A fairer society means breaking the big business stranglehold on politics

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Labour’s challenge to fight inequalities and rebuild democracy rests on addressing Britain’s ‘finance curse’

If the next Labour leader wants a fairer society, they must break the big business stranglehold on politics.

by Nick Dearden Re-posted from openDemocracy 10.09.15

In just a few weeks, the Labour leadership contest has substantially shifted the political debate in Britain, challenging the policy of austerity, raising inequality as the defining issue of our times, highlighting the erosion of democracy.

Fighting inequality and rebuilding democracy depend on breaking the stranglehold of big business and finance on politics in this country.  And this means reassessing Britain’s role in the world, because the prestige of this country is based upon London as a financial hub and a corporate HQ.

We live in an offshore centre for corporate interests, and this has not only fuelled poverty and inequality around the world, it has done so at home too.  Britain’s prestige has not translated into benefits for ordinary citizens here.  Despite this, political leaders have for decades failed to tackle the vested interests that have captured this country.

If they want to really change Britain, top of the list for the next Labour leader is the dependence of our economy on finance.  We have a ‘finance curse’, in the same way oil-rich nations can develop a ‘resource curse’.  Far from harnessing resources to build a fairer society, finance’s dominance has undercut other sectors of our economy.  Today, governments of every shade jump to the tune of finance, as we experiment in ever greater forms of deregulation, allowing the banks to transform everything we value into a derivative to be gambled on.

Britain has been captured by financial interests, which use this island to avoid taxes globally, to unsustainably inflate debt bubbles, and to speculate on the air we breathe.  There is no path to rebuilding democracy which doesn’t involve an almighty battle to ‘tame the City’ – with robust mechanisms to make companies pay their taxes internationally, levy taxes on speculation, restrict stock market listings, cancel unjust debts and reform the Corporation of London.

But finance is only the most obvious case of corporate capture in Britain.  In fact big business has a stranglehold on our politics.  On the one hand our government is aggressively pushing forward a ‘new generation’ of trade agreements like the EU-US investment deal known as TTIP.  TTIP threatens to water down social and environmental standards across the board, seeing such regulations as little more than ‘trade obstacles’.  TTIP will even give multinational corporations a special ‘right’ to sue our government for passing laws which threaten their profits.

On the other hand the British government is obstructing attempts by Latin American countries to hold multinational companies accountable for abusing real human rights, meaning that people have no access to effective legal redress for harm done to them by British-based corporations.  So far is the British state in the pocket of corporate interests that even our aid budget is used to privatise and deregulate economies in Africa, Asia and Latin America.  Aid money is thrown at free market think tanks to privatise energy supplies; agribusiness conglomerates get a helping hand to control seed markets; education multinationals find new markets in some of the poorest countries on the planet.

The rule of multinational corporations, which places a higher value on profit than human rights, is a key factor driving inequality. Combatting inequality means the next Labour leader needs to be prepared to use the British veto in Europe to halt TTIP and its sister deals, limit the influence of multinational corporations over the UK political process, establish a commission to tackle corporate abuse of workers’ rights and environmental sustainability, and overhaul the aid budget as a form of redistributive taxation which can help countries across the world develop decent public services.

These proposals form part of a manifesto of policies which we launch today, the first step in beginning to rebuild our democracy and properly fight inequality.  It also includes reducing carbon emissions and giving substantial reparations to help developing countries build democratically-controlled energy systems in low carbon economies.  And supporting small scale, organic agriculture, rather than industrial farming.

If we really want a fairer society, there is no alternative to taking on vested interests.  We can’t just decide to exercise a ‘nicer’ form of global power, because our power is built on a base that necessarily erodes democracy.  A powerful financial sector, unfair trade practices, ideologically-driven privatisation, and many other policies, which we inflict on the world, also serve to make our own country more unequal.  So these policies must be changed not just for the millions of people around the world affected, but for the British people too.

True, it may make our country less ‘important’ at the top table, but that is a price well worth paying for a fairer world, and a happier society

This article is cross posted from Global Justice Now and appears here.

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GDP DATA SHOWS BRITAIN IS THE WEAKEST OF ALL THE LARGE ECONOMIES

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First posted Sunday, 3 February 2013 at Socialist Economic bulletin

GDP Data Shows Britain Is the Weakest of All the Large Economies

By Michael Burke

Britain is only the second large economy to report GDP data for the final quarter of 2012.  It showed a contraction of 0.3%.  China has already reported its GDP, which accelerated in the 4th quarter – Chinese GDP being 7.9% higher compared to a year ago.  In stark contrast there has been no growth in the British economy over the same period, with GDP unchanged from the 4th quarter of 2011.
Other leading economies will report the final quarter growth of 2012 by the end of this month.  In terms of Purchasing Power Parities (PPPs), the UK economy produces slightly over US$2 trillion.  The table below shows economy in relation to other economies of a similar size or greater.  The data is based on the most recent OECD estimates of constant PPPs at 2005 prices.

