FRFI 211 October / November 2009

The financial panic is apparently over. Those investment banks that survived the crisis are back to business as usual, making huge profits from buying and selling stocks, bonds and commodities. Large bonuses worth millions of dollars are being doled out to bankers. Stock markets are rising again. The French, German and Japanese economies began to grow again in the second quarter of 2009. In mid-September Ben Bernanke, Chairman of the US Federal Reserve, said that the US recession is ‘very likely over’ and the governor of the Bank of England, Mervyn King, told MPs that the UK economy may have already started to grow. Finally Dominique Strauss-Kahn, head of the International Monetary Fund (IMF), has declared that ‘The global economy appears to be emerging at last from the worst economic downturn in our lifetimes.’ The immediate crisis might be over for the rich and powerful, but, as DAVID YAFFE reports, it still has a long way to run for almost everyone else.

The IMF reported in April 2009 that total support for the financial system from governments and central banks of the US, the eurozone and the UK had reached an unprecedented $8,955bn – $1,950bn in liquidity support, $2,525bn in asset purchases and $4,480bn in guarantees (Financial Times 16 September 2009). The sheer scale of this intervention explains why financial meltdown has been averted. But the economic crisis is by no means over. The overaccumulation of capital in the main imperialist countries, the lack of profitable investment opportunities globally for capital and the rivalries between the main imperialist powers that underlie the crisis have not even been addressed. What has occurred is that the losses of financial institutions have been socialised and transferred to government balance sheets. These will eventually have to be paid back. This deleveraging process – cuts in state welfare, tax increases and rising interest rates – has barely begun and when it does eventually get underway it could tip the main capitalist economies back into recession.

Socially useless banks’

The impact of the global crisis on the British economy has been accentuated by the central importance of financial services and particularly the City of London to British capitalism.1 There is public anger at the bonus culture, greed and arrogance of City bankers. This reality is even causing divisions in the British ruling class. The head of the Financial Services Authority (FSA), Lord Turner, in a remarkable interview in Prospect magazine at the end of August described some of the innovative activities of the City, such as credit default swaps, as ‘socially useless’. A former banker himself, Lord Turner said that the financial services sector had ‘grown beyond a socially reasonable size’. The FSA should, he said, ‘be very, very wary of seeing the competitiveness of [the City of] London as a major aim’, arguing that the City has become a destabilising factor in the British economy. If higher capital requirements are insufficient to curb excessive profit and pay in the sector then he is prepared to consider a global tax on financial transactions. His position is in direct conflict with that of the Labour government, whose central priority is to ensure that the British economy remains a ‘world centre of finance’2 the financial arm of British imperialism. In response to Turner, Treasury aides to the chancellor said that no such taxes on financial transactions were under consideration, and that Mr Darling insists that the City should continue to play a leading role in global finance (Financial Times 27 August 2009).

George Magnus, senior economic adviser at the Swiss corporate bank UBS, took Turner’s side on the excessive influence of the City. He pointed out that between 2005 and 2007 financial and housing sector-related activity made up 60% of the growth of the British economy. ‘Banks were using money to make money in a kind of casino fashion that has no socially useful purpose’. Karel Williams, professor of accounting and political economy at Manchester University, also sided with Turner, saying: ‘The final measure of the social uselessness of the City is that it has wrecked the public finances for a whole generation’. Richard Lambert, director general of the Confederation of British Industry, hit back a few days later, arguing that the City is a vital part of the UK and not a ‘bloated excrescence’ that unbalances the economy. He used the opportunity for a gratuitous attack on the public sector. Playing down the importance of the financial sector in the British economy – no more than 8% of gross value added – he said that the total pay of financial services employees represents a bit less than 4% of GDP. He continued: ‘For comparison, the public sector equivalent is over 16%. Which figure is too big?’ (Financial Times 29/30 August and 4 September 2009). Two weeks later Peter Levene, chairman of Lloyds, joined in attacking what he called ‘dangerous talk’ from those who seek to limit pay and reduce the size of the financial sector. ‘There is a very real danger that we shall end up doing irreparable damage to one of the strongest sectors of our economy.’ He said he was proud to be part of the City of London because ‘financial services are something at which we British excel’ (Financial Times 18 September 2009).

