Ann Pettifor chose this graph as the most significant one of 2011.
“This is the chart that struck me most forcibly, both for what it tells us about the debts of the private sector, in particular the private finance sector; but also because of what the Treasury chose not to tell us: that the public debt to GDP ratio is tiny compared to private sector debt to GDP ratio.”
Ann Pettifor http://www.debtonation.org/2011/12/my-graph-of-2011-along-with-top-economists/
In other words, the Brown government did not ‘max out the credit card’. The increase in the debt to GDP ratio is the result of debt created by the financial sector, aka The City of London.
The UK’s staggering debt is now nearly 1000% of GDP as the Morgan and Stanley chart below indicates… but it is notable that neither the UK government debt or personal household debt to GDP are very different from the other countries compared on the chart. It is solely the size of the financial sector debt which pushes up the total.
It was also financial sector debt which brought down Ireland and Iceland. Privatisation of profits and socialization of losses. Unfortunately, under our present system, governments always end up having to rescue their financial sectors when they are about to fail from their risk-taking gambling … and that is the very good reason why our banks are unlikely to leave the UK in a mass exodus if they were properly controlled. What country would want to take on the risk of bailing out the UK’s financial sector?
The banker, Amschel Rothchilds’ famous quote was Give me control of a nation’s money supply, and I care not who makes it’s laws. This seems even more ominous, in light of the credit rating company, Moody’s threat to downgrade the UK’s AAA ratings.
The ratings agency Moody’s said on Tuesday night that the UK faced “formidable and rising challenges”, noting that the country’s prized triple-A rating depended on keeping the deficit reduction plan on track, adding: “Any additional weakening in the macroeconomic outlook or a need to support the banking system could temporarily set back the government’s fiscal consolidation … the outlook on the rating is likely to be sensitive to future developments in the euro area’s debt crisis.”
It should be understood that the ratings agents are not independently funded but are paid by the clients who have a vested interest in the credit ratings. Losing the triple A rating means that the UK would have to pay more in interest to obtain a loan … in other words, the tax payer will pay more to the financial sector in order to borrow the same amount of money… or to put it another way, the lenders like countries to be downgraded because they will make greater profits on lending to the UK that may then be squirreled away in some tax haven.
‘Sovereign debt’ in the Eurozone has become the new ‘sub-prime mortgages’, a bubble which is threatening to burst, and create economic havoc globally…
As Michael Hudson writes:
The easiest way to understand Europe’s financial crisis is to look at the solutions being proposed to resolve it. They are a banker’s dream, a grab bag of giveaways that few voters would be likely to approve in a democratic referendum….
…. It is claimed that without a profitable banking sector (no matter how predatory) the economy will break down as bank losses on bad loans and gambles pull down the payments system. No regulatory agencies can help, no better tax policy, nothing except to turn over control to lobbyists to save banks from losing the financial claims they have built up.
What banks want is for the economic surplus to be paid out as interest, not used for rising living standards, public social spending or even for new capital investment.
‘The success of this strategy in the US can be seen in a highly recommended series of graphs produced by the Wall Street Protesters.’ (1) Richard Murphy says that it would also be valid for the UK.
Michael Hudson explains:
From the financial sector’s vantage point, the “solution” to the Eurozone crisis is to reverse the aims of the Progressive Era a century ago – what John Maynard Keynes gently termed “euthanasia of the rentier” in 1936. The idea was to subordinate the banking system to serve the economy rather than the other way around. Instead, finance has become the new mode of warfare – less ostensibly bloody, but with the same objectives as the Viking invasions over a thousand years ago, and Europe’s subsequent colonial conquests: appropriation of land and natural resources, infrastructure and whatever other assets can provide a revenue stream. It was to capitalize and estimate such values, for instance, that William the Conqueror compiled the Domesday Book after 1066, a model of ECB and IMF-style calculations today.
I have deliberately intermixed references to the US and the EU with those referring to the UK, because this new financial crisis is not new; it is not a crisis produced by government spending on public services; and it is not a UK crisis. This is a global banking crisis caused by the unregulated financial sector which was set free by Margaret Thatcher and Ronald Regan in the 1981. (2)
The Tory-LD ploy is to cynically trot out the lie, that over-spending on public services by the last Labour government caused ‘this mess’, and that they are ‘forced’ to clear it up by dismantling the welfare state, the NHS and our education system. The reality is that this Tory-LD government is governing on behalf of the banks and ‘what banks want is for the economic surplus to be paid out as interest, not used for rising living standards, public social spending or even for new capital investment.’ The present financial position of the UK is the product of a global banking crisis coupled with George Osborne’s ‘suicidal policies’ (3). It is not because ‘Gordon Brown spent all the money’!
