FRFI 205 October / November 2008

The turmoil in global financial markets has finally forced Labour’s smug Chancellor Alistair Darling to face up to reality. In a short period of six months, Britain, according to Darling, has gone from being best placed of the G7 major capitalist countries to withstand global economic turbulence (March), to facing an economic downturn that looked set to be more profound and long lasting than initially expected (mid-July), to confronting an economic climate that is ‘arguably the worst in 60 years’ (end of August). DAVID YAFFE reports on the impact of the financial storm now hitting the British economy.

To prevent the global financial system going into meltdown, over an extraordinary period of ten days from 7 September, the most right-wing neo-liberal US government ever nationalised the two giant mortgage providers Fannie Mae and Freddie Mac; refused to bail out the fourth largest investment bank, Lehman Brothers; helped direct the takeover of investment bank Merrill Lynch by Bank of America and rescued the world’s biggest insurer AIG, by lending it $85bn in return for an 80% stake, to prevent it going bankrupt. In addition the world’s central banks injected some $550bn into the money markets in an effort to get them functioning adequately again. Finally came a last-ditch US government plan to create a $700bn fund to buy toxic assets – value unknown – from the banks in an attempt to ease the credit crunch. This is a desperate effort to socialise the unsupportable debt of a parasitic and decaying capitalism.

British economy rocked by global financial storm
It is the particular parasitic character of British capitalism – its reliance on the earnings of its overseas assets, particularly its bloated and usurious banking sector, and the ever growing importance of financial and business services in the domestic economy – that makes it the imperialist country most vulnerable to external financial shocks.1 Britain’s overseas assets in 2007 were a remarkable £6,486.5bn, 4.7 times its GDP, with ‘other investments’, predominantly bank loans and deposits by UK banks, 2.74 times GDP – a gigantic usury capital. These assets are exceeded by the UK’s liabilities of £6,836.9bn, leaving a net external debt of £350.4bn, 25.4% of GDP. US overseas assets and liabilities, in comparison, are only around the size of its GDP. Despite its net external deficit Britain still has a positive investment income on its international investment account – it shares this feature with the US. However as funding costs for lending to the UK will increase significantly with the credit squeeze, these earnings will fall significantly, with serious consequences for Britain’s rapidly deteriorating balance of payments deficit. This deficit will grow and the pound will continue to fall against other currencies, reducing economic growth and the standard of living of the British people.2

Rescuing the banks
The need to defend the interests of Britain’s financial sector and the City of London’s vast international assets is central to Labour’s economic policies and that of any British government in power. The belief, now widespread in sections of the left, that the financial crisis has forced a change in Labour is risible. Larry Elliott believes the ‘Prime Minister has belatedly discovered his party’s social democratic roots’ (The Guardian 20 September 2008). Seumas Milne (The Guardian 25 September 2008) argues ‘Ministers such as Yvette Cooper, Ed Miliband, Ed Balls and Douglas Alexander have gone out of their way to attack “greed and excess” in the City and call for tougher regulation and greater boldness’. Brown’s promise to regulate the City was a real sign that he ‘will throw off the shackles of New Labour’ said Derek Simpson, joint General Secretary of Labour’s biggest trade union affiliate Unite. Fine words butter no parsnips. Ed Balls, two and a half years ago, was telling us that the government has to fight the City’s corner not just in Brussels but in New York, India, China and other centres around the world (Financial Times 23 May 2006). That was confirmed by Gordon Brown in his speech to the Labour conference on 23 September. Brown also said he wanted transparency, responsibility, sound banking and managed risks in financial transactions, with bonuses not based on speculative deals. But he claims this is to ensure ‘London will retain its rightful place as the financial centre of the world’. As we said two years ago: ‘Any Labour government elected to run British capitalism has to defend the interests of British imperialism and, in particular, take measures to promote the financial interests of the City’ (FRFI 194). The rest is hot air.

The Labour government has representatives of the parasitic banking corporations at every level of government, as ministers and advisors directing its social and economic policies and, in the heart of Downing Street itself, running the office of the Prime Minister. City businesses fund Labour-supporting think tanks such as the Institute for Public Policy Research and the Social Market Foundation’s policy forums. The payback has been a comprehensive opening up of public sector provision to private firms – estimated to be a £79bn industry. Business minister Baroness Shriti Vadera, a UBS Warburg investment banker, for example, forced through the disastrous £16bn Public Private Partnership financing of the London Underground. The influence of the City is all pervasive. The government will always look after City interests, first and foremost, in its increasingly ineffective efforts to stave off the unfolding crisis.

The Northern Rock crisis broke out just over a year ago and it took five months of frantically searching for a private sector takeover of the bank before the government was forced into a last resort nationalisation in February. Thousands of bank employees lost their jobs while loans and guarantees of around £87bn from the government keep the bank in operation.