Table 1

13 01 29 Table 1

Where the comparable data is available for these economies to the 3rd quarter of 2013, the British economy has the weakest economy growth over the period.  Only the performance of the Euro Area economy was worse, contacting 0.6% from a year ago compared to zero growth in Britain.
Since the global crisis in 2008 the Chinese, Indian and Brazilian economies have all recovered the output lost in the recession and have grown further.  GDP in China, India and Brazil is now more than 40%, 30% and 10% higher than at the outset of the crisis respectively.
Growth in the other large economies has been slower.  The Russian economy has also fully recovered and has grown by a little over 3% since the crisis began.  The chart below shows the weaker growth economies since the crisis began at the beginning of 2009.  Only the US and German economies have fully recovered at all, a recovery of just 2% above the pre-recession peak.  The French economy is still 0.8% below its peak while both the Euro Area and Japanese economies are 2.4% below their peak before the recession began.  The performance of the British economy is the worst of all these economies, being 3% below the prior peak.  These comparative data do not include the contraction of the British economy in the 4thquarter GDP.

Figure 1

13 02 03 Figure 1

In terms of broad categories of output, the weakness in the British economy is concentrated in manufacturing and construction as the chart below from the Office for national Statistics shows.  In fact, even within the services sectors, only two categories of services are higher now than where they were in 2008.  These are business and financial services and government services.  The former represents the commitment of the government to supporting the finance sector, while the latter represents its inability to cut the total of current government spending while poverty is increasing.  This is a broad-based failure of the economy and of economic policy.

Figure 2
13 01 03 Chart 2

The fall in investment Gross Fixed Capital Formation (GFCF) is the main brake on the recovery output in the OECD countries since the crisis began.  In Britain the shortfall (before the 4th quarter data) accounts for more than the entirety of the slump.  Among the weaker large economies identified above, Britain has the weakest level of investment since the crisis, down 20.1% since the crisis.  Even the crisis-torn Euro Area as a whole is not as weak, down 17.8% although some countries within the Euro Area are much weaker than Britain.

Figure 3
13 02 01 Figure 3

Whatever the outcome of the data for the final quarter of 2012 for the other large economies, to date the British economy has been the weakest of all the large economies. This is driven by the weakness of investment, which accounts for the whole of the slump and which is also the weakest of all those major economies.

(emphasis added)

Other Michael Burke articles reposted on Think Left:

PRODUCTIVITY CRISIS IN THE BRITISH ECONOMY

20 YEARS OF LOST OUTPUT

The Autumn Statement and long-term Austerity

Investment Slump Greater Than Whole Loss of British GDP

BRITAIN’S EXPORT PERFORMANCE IS WOEFUL

The new recession is directly made in Downing Street

WHY MORE ‘AUSTERITY’ IS ON THE WAY

THE UK’S BUDGET DEFICIT IS RISING NOT FALLING

Criminogenic environments like the City of London

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On the Daily Politics and the Sunday Politics recently, Andrew Neil has referred to how journalists do not report on the financial sector.  That he feels this to be a lack was also suggested by his treating Max Keiser with much respect.  The online community is relatively familiar with the Keiser Report but amongst academics, Professor Bill Black is a rare creature…  a former financial regulator and now, Associate Professor of Law and Economics at the University of Missouri-Kansas City. This post presents some of his findings about the abundance of fraud in the financial sector, and a video clip of his recent speech in Davos.

What is a criminogenic environment?

Criminogenic environments produce such intense and perverse incentives that they generate epidemics of control fraud. (1) 

Large, individual accounting control frauds cause greater financial losses than all other forms of property crime – combined.  Accounting control frauds are weapons of mass financial destruction.  Epidemics of accounting control fraud drove the national crises that produced the Great Recession.  We have reliable information on this in the United States, the United Kingdom, Ireland, and Iceland…. These accounting control fraud epidemics drove crises that caused a loss of over $20 trillion in wealth and cost roughly 20 million workers their jobs. (1)

How do we know that the City of London is a criminogenic environment?

Most of the major financial and banking scandals have originated in London.  Incredibly, the belief amongst neoclassical economists and the World Economic Forum is that

‘Malfeasance and outright fraud [in finance] are extraordinarily damaging but also, fortunately, extremely rare.’(1)  

Without evidence, the markets are assumed to be ‘self-cleansing’ and therefore, ‘self-regulating’.. hence, it is argued that there is no need to have regulation and supervision.