(2) Red Labour must address the elephant in the room. https://think-left.org/2011/07/21/red-labour-must-address-the-elephant-in-the-room/
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Darrell Goodcliffe calling for the LP to ‘be the anti-City and pro-people Party that it was founded to be if it ever wants to return to government again’. Well worth reading!
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I agree it is important to challenge the myth that Gordon Brown “spent all the money”, and I think it is important to understand what really happened. I would like to challenge some of the conclusions offered here, however.
Firstly, we are a long, long way from “spending all the money”. The government can currently borrow at below the rate of inflation! This means that even including the interest, repayment of the debt gets easier over time, without having to do anything…
Secondly, the private sector debt is an animal that is different from government debt. What exhibit 1 tells us is that the banking sector is a much larger proportion of the UK economy than in other countries. When a bank has a debt it also holds an asset, and in fact the value of those assets exceeds the outstanding debt. This is totally different to government debt, where there are no counterbalancing assets.
So it is not true to say the banks spent all the money. What is true is to say the banks invested a lot of money, more so in proportion to our size than in any other country.
And investing money carries the risk that in a crisis the assets may no longer balance the liabilities – the bank can go bust. Ireland and Iceland fared rather differently when this happened: the Irish government foolishly assumed all the losses and bankrupted itself in the process. The Icelanders didn’t, allowed the banks to collapse, and are in a much better position now.
So the lesson for the UK is to devise a system where liabilities in bust banks don’t end up with the state. The Vickers report is part way to a solution but I think it should go much further. There should be a bankruptcy procedure for retail banks even that involves nationalising only the operating assets and the balances guaranteed by the government – leaving the unguaranteed balances, bond holders and other assets to be wound up.
Thank you for your helpful comments. The title took some literary licence as you indicate. I agree with you that Vickers recommendations are too little, and in any event, are not to be implemented until 2019, so too late.
I would go further and question the role of the whole of investment banking as presently constituted. A large majority of the transactions are involved with minimising tax and insuring their own risky ‘punts’. Furthermore, the capacity to impact on national interest rates is anti-democratic, and I would favour some sort of exchange controls. The question of government created money vis a vis loans obtained via the bond market seems to rest on a supposed difference in inflationary pressure but I fail to see why the 75 billion in QE invested directly into the real economy to produce jobs/growth, would have been more inflationary than the creation of money through private banks. Indeed with the multiplier effect, I would have thought that the private banks would be likely to be more inflationary, not to mention bubble-creating.
David Boyle of New Economics Forum writes http://www.neweconomics.org/blog/2011/12/09/bring-on-the-eu-reforms-to-financial-services:
‘Yes, the City pays £53 billion in taxes, which is certainly important, and would be a sign of UK economic success if this came from the City playing a useful role nurturing and supporting the real economy – but, as it currently stands, it signally fails to do so.
The tragedy is that the City has become a huge engine designed for its own self-aggrandizement, vacuuming up the talent and resources out of the UK’s economy in order to make its key figures immensely rich.
It is allowed to continue this largely useless work of enriching itself purely by paying large sums to the exchequer. Any threat to its privileges, and everyone looks at their tax revenues and leaves them alone.’
The City only makes money by sapping financial strength from the genuinely productive. Remove the City and the rest of Britain will eventually return to life. The damn place needs razing to the ground.
That is the conclusion of Larry Elliott and Dan AtKinson’s brilliant book ‘The Gods that failed us’ and they should know 🙂 As you say, not only do the global banks not create anything but they ‘parasitise’ our wealth away into tax havens. The City is the hidden state/tax haven within the state, not subject to normal UK laws and pours lots of money into protecting the interests of their own.
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It is worth considering the work of Anthony B. Sanders, in his testimony to the United States House Committee on Oversight and Government Reform Subcommittee it shows UK debt to be 950% (500% from the financial sector) http://confoundedinterest.files.wordpress.com/2011/12/sanders-house-testimony-12-15-2011abs.pdf
Thank you for the link. I was uncertain as to what it was that you wished me to consider. Unless I am mistaken, the analysis was completely consistent with neoclassical economics which much better informed people than myself, totally reject. Increasing austerity has been likened to increasing blood letting when the patient fails to get better.
