especially in the sphere of green energy.
Repayment of the £100 Billion Borrowing
A convincing repayment strategy, over a 5 year period, is aim to acquire the finance from:
(i) cuts in defence expenditure, where £50 Billion could be found (including £20 Billion from abandoning Trident);
(ii) Progressively higher tax rates for incomes over £80,000, and measures to prevent tax avoidance;
(iii) Windfall taxes on excessive company profits and, again, steps to prevent tax avoidance.
It is only with a strategy along these lines that movement towards a fairer society will be convincing. Until such a strategy is launched voters will continue to believe that government is on the side of bankers, not the people.
We are told that Alistair Darling is considering further action to end the recession - to be included in his budget statement in March. Why wait until March? It is obvious that people need help, and jobs are needed, NOW.
There is no case for delay. There is much uncertainty about: one certainty is that it is impossible to give too much help to struggling people, or to create too many jobs.
The Banks
In dealing with the banking crisis the government has done only half a job. We all agree we need a banking system. But we need a system which serves the people, not bankers and shareholders.
The banks owned by the taxpayer – Bradford and Bingley, Northern Rock, Royal Bank of Scotland (along with the Post Office) must be converted to a People’s banking system.
Instead of state control through nationalisation, which the government does not like, these banks should be established as Mutual Societies. They would then be owned by their members, which was the position of Bradford and Bingley and Northern Rock before the stupid Thatcher policy allowed them to convert to banks.
In the re-organisation, the commercial bits of RBS should be separated from the domestic bits. It could then operate as a separate company to take the lead in implementing government policies for the commercial sector.
The message from anyone (which appears to include government ministers) opposed to these proposals is that such matters are best left to the capitalist financial markets: this position is obviously out of touch with reality.
Action on Unemployment and Poverty
Some government ministers have made vague noises about measures taken creating a fairer society, as well as ending the recession. This is not true in any significant sense of the measures taken so far. Vague statements about the borrowing being repaid from ‘government receipts in the upturn’ are not good enough.
The vagueness gives some creditability to the Tory’s claim that the borrowing is irresponsible. It is not the borrowing, so essential to ending the recession, that is irresponsible but the vagueness on repayment.
A package to stimulate the economy at the same time (now) as President Obama’s will be much more effective than waiting until March. It should be more ambitious than the November £20 Billion: a £100 Billion, at least, but with a convincing strategy on repayment.
The priorities for the £100 Billion are to:
(i) take at least one million out of income tax brackets and increase allowances, including pensions;
(ii) provide finance for local authorities to support families unable to pay their mortgages (either by offering easier mortgage repayments, or renting arrangements);
(iii) create jobs, especially in the sphere of green energy.
Repayment of the £100 Billion Borrowing
A convincing repayment strategy, over a 5 year period, is aim to acquire the finance from:
(i) cuts in defence expenditure, where £50 Billion could be found (including £20 Billion from abandoning Trident);
(ii) Progressively higher tax rates for incomes over £80,000, and measures to prevent tax avoidance;
(iii) Windfall taxes on excessive company profits and, again, steps to prevent tax avoidance.
It is only with a strategy along these lines that movement towards a fairer society will be convincing. Until such a strategy is launched voters will continue to believe that government is on the side of bankers, not the people.
Monday, 19 January 2009
The UK Banks and the Wider Economy
Banks With No Money
The UK government’s £200 Billion package, announced 20 January 2009, follows worries about the banks. Their shares appear to be in freefall. However, the Prime Minister, and the Chancellor, insist that the purpose of the package is not to bale out the banks, but to support the wider economy - by increasing lending to companies and individuals who need mortgages.
Is this convincing? Companies and people who need mortgages have been pleading for help for months, yet the action was not taken until it became clear that the banks were in difficulty. Even more important, will the £ Billions made available end the recession?
There will obviously be some easing in the lending market as a result of the terms which accompany the £ Billions provided for the banks. This will apply especially to the government controlled Northern Rock (which is nationalised), and the Royal Bank of Scotland (where the government has a majority shareholding).
It remains to be seen how far the other banks will keep their promises. Although they have an incentive to increase lending, because they need new profitable business, they will weigh this against other considerations (such as how to maintain their dividends).
A More Radical Approach
The fundamental problem is that the government fails to recognise that the old free market system has collapsed. This would have been more obvious if the banks had collapsed, which would have happened in November if taxpayers’ money had not saved them.
Using our money in this way is justified only if it is seen as an interim measure while a new system is created. There is, sadly, no sign of the intention to build a new system. The government appears to believe that, given Billions of £s, the old system will be restored to health.
Yet, every day, it becomes increasingly evident that this will not occur. The obvious message from the past 18 months is that economies cannot be left at the mercy of the financial markets. If governments had not stepped in, especially in the USA and the UK, unemployment would be even higher than the dreadful figures reported almost daily.
