They promised economic stability, order and prosperity. But instead the world's bankers have delivered chaos, debt and uncertainty - and then blamed the feeble governments that surrendered control of the global economy to them. In the first of three extracts from their new book, Larry Elliott and Dan Atkinson explain how the reckless speculation of a super-rich elite has left us all the poorer
* Larry Elliott and Dan Atkinson
* The Guardian,
* Monday June 2 2008
March 2008 was no time to be a welfare scrounger in Gordon Brown's Britain. That month saw a much-trumpeted move, the latest of many since Labour came to power in 1997, to end the so-called "sick-note culture".
On March 17, Dame Carol Black, the government's national director for health and work, declared that absence and worklessness related to sickness were costing the country £100bn a year, and it was announced that ministers were to look at replacing the doctor's sick note with a "fit note", detailing what people can do rather than what they cannot when they are on leave for health reasons. This was of a piece with the "tough love" approach of Brown and his predecessor to those on welfare benefits. It was all about reminding those who wanted to get their hands on public money that rights came with responsibilities.
Four days later, the chief executives of Britain's five largest banking institutions - Barclays, HBOS, HSBC, Lloyds TSB and Royal Bank of Scotland - met the Bank of England. In the jargon of the City, they wanted governor Mervyn King to widen the types of collateral against which the Bank would lend to the clearing banks. In plain English, they wanted him to lend taxpayers' money against much flakier assets than would normally be considered acceptable.
Why did they need this handout? Because banks themselves had stopped lending each other money. The collapse of the US housing market, and the complex financial instruments that had been spun off from it, had caused chaos in the money markets. The victims of last year's "subprime crisis" included two of the world's most respected banks, America's Bear Sterns and France's BNP, while the "credit crunch" that followed claimed Britain's Northern Rock. Those banks that escaped unharmed were sure of only one thing: with so many of their peers exposed to incalculable risks, there was more bad news to come.
That fear seems amply justified. Speculation has left the global economy more vulnerable to a financial collapse than at any time since 1929. According to the supposedly sophisticated models used by market practitioners, a stock-market crash such as the one in 1929 was likely once in 10,000 years. They said the same, however, about the stock market crash of 1987, the collapse of the hedge fund Long Term Capital Management in 1998 and the subprime crisis. The obvious conclusion is that these models are flawed. The International Monetary Fund (IMF) recently described the crisis that erupted last August as "the largest financial shock since the Great Depression". George Soros, the billionaire speculator who knows a thing or two about financial upsets, says the world is facing the "most serious crisis of our lifetime".
Fortunately for the banks, in Brown's Britain they are seen as a cut above the average benefits scrounger. A month after they visited King, the governor announced a £50bn "special liquidity scheme" to provide emergency loans to struggling institutions. It was a similar story across the Atlantic. Over the weekend of March 15 and 16, America's central bank, the Federal Reserve Board, launched a rescue for Bear Stearns, the country's fifth-largest investment bank. To smooth a takeover by JP Morgan Chase, the Fed assumed up to $30bn (£15bn) of Bear's more doubtful assets. Were this act of corporate welfare not sufficient, the Fed also announced that it was to provide emergency liquidity to the market. For good measure, it cut interest rates.
What was most extraordinary about all of this was not the bailing-out of City and Wall Street types who had spent decades, like surly teenagers, insisting that they wanted only to be free from the stuffy, paternal state institutions to which they now turned for help. Rather it was the failure of those same institutions to insist on any quid pro quo. In the real world, when a wild-child son or daughter comes home, tail between their legs, their "boring" parents usually require them to clean up their act in return for financial support and use of their old bedroom. Not so in the world of banking and finance. In remarks to the press in March, the British treasury actually ruled out tougher controls.