Cutting the public sector down to size

The ‘dangerous talk’ from Lord Turner about the bloated size and social uselessness of the financial services sector in the British economy was very quickly drowned out by an ideological assault on the public sector. Suddenly the most dangerous threat to the British economy became not the bloated financial sector, the banks and the bankers, but the debt of the public sector. This was given expression through an orchestrated campaign in the media with politicians of all persuasions rapidly and willingly following this lead. At least on this issue the ruling class could be united. What followed was almost a public auction by the main political parties over the cuts in public spending necessary to tackle the ‘unsustainable’ public sector deficit. The banks and bankers were off the hook.

With a general election due next spring, the political parties had previously been very cautious about their plans for the public sector. There is massive support within the country for public sector services and state welfare. Elections are decided by the votes of the better off sections of the working class and middle classes. They too rely on state services and public subsidies to sustain their higher standard of living. So the campaign against the public sector took some time to take off. It was directed not at public services but at ‘unsustainable’ public borrowing that had to be brought down.

Historically, the Tories are ideologically opposed to a large state sector. However, since he became leader of the party, David Cameron has tried to soften this Thatcherite image in order to win the centre ground back from Labour and make the Conservative Party electable once again. He has consistently refused to be drawn on his spending plans, while criticising the government for ‘losing control of the nation’s finances’. Previously he even said that he would not support a freeze of public sector pay, arguing that ‘I don’t think that is the way we do pay in this country’ ( 7 July 2009). He plays for the popular vote telling us he would cut ministers’ pay and end subsidised food and drink in the House of Commons, but admits that such savings are a ‘pinprick’ in relation to the overall amount of money he wants to save to bring the public deficit under control. His soft man approach is accompanied by the hard line, less cautious Tory shadow chancellor George Osborne. He keeps pressure on Labour over its ‘out of control’ public finances. A leaked Treasury document was published by the Conservatives in mid-September showing that earlier in the year, when Labour was accusing the Tories of planning 10% public spending cuts, the government had been planning to cut departmental budgets by 9.3%. Osborne declared that Gordon Brown’s attempt, at that time, to contrast Labour’s investment in public services to Tory cuts was dishonest: ‘he was not telling the truth’. Osborne himself has apparently ordered the Treasury’s permanent secretary, Nick Macpherson, to find savings of nearly 30% in departmental budgets, which would come into effect if the Tories gain power (Peter Oborne MailOnline 12 September 2009).

Over a couple of months the pressure had been gradually building up on Labour to come clean over its planned cuts in public spending or lose any remaining credibility. Following a softening-up speech by Labour’s business secretary, Peter Mandelson, at the London School of Economics a day earlier, Brown used the TUC conference on 15 September to tell trade unionists bluntly that sustainable public finances demanded: ‘cutting costs where we can, ensuring efficiency where it is needed, agreeing realistic public sector pay settlements throughout, selling off the unproductive assets we don’t need to pay for the services we do need’. His claim that frontline services would not face cuts under Labour is spin. This is the neo-liberal cost-cutting and privatisation agenda, which has been a central feature of Labour’s programme since 1997. Soon after this speech, Andy Burnham, the health secretary, said that the NHS has to find ‘efficiency savings’ of £15-20bn and Ed Balls, the minister for children, schools and families, £2bn from the school’s budget. Chancellor Alistair Darling is discussing with other ministers what cuts could be announced in the pre-budget report in November.