Obama and the World Economy
The most promising development is the election of Barack Obama as American President, with his commitment to take urgent action to save the economy. Unlike his predecessor, he is not reluctant about government intervention. He has promised over $800 Billion to create jobs, support householders, and move towards a more equal society.
Although economic recovery in the USA is the most important single factor, the challenges are global. Ending the recession requires other countries, especially in Western Europe, to follow the new President’s lead. And the importance of the involvement of Russia, China and India in economic recovery action must also be recognised.
Where Next For The UK?
For the UK, it is essential to match (in comparative terms) Obama’s job creation and householder support measures. As I have argued in an earlier Blog, there is no danger that too many jobs would be saved, or created.
However, fundamental to success is a co-ordinated approach to the government’s involvement in the economy. It will not be possible to end the recession unless the availability of finance (for companies and mortgages) is ensured.
This will occur only if the government determines that relevant financial support is available: this cannot be left to market forces. The obvious solution is to co-ordinate the state controlled entities so that they function as a state bank. A co-ordinated operation through the Royal Bank of Scotland, Northern Rock, Bradford and Bingley, The Post Office should lead the way.
With the prospect of competition from state controlled lenders, the other banks would be more likely to co-operate. To do business, and make profits, they would have to focus on consumer need, rather than dividends and bonuses.
A New Financial World
The reality is that financial systems are now inevitably global. The UK and other West European countries must work with the new USA President to restore order and lead economic recovery.
Policy must be determined by governments working together, not by market forces. Stability is essential for greater prosperity in developing countries, as well as for the wealthier nations.
The UK government’s £200 Billion package, announced 20 January 2009, follows worries about the banks. Their shares appear to be in freefall. However, the Prime Minister, and the Chancellor, insist that the purpose of the package is not to bale out the banks, but to support the wider economy - by increasing lending to companies and individuals who need mortgages.
Is this convincing? Companies and people who need mortgages have been pleading for help for months, yet the action was not taken until it became clear that the banks were in difficulty. Even more important, will the £ Billions made available end the recession?
There will obviously be some easing in the lending market as a result of the terms which accompany the £ Billions provided for the banks. This will apply especially to the government controlled Northern Rock (which is nationalised), and the Royal Bank of Scotland (where the government has a majority shareholding).
It remains to be seen how far the other banks will keep their promises. Although they have an incentive to increase lending, because they need new profitable business, they will weigh this against other considerations (such as how to maintain their dividends).
A More Radical Approach
The fundamental problem is that the government fails to recognise that the old free market system has collapsed. This would have been more obvious if the banks had collapsed, which would have happened in November if taxpayers’ money had not saved them.
Using our money in this way is justified only if it is seen as an interim measure while a new system is created. There is, sadly, no sign of the intention to build a new system. The government appears to believe that, given Billions of £s, the old system will be restored to health.
Yet, every day, it becomes increasingly evident that this will not occur. The obvious message from the past 18 months is that economies cannot be left at the mercy of the financial markets. If governments had not stepped in, especially in the USA and the UK, unemployment would be even higher than the dreadful figures reported almost daily.
Obama and the World Economy
The most promising development is the election of Barack Obama as American President, with his commitment to take urgent action to save the economy. Unlike his predecessor, he is not reluctant about government intervention. He has promised over $800 Billion to create jobs, support householders, and move towards a more equal society.
Although economic recovery in the USA is the most important single factor, the challenges are global. Ending the recession requires other countries, especially in Western Europe, to follow the new President’s lead. And the importance of the involvement of Russia, China and India in economic recovery action must also be recognised.
Where Next For The UK?
For the UK, it is essential to match (in comparative terms) Obama’s job creation and householder support measures. As I have argued in an earlier Blog, there is no danger that too many jobs would be saved, or created.
However, fundamental to success is a co-ordinated approach to the government’s involvement in the economy. It will not be possible to end the recession unless the availability of finance (for companies and mortgages) is ensured.
This will occur only if the government determines that relevant financial support is available: this cannot be left to market forces. The obvious solution is to co-ordinate the state controlled entities so that they function as a state bank. A co-ordinated operation through the Royal Bank of Scotland, Northern Rock, Bradford and Bingley, The Post Office should lead the way.
With the prospect of competition from state controlled lenders, the other banks would be more likely to co-operate. To do business, and make profits, they would have to focus on consumer need, rather than dividends and bonuses.
A New Financial World
The reality is that financial systems are now inevitably global. The UK and other West European countries must work with the new USA President to restore order and lead economic recovery.
Policy must be determined by governments working together, not by market forces. Stability is essential for greater prosperity in developing countries, as well as for the wealthier nations.
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