But then there is plenty of evidence that, in Britain as elsewhere, those in government could see little wrong with the system as it is. Democratically elected governments have, over the past three decades, willingly ceded control of the world economy to a new elite of freebooting super-rich free-market operatives and their colleagues in national and international institutions like the IMF, the World Bank and the World Trade Organisation. These New Olympians, who earn that title by their remoteness from everyday life and their lack of accountability, have gained this control on a prospectus every bit as false as much of the promotional material for the "exotic securities" of which they are so fond. The charge sheet is as follows:
· They promised economic stability - and have delivered chaos and volatility.
· They promised an economic order based on enterprise, thrift and personal effort - and have delivered one based on chronic indebtedness and wild speculation.
· They promised a "transparent" future in which all costs and prices would be clearly laid out - and have delivered a world of bizarre, occult financial knowledge.
· They promised a greatly expanded middle class of property- and share-owning individuals - and have unleashed havoc on professional and white-collar career structures.
But then none of this ought to be surprising. The New Olympians are unconcerned with - in fact, hostile to - job security (other than their own), social tranquillity and the traditional aspiration for both the good life and the quiet life. They roll their eyes when they hear that the Detroit car worker, the Argentinian shopkeeper or the Cornish fisherman is complaining that their way of life is under threat. Like it or lump it, the New Olympians say. That's just the way it has to be. Meanwhile, elected politicians bend over backwards to make life as pleasant as possible for them.
That was vividly illustrated in February when the British government backtracked on its extremely modest proposals to increase taxes on some of the heroes of business and finance. These were the wealthy "non-domiciled residents" who, while living in the UK, claimed their residence to be elsewhere and paid tax only on income shown to have been earned in Britain. In his pre-Budget report in October 2007, the chancellor, Alistair Darling, had proposed a tougher regime for those 20,000-odd non-doms who had been in Britain for seven years or more, a regime that included the payment of an annual £30,000 flat tax to the exchequer. The backlash from the assembled bankers, ship-owners and other tycoons was predictable, as their political and media apologists lauded their contribution to economic growth and employment and warned of disaster should these philanthropists take themselves elsewhere.
Vince Cable, the Liberal Democrats' treasury spokesman, noted the bizarre nature of the campaign being waged: "We hear stories that a high proportion of non-doms will flee ... It is also claimed that public discussion of non-dom taxation is dangerous because it might frighten these fragile creatures away. This is effective propaganda. We are in the absurd position that some taxpayers on modest incomes have started to feel sorry for the wealthy tax-avoiders."
To be fair, at least 100 Labour MPs failed to accept that global competition means that all workers except CEOs and top directors must accept lower real wages and pensions and poorer working conditions. Nor did they find it convincing that globalisation makes all types of labour more abundant, except chief executives. Brown and Darling, however, seemed to have swallowed the argument. The charge would stay, it was announced, but into the waste-bin went earlier, hated suggestions of making non-doms report on the source of their earnings abroad. Furthermore, there was a categorical statement that the tax changes would not be retrospective.
Growth under the Blair and Brown governments has relied excessively on speculation in two forms: that in the City and that by home-owners. Economically, the legacy is a debt-sodden, lopsided and unequal country in which the pay of those at the top rises at 10 times the rate of those at the bottom. Instead of taking on the City, however, the government has turned its attentions to the workforce - both blue-collar and white-collar - which has to be made ready for the global challenge from China and India by being re-skilled and re-educated and by learning how to be "entrepreneurial". Furthermore, the majority is routinely subjected to ever more illiberal, intrusive and obnoxious interference from state agencies, whether in terms of visual surveillance and the proposed identity card scheme, or in terms of being instructed to change their "attitudes" on a range of subjects.
In the period before the New Olympian takeover, market capitalism proved remarkably good at providing both peace of mind and material advancement. Living standards rose rapidly, financial crises were rare, banking crises rarer still. The New Olympian regime, by contrast, has offered neither faster growth in living standards (for at least 99% of the population) nor peace of mind. The modern era has been characterised by slower growth in average real incomes, higher levels of debt to maintain living standards, greater job insecurity and financial crises that have become more frequent and more far-reaching. The only class that has benefited unambiguously from the new world order has been that of the New Olympians, just as the only creed that has been accepted has been their creed.