The Lloyds TSB £12.2bn takeover of HBOS on 18 September unequivocally demonstrated the government’s priorities. HBOS was in deep trouble as its share price plunged around 70% in a week, falling at one stage to 88p, compared with 892p in September 2007. A Northern Rock-style run on the bank could not be ruled out. Its market value had fallen from £32bn a year ago to £7.75bn on 17 September. Yet its total income in the first half of 2008 was £6.5bn. The bank has 22m customers, over 1000 branches and 74,000 employees; it accounts for 20% of the domestic mortgage market and around 16% of the savings market. HBOS has wholesale funding requirements of £278bn which it must renew on the capital markets, 59% of which is relatively short term, lasting less than a year. The credit crunch makes financing these funds increasingly difficult and expensive. In addition its £236.5bn mortgage book is endangered by falling house prices and growing arrears in mortgage payments. This is why its share price plummeted. It was not, as some have made out, primarily the result of short selling by corrupt speculators, but is the result of the financial crisis hitting the capitalist system. The government banning of short selling is a cynical move to win the popular vote. It distracts from the root cause of the financial crisis – the unwinding of the unprecedented debt throughout the British economy (FRFI 204), which can no longer be postponed.

Lloyds TSB offered 0.83 of its share price for one HBOS share, valuing an HBOS share at takeover
at 232p. Cost savings of at least £1bn, the closing of 500 branches of the new bank and the loss of tens of thousands of jobs are being planned. The new merged bank will have links to 40% of homes, a retail deposit base of half the savings market, have around 35% of current accounts, 28% of the mortgage loans, 25% of small business banking, and a huge general insurance and investment business. This is the creation of a banking monopoly.

The government made it clear that it would disregard competition rules to allow this takeover, creating the largest retail banking group in the UK. It regarded a banking monopoly as far preferable to a Northern Rock-style nationalisation. Lloyds TSB chairman, Sir Victor Blank, thought it a ‘wonderful’ deal and said it was ‘landmark day’ for the financial services industry. He held out the prospect of using the new group’s financial muscle to expand overseas (The Observer 21 September 2008) – a more powerful addition to British imperialism’s parasitic banking sector.

Still the financial crisis intensified. On 28 September the government was left with little choice but to nationalise Bradford & Bingley, break up the bank and sell its profitable assets to another banking monopoly, Santander. Can anyone seriously call socialising the debt of failing banks and creating new banking monopolies a return to Labour’s ‘social democratic roots’?

Heading into recession
The UK economy finally ground to a halt in June. The pound fell to its lowest level against other currencies for more than 11 years. Gross mortgage lending in August was £21.8bn, down by 36% from a year ago. This deterioration in the housing market will feed back on economic activity, with the banks cutting back their lending and raising mortgage rates. Public finances went deeper into the red with the August deficit at £10.2bn, the worst figure for that month since records began in 1993. With the debt of Northern Rock’s nationalisation now brought onto the books for the first time, the national debt has reached 43.3% of GDP, well above the government’s 40% ceiling. With the addition of the cost of Bradford & Bingley’s nationalisation, the budget deficit this year could reach £110bn, more than two and half times the  budget forecast in March. There will be a severe squeeze on government spending.

Unemployment is rising rapidly. The number of claimants rose by 32,000 to more than 900,000 in August. This was the biggest rise since December 1992, having increased for seven months in a row. The total number of unemployed rose by 81,000 to 1.7m, the highest level for nine years. It could reach 2 million before the end of this year. The crisis in the financial sector is worsening the jobs outlook, with 19% fewer job vacancies in the finance and business service sector in the three months to the end of August compared to last year. Redundancies have risen by almost 15% overall and 31% in the construction industry since last year. This situation will rapidly deteriorate as the financial crisis hits home. Inflation has reached 4.7% while real earnings rose 3.5%, so most workers are facing significant pay cuts.

This then is the ‘real’ economy in which financial services’ share of GDP has risen to 9.4% from 6.6% in the mid-1990s and 8.5% in 2005. It accounted for 10.4% of gross value added in 2007 and was the second fastest growing sector of the British economy after oil and gas. 1.04m people work in banking, finance and insurance. The much broader financial and business services sector has grown by 57% since Labour came to power. It accounted for 33% of the gross value added in 2004 and employed more than 6 million people in 2005. Manufacturing has been close to recession throughout the last ten years and its share of GDP is now 13% compared to 21% ten years ago. These are the features of a parasitic and decaying capitalism. The Labour Party is never going to change this but, on the contrary, as the party in power, can only reinforce these developments.

1 See ‘Britain: parasitic and decaying capitalism’ in FRFI 194 December 2006/January 2007, available online:
2 See David Yaffe ‘On the road to recession’ in FRFI 204 August/September 2008. Online at