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‘According to the IMF the reason the UK has experienced a large build up in public debt is because of the costs of the large loss of output following the crisis. Not quite the story of public sector profligacy the government is usually so keen to tell.’
More at http://www.scoop.it/t/deficit-myth ‘Banking crises deniers.’
I suspect that Morgan Stanley chart of grossing up interbank balances. Other charts I have seen put the UK’s total debt to GDP (including private sector) at around 650%, which is a massive difference. It’s worth remembering that with an election approaching, the United States government has a vested interest in talking down the UK’s financial position to distract attention from its own enormous debts. And as someone above commented, the inclusion of financial sector liabiltiies ignores the fact that they are balanced by corresponding assets. Really the non-financial sector debt and financial sector debt should be netted out, as corporate and household loans and purchased corporate bonds are financial sector assets. I totally agree with the commentor who said that the issue was the riskiness of those assets, and that we should be looking to protect taxpayers as well as depositors from the possibility of bank failure. Banks should be allowed to fail, and we need a standard winding-up procedure that only rescues things that are essential to the economy.
I do NOT agree with the OP, who seems to think that all the problems lie in investment banking and capital markets. They don’t. In fact none of the UK banks that failed in the financial crisis did so because of investment banking. Three of them – Northern Rock, Bradford & Bingley and HBOS – failed because of excessive risk in retail lending, particularly mortgages. HBOS and RBS were also seriously exposed to some very dodgy corporate lending. RBS lost a lot on mortgage derivatives, but it also took serious losses on mortgage lending in both the UK and US. But RBS was a basket case through and through. Its operations were highly leveraged and poorly managed in just about every area. What finally brought it down was the idiotic aquisition of ABN AMRO, but in my view it would have failed anyway probably for similar reasons to HBOS (bad lending, mainly).
We have a tendency to look at the US, where investment banking is much bigger and the economy is much more dependent on capital markets, and assume that what went wrong there also applies to the UK. And to the extent that the City of London was involved in the US problems because of light-touch regulation and overseas activities, that is true. But to deduce from that, that all problems come from investment banking and capital markets, is simply wrong. Even in the US, it was the failure of the housing market that drove the collapse of investment banking. I’m not defending the practices in investment banking that inflated the risks in the mortgage market. But we really do have to get away from this myth of “risky” investment banking and “safe” retail banking. It’s not true and it is very dangerous to manage our financial sector on the basis of those assumptions. Vickers, by the way, does not make this mistake. THe ringfence is as much to protect investment banking from retail bank failure as vice versa, and the segregated and increased capital requirements for retail banking are to protect the taxpayer from losses in retail banking, not investment banking. .
Oh, and in talking about exchange controls, we are in VERY dangerous territory. The last time we had exchange controls in the UK was in the early 1990s – the ERM, which the UK was forced to leave because it could not sustain the high currency value in a recession. Unless you are thinking of simply withdrawing sterling from the currency markets – in which case sterling-denominated debt would cease to trade as well, which would have catastrophic effects on corporate and government funding – maintaining exchange controls requires interest rate control and reserves. It is costing the Swiss National Bank a lot of money at the moment to hold down the value of the Swiss franc.
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Gordon Brown didn’t spend the money. Quite right. But he allowed it all to happen, and with deregulation even facilitated it. He called the result “the end of boom & bust” when in fact it was a massive build up of private sector debt, particularly in the finance sector. That bubble has now burst. His only saving grace is that everyone was doing it, so he’s not evil, just naive. His admission of fault at Bretton Woods don’t go anywhere near far enough.
I agree 🙂 And I agree that I think he was naive rather than evil. IMO Brown’s tragedy was to realise his mistake in the last few months before the GE. If you remember, he was forced by Harman, Darling et al to go for the ‘too fast, too far’ line because they did not think that the reality that the UK could cope with the bank’s debts was electorally plausible. New Labour has a lot to answer for.. it was such an opportunity wasted.
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There ought to be laws governing banks use and misuse of depositors funds which in reality do not belong to the banks. Greater transparency of accountancy to depositors and shareholders, as well as clearly laid out agendas. Failure in any of these respects would be adjudged to be crimes, and jail sentences for those responsible for the perpetrations, as well as forfeiting of personal assets. Anybody not in agreement with these proposals would be deemed to be of inadequate moral integrity, and not fit to occupy a position in banking. Doctors, judges, the military all have to take oaths of office, and probably others too. It would not be asking too much of bankers to take an oath of office, considering the harm they can cause through their ineptitude, or dare I say corrupt activities!
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