The ancient Greeks believed their 12 most important gods and goddesses lived on Mount Olympus. They all had a special significance. Zeus, the lord of the gods, ruled the sky; he was responsible for thunder and lightning. Poseidon, his brother, was the king of the sea; he could ensure that a traveller returned safely home to port. Aphrodite was the goddess of love, Ares the god of war, Apollo the god of the sun and music. Today, there are another dozen governing spirits that hover above and direct our daily lives.
First among these modern gods is globalisation. The ancient Greeks worshipped Zeus; today's cosmopolitan elite pays homage to a world without borders. From the acceptance that economic power had shifted from the nation state to the global market, everything else stems. Governments that seek to meddle with the global market do so at their peril. Rather than tame globalisation, they are supposed to ready their citizens to compete in a world of cut-throat competition. Rather than putting tariffs on foreign steel or banning a foreign company from buying their ports (as the US has done) or seeking to prevent cheap food from undercutting their farmers (as the French have done), they should invest in education, skills and science in the belief that this will "brain-up" their population and create a knowledge economy that will find an upmarket niche in a world awash with cut-price goods. This, of course, is Brown's approach. Whether or not it works is another matter. As the twin engines of the economy struggle, there is little evidence of the knowledge economy riding to the rescue. Indeed, the managerial incompetence that marked the opening of Heathrow Terminal 5 suggests a national shortage of grey matter.
The twin brother of globalisation is communication. The development of powerful digital technology has transformed the way the world works. Had a French bank run into difficulties as a result of financing Napoleon's wars in 1807, for example, it would have taken days for the news to arrive in London, and weeks for it to get to New York. Yet when BNP announced that it was having problems, every dealer in Wall Street and Canary Wharf knew within seconds.
Nation states, despite the impact of globalisation and communication, retain considerable power. They control the flow of imports into their markets; they have controls on the movement of capital; they run industries that are considered to be strategic; they believe that some sectors of the economy - health and education - should be shielded from the full blast of competition. These are, however, impediments to the smoother running of the global market and thus need to be removed. The World Trade Organisation - a supranational body with punitive powers for governments that transgress its rules - started a new round of talks in November 2001 designed to open up markets in agriculture, manufacturing and services. The IMF and the World Bank insist that poor countries receiving financial assistance should abandon state control of their mines, banks and energy companies. In Brussels, the European Commission is dedicated to the removal of the restrictive practices and state subsidies that throw sand into the machinery of the single market. The next three gods are, therefore, liberalisation, privatisation and competition
The sector of the economy to benefit most from these developments was finance. International banks had always tended to have global reach, they could benefit more than any other sector from more rapid communication, it was in their interests to have barriers on capital removed, they picked up hefty fees for organising privatisations, and competition allowed them to wipe out weaker competition. What was not really apparent until last year was how powerful this sixth god - financialisation - had become. In countries like Britain, the expansion of the City of London had been the engine of the economy's growth - the fastest-growing parts of the finance sector expanded at around 7% a year between 1996 and 2006. Meanwhile, manufacturing output stagnated. Financialisation, it was argued by its proponents, was good for a country like Britain. It allowed the country to specialise in what it was good at, made London the hub of global finance, encouraged innovation and - by allowing the market to decide where capital should go - made the economy more stable. Whether this proves to be true in the long term remains to be seen. In the short term, economic growth did not accelerate, productivity did not surge, there was no miracle cure to the balance of payments and only rare glimpses of trickle-down.