The Liberal Democrat leader, Nick Clegg soon joined the fray, telling The Guardian (19 September 2009) that Britain needs ‘bold’ and ‘savage’ cuts in current spending to bring down the public deficit. Liberal plans include a long-term freeze in public sector pay, cutting future public sector pensions and withdrawing tax credits from the middle class.

Government borrowing in August reached a record £16.1bn for that month, bringing public sector net debt to £804.8bn, 57.5% of GDP. Around £141bn of this debt, 10% of GDP, results from public sector intervention to rescue the banking system, a point that has been buried in the rush to cut public spending. All the ruling class political parties are now speaking with one voice. Far from the crisis being over, for the overwhelming majority of the British population it has barely begun.

The crisis deepens

Throughout the world the crisis is destroying the lives of millions of people. The OECD predicts that unemployment in the world’s 30 richest nations could reach 10% in 2010, with 25 million jobs lost in the downturn. For the underdeveloped countries the situation is far worse. The World Bank estimates that the crisis has driven a further 90 million people into extreme poverty; living on less than $1.25 a day.

In Britain unemployment continues its relentless rise. In the three months to July unemployment rose by 210,000 to 2.47 million, 7.9% of the labour force, the highest level since 1995. The number of people under 25 out of work rose dramatically to 947,000 in the same period, 20% of the age group, the highest since records began in 1992. With the British economy set to decline around 4.7% this year, unemployment will continue to rise.

The outlook is bleak. In August the Bank of England had surprised the City with a £50bn extension of ‘quantitative easing’ up to £175bn, breaking the limit of £150bn originally set by the chancellor Alistair Darling. This is the scheme by which the Bank of England creates ‘new money’ through buying assets, particularly government bonds, from banks and financial institutions, in the hope that these institutions will make more funds available for businesses and households to spend. So far the scheme is having very little impact, with the banks using the funds to rebuild their balance sheets, while restricting the availability of credit to the broader economy.

In July the net flow of lending to businesses fell by a record amount as companies paid back £15.5bn in bank debt. Companies paid off more debt in August. This follows a dramatic fall in investment in the British economy, which looks likely to continue. Business investment in the second quarter of 2009 fell by 10.2% compared with the previous quarter, and a fall of 21.8% compared with same quarter in 2008. This is the largest decline in business investment since records began 40 years ago.

This situation will rapidly deteriorate after the general election next spring when the planned cuts in public spending, demanded by international investors and willingly accepted by all the ruling class parties, get underway. At the TUC conference, the TUC general secretary, Brendan Barber, warned that spending cuts could drive the British economy into a ‘double-dip’ recession that would push unemployment up to more than four million, leading to the threat of industrial action by millions of workers, and riots on the streets last seen in the 1980s. ‘Last time we suffered slash and burn economics we had riots on the streets here in Liverpool’, he said, as though this threat would deter the ruling class from their course of action. The ruling class remember very well that during the uprisings (‘riots’) of black and white youths on the streets of British cities in the early 1980s, the then TUC general secretary, Len Murray, condemned them, saying: ‘Violence is no solution to the problems of the inner cities and I condemn those who have used it’. He was joined in this condemnation of violence by Tony Benn of the Labour Party, the Communist Party of Great Britain, the Socialist Workers Party and an assortment of Trotskyist groups.3

Class politics in this country can only be rebuilt by a militant movement coming on to the streets and involving millions of working people, young and old, in work and unemployed, determined to resist the destruction of public services. This will be necessary whichever party is in power after the election. Such a movement will have to confront the traditional forces of the organised British Labour movement, which will do everything necessary to limit any challenge to the ruling class and the capitalist system which it sustains.

1 See David Yaffe ‘Britain: parasitic and decaying capitalism’ FRFI 194 December 2006/January 2007.

2 Darling made this point patently clear in his Budget speech in April 2009. See David Yaffe ‘Years and years of austerity ahead’ FRFI 209 June/July 2009

3 This was reported at the time in FRFI 12 September 1981 and FRFI 14 November 1981.