However, Akerlof & Romer explain why deregulation encouraged control fraud:

“[M]any economists still seem not to understand that a combination of circumstances in the 1980s made it very easy to loot a financial institution with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution?” (Akerlof & Romer 1993: 4-5). (1)

In fact, the dishonest practices of some institutions, invited a ‘race to the bottom’.  It is very difficult to ‘honestly’ compete with a dishonest broker… so effectively a ‘market’ was set up as to who could be the most successfully ‘fraudulent’.  The inevitable corollary was the pressure to remove as much supervision and regulation as possible:

The “race to the weakest supervisor” did not occur only within the U.S.  Brooksley Born and a former senior SEC official have confirmed to me that UK regulators directly pitched U.S. financial firms to relocate operations to the City of London in order to obtain weaker supervision.  “Fed lite” supervision was a competitive response to the FSA’s “reg lite” system of deliberately weak supervision.  The City of London became the most criminogenic environment in the world for financial fraud, which is why so many UK banks and units of foreign banks located in the City have caused the major scandals in the UK and globally. (1)

I have quoted extensively from Professor William K Black’s articles on New Economic Perspectives because they are essentially the keynote speech that he gave at the ‘Public Eye’ shame award in Davos.  As he says in the video clip below, economists know nothing about fraud and law students very little.  Of course, anyone familiar with Max Keiser will also be familiar with the levels of ‘decriminalised’ fraud that Bill Black describes in the financial markets.  For example, 40% of the mortgages issued in the US in 2006 were ‘liar’s loans’ in which the lenders deliberately chose not to verify the borrower’s income.  90% of ‘liar’s loans’ have been shown to be fraudulent, but the incentives offered to the agents were huge.  In the UK, 45% of the mortgages at that time were also ‘liar’s loans’.

This year, the annual “Public Eye” “shame prize” was awarded to Goldman Sachs for its abuses.  Bill Black writes:

The shame prize award was made in Davos during the World Economic Forum as a counter-WEF event.  Shell also “won” a shame prize, but I spoke on Goldman Sachs, the role of epidemics of accounting control fraud, and the WEF’s anti-regulatory and pro-executive compensation policies.  I explained that the anti-regulatory policies were intended to fuel the destructive regulatory “race to the bottom” and why the executive and professional compensation policies maximized the incentives to defraud.  I also explained that WEF was a fraud denier.  Collectively, these three WEF policies contributed to creating the intensely criminogenic environments that produce the epidemics of accounting control fraud driving our worst financial crises.

http://neweconomicperspectives.org/2013/01/the-handmaiden-of-capitalism-v-the-swamp-denizen-of-detroit.html#more-4614

 

William K. Black’s speech at the Public Eye Awards 2013 World Economics Forum

Published on Jan 25, 2013  greenpeaceCHgreenpeaceCH·167 videos

In  New Economic Perspectives Bill Black writes:

The central point that I want to stress as a white-collar criminologist and effective financial regulator is that Goldman Sachs is not a singular “rotten apple” in a healthy bushel of banks.  Goldman Sachs is the norm for systemically dangerous institutions (SDIs) (the so-called “too big to fail” banks).  Impunity from the laws, crony capitalism that degrades democracy, and massive national subsidies produce exceptionally criminogenic environments.  Those environments are so perverse that they produce epidemics of “control fraud.”  Control fraud occurs when the persons who control a seemingly legitimate entity use it as a “weapon” to defraud.  In finance, accounting is the “weapon of choice.”  It is important to remember, however, that other forms of control fraud maim and kill thousands.

http://neweconomicperspectives.org/2013/01/goldman-sachs-doing-gods-work-by-inflicting-the-wages-of-sin-globally.html

 

 

The Tory/LD Coalition Ministers and MPs never miss an opportunity to blame the last New Labour government for the ‘mess’ that they say they inherited.  However, they blame Gordon Brown for overspending on public services, when his real fault was to leave the City of London to become ‘the most criminogenic environment in the world for financial fraud’.  Needless to say, David Cameron and George Osborne have not taken the actions against financial institutions which would be necessary to protect the UK and the rest of the world from another financial crash .. Max Keiser predicts that it will occur this spring, perhaps April.

Gordon Brown Did Not Spend All the Money. The Banks Did.

“Fraud by false representation” is defined by Section 2 of the Act as a case where a person makes “any representation as to fact or law … express or implied” which they know to be untrue or misleading.

“Fraud by failing to disclose information” is defined by Section 3 of the Act as a case where a person fails to disclose any information to a third party when they are under a legal duty to disclose such information.