Until last year, it was easy to argue that these first six gods were beneficial to the global economy, and at worst, neutral. Privatisation in developing countries, for example, was heralded as a way of preventing corrupt ruling cliques from siphoning off profits into Swiss bank accounts. Globalisation was specialisation on a grand scale: the logical conclusion to the sort of division of labour that Adam Smith and David Ricardo had envisaged 200 years ago. The modern world not only means that we can keep in touch by email with our cousins in Cape Town and buy an agreeable Malbec from an Argentinian vineyard in the foothills of the Andes, but also allows our pension fund to buy shares in an Indian software company. On paper, this life of greater choice, freedom and opportunity sounds splendid. It is certainly preferable that modern communication technology allows Mozart's clarinet concerto to be heard on a CD player in any living room rather than being the exclusive preserve of the court of the Austro-Hungarian emperor in Vienna. In reality, however, the world doesn't work this way - and that's because the remaining six gods have such potentially dangerous properties. These are speculation, recklessness, greed, arrogance, oligarchy and excess
Speculation is not always harmful. Britain's 15 years of uninterrupted economic growth from 1992 onwards was the direct consequence of sterling being forced to leave the European exchange rate mechanism following an attack on the pound orchestrated by Soros. Freed from the need to use excessively high interest rates to defend sterling, growth picked up and unemployment came down. Yet the activities of the big banks and the hedge funds in the first half of 2007 had no noble purpose: far from rectifying a glaring public policy error, they exploited a problem in the private sector - the granting of mortgages in the US to those who couldn't really pay them. Financialisation had created an inverted pyramid. Instead of having a broadly based productive economy supporting a financial sector that had speculation as one of its lucrative but less important activities, a diminished productive sector supported an ever-bigger financial sector that saw speculation as the very reason for its existence.
It would be naive to believe that greed could ever be expunged from financial markets: the pursuit of riches is, and always has been, a factor motivating those who buy and sell shares, bonds, currencies and commodities. Nor is it uncommon to find that the brokers and dealers do rather better out of asset-price bubbles than their customers; as long ago as 1940 the Wall Street veteran Fred Schwed wrote a book called Where Are the Customers' Yachts? Every so often, however, the money lust becomes so pronounced that it crosses the dividing line between cupidity and criminality. Since 2002, a wave of mis-selling has been evident in the US real estate market, with tales of pensioners with only a tiny amount outstanding on their loans tricked into remortgaging their homes at ruinous rates of interest by unscrupulous mortgage brokers.
In January, panellists at the World Economic Forum in Davos were asked how the big banks of North America and Europe had failed to spot the potential losses from subprime lending. The one-word answer from a group that included the chairman of Lloyd's of London and the chief risk officer of the insurance company Swiss Re was "greed". As one participant put it: "Those running the big banks didn't have the first idea what their dealers were up to, but didn't care because the profits were so high."
It goes without saying that those responsible for the speculative bubble of early 2007 could not conceive that one day it would burst. That was where the arrogance kicked in. The super-heroes of the New Olympian order were the brightest and the best of their generation. Their activities were making massive profits, a good chunk of which were being paid out in seven-figure bonuses that kept property markets humming in the Cotswolds and the Hamptons. Could they really be guilty of crass stupidity? Even when cracks did start to appear, the New Olympian class managed to blame everyone but themselves.
Bob Diamond, the American chief executive of Barclays Capital in London, earned £22m in 2006 and was the sort of person who saw no reason why his money-making activities should be curtailed by red tape. But in August and September 2007, once the going had got tough, Diamond conducted a vigorous campaign against the Bank of England's Mervyn King for failing to provide the same sort of help to banks in the UK as was being provided by the Fed or the European Central Bank, which had stepped in after BNP's problems. As one commentator noted, this state of affairs was tantamount to the police being forced to provide a getaway car to bank robbers for fear that even greater damage would be caused by not doing so.
The response to the market meltdown helps illustrate the final two principles that govern the modern world. One is that, despite the lip-service paid to democracy, western societies are in effect run by moneyed oligarchies, who have as little time for their wage slaves as did the ruling elite of ancient Athens. In February 2008, two weeks after Darling's U-turn on the taxation of non-doms, Brown and his ministers opposed a private member's bill designed to give greater rights in the workplace to agency workers - part-timers who face some of the lowest wages and toughest working conditions of any group.