“Fraud by abuse of position” is defined by Section 4 of the Act as a case where a person occupies a position where they are expected to safeguard the financial interests of another person, and abuses that position; this includes cases where the abuse consisted of an omission rather than an overt act. 

(1)  http://neweconomicperspectives.org/2013/01/why-the-world-economic-forum-and-goldman-sachs-are-capitalisms-worst-enemies.html

http://neweconomicperspectives.org/2013/01/the-handmaiden-of-capitalism-v-the-swamp-denizen-of-detroit.html#more-4614

http://neweconomicperspectives.org/2013/01/goldman-sachs-doing-gods-work-by-inflicting-the-wages-of-sin-globally.html

 

The Rich Get Richer Explained by the Bears

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For US substitute UK .. the financial sector is not bound by national borders.

The Rich Get Richer Explained

Published on Oct 10, 2012

An explanation of the growing disparity between the poor and the rich in America.
by Omid Malekan

“Through the tax code, there has been class warfare waged, and my class has won,” Buffett told Business Wire CEO Cathy Baron Tamraz at a luncheon in honor of the company’s 50th anniversary. “It’s been a rout.”

Between 1979 and 2007, the richest one percent of Americans saw their incomes rise by 275 percent, according to a recent report by the Congressional Budget Office. The bottom fifth of Americans experience only a 20 percent jump.

http://www.huffingtonpost.com/2011/11/15/warren-buffett-tax-code-l_n_1095833.html

Michael Hudson describes how the financial overclass suggest a solution to increase their wealth still further:

‘As TARP Special Inspector General Neil Barofsky has described, “saving the banks” has been a euphemism for saving Wall Street from losses, not to mention criminal prosecution.’

‘The U.S. and European governments assume that the solution to clean up the financial wreckage is for economies to “borrow their way out of debt,” by creating yet a new bubble. The new article of faith is that high finance cannot lose; only the economy can be made to suffer losses, regardless of responsibility.

There is an alternative, of course. It requires overcoming today’s tunnel vision to undo the economy’s tragic detour that led to the bubble, the bailout, austerity, and economic polarization between creditors (the 1%) and the 99% in debt to them. The bank lobbyists’ narrative underlying the claim that governments need to bail out the banks at the expense of the “real” economy is that austerity will enable debts to be paid down by enough so that people can begin to borrow again. A new bubble will rescue us – and this time it will be better managed.

The counter-narrative is to recognize the financial sector comprises the Liabilities side of the economy’s balance sheet of assets and debts. As such, it has become a separate and indeed a perverse mirror image of the “real” production and consumption economy. A new debt bubble cannot succeed as a solution based on the economy “borrowing its way out of debt” in an attempt to re-inflate real estate and other asset prices. More bank lending will only impoverish the economy more, indebting the bottom 99% further to the 1%.

The dream is that borrowing can become part of increas(ing) the Magic of Compound Interest, continuing to enrich a financial overclass. But this cannot go on for long. It is a fantasy for governments to accept the financial lobbyist’s dream that the way to pull the economy out of austerity and debt deflation is to create a new bubble – to restore real estate as a speculative activity, to “create wealth” by re-inflating asset prices. It cannot be done honestly.’

Interesting use of the phrase “borrowing its way out of debt” which the UK associates with the Tory jeer against the opposition.  Of course, the Tories are meaning government borrowing and not private sector borrowing.  In fact, they are extremely keen on personal and household borrowing to pull the economy out of its hole .. as Michael Meacher reported in 2011:

Incredible as it might seem, the last straw that the Chancellor is clutching at is a huge increase in personal and household borrowing, which is already at more than £1.5 trillion—well above the level of Britain’s entire gross domestic product. Although it was falling at the last election, the OBR is now forecasting that it will reach £2.13 trillion by 2015—half as large again as Britain’s entire GDP. That is an extraordinary admission. The Government’s only way of imposing massive public expenditure cuts is by pumping up a gigantic financial bubble in the private sector, which can only end in another colossal financial crash.

 

As Michael Hudson says this is the financial lobbyist’s dream of continuing to enrich the financial overclass at the expense of the real wealth producers, the 99.9%.

http://neweconomicperspectives.org/2013/01/the-delicious-irony-of-morris-greenbergs-aig-suit-against-the-us-treasury.html#more-4415

http://www.michaelmeacher.info/weblog/2011/06/the-osborne-budget-1-year-on/#more-2527

Related Think Left post:

Neil Barofsky: How Washington Saved Wall Street and Abandoned Main Street

Plutonomy – Invasion of the Political Body Snatchers.