It is tempting to say that the final god of modern finance is weakness, because it was certainly apparent in late 2007 and early 2008 that the apparent strength of the financial markets was illusory. The happy-go-lucky mood evaporated instantly, with the write-down of losses accompanied by some token sackings of executives and followed by more stringent lending for the real victims of the credit crunch - individuals and businesses forced to pay more when they borrowed. Weakness, though, cannot really be included as a principle of the New Olympians, since nobody willingly seeks to be weak. Rather, our 12th and last principle is excess. It is an axiom of the global order that there is never too much of anything: never too much growth, never too much speculation, never too high a salary, never too many flights, never too many cars, never too much trade. It was for that reason, perhaps, that the financial crisis was accompanied by rising inflation - as demand for oil and food pushed up prices globally - and by almost daily evidence of the impact of global warming. Losses in the financial markets; hardship for pensioners facing dearer heating and food; climate change. There were no prizes for guessing which the New Olympians considered the most pressing issue for policy makers.
The gods promised us paradise if only we would obey and pamper their hero-servants and allow their strange titans and monsters to flourish. We did as they asked, and have placidly swallowed the prescriptions of the lavishly rewarded bankers, central bankers, hedge fund managers and private equity tycoons, while turning a blind eye to the rampaging of the exotic derivatives, the offshore trusts and the toxic financial instruments. Had they delivered, there would, at least, be a debate to be held as to whether the price was too high, in terms of the loss of democratic control and widening social inequality. But they have not. Chronic financial instability and the prospect of, at best, years of sluggish economic activity are the fruits of their guidance.
These gods have failed. It is time to live without them.
© Larry Elliot and Dan Atkinson 2008
· Extracted from The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future by Larry Elliott and Dan Atkinson, to be published by The Bodley Head on Thursday, priced £12.99. For more information see the authors' blog at thegodsthatfailed.co.uk. To order a copy for £11.99 with free UK p&p go to guardian.co.uk/bookshop or call 0870 836 0875.
How Britain's middle class was betrayed
* Larry Elliott and Dan Atkinson
* The Guardian,
* Tuesday June 3 2008
The summer of 2007 was a washout - literally so for people in Gloucestershire, Herefordshire, Yorkshire and beyond, who suffered severe flooding. Autumn weather alternated between further rainfall and plunging temperatures. The glorious summer days and fiery autumn colours of 2005 and 2006 seemed a fond memory.
Poor weather was matched by growing unease in the British middle class as 2007 turned into 2008. On every front, its living standards, status and career prospects were threatened, along with such objects of affection as the value of its homes and its children's education.
Life was still sweet for the New Olympians, the pampered rich who run the country's biggest companies and financial institutions. But Middle Britain, that union of the traditional professional middle class and the much wider group of "aspirant" households, was facing the stark possibility that 15 or more years of prosperity were drawing to a close. Worse, its members could have been forgiven a sneaking feeling that they were now the target of the sort of asset stripping that had been visited on the nation's factory workers, on those employed in "primary" industries such as farming, fishing and mining, and on small shopkeepers, thousands of whom had been driven out of business by supermarkets.
Indeed, on the subject of supermarkets, lawyers learned this time last year that they had a new competitor. "Tesco," the Sunday Telegraph reported, "is plotting to take on high-street solicitors by launching a property conveyancing service ... The move is likely to see a call centre-type operation offering shoppers a low-cost, computerised service."
Lest anyone comfort themselves with the thought that property conveyancing is a pretty standardised service, and that a supermarket's incursion into the market is nothing about which to get excited, beware. The Labour government's "liberalisation" of the legal system, due to take full effect by 2011, aims to allow all legal advice, not merely conveyancing, to be dispensed from booths in supermarkets. Not for nothing have the "reforms" been dubbed "Tesco law".
As with the City of London's "Big Bang" changes in 1986, "Tesco law" allows firms of solicitors to seek outside investment and even have their shares listed on a stock market. This parallel was made explicit in an authoritative news report on November 9, headed "Law firms gear up for their own Big Bang". "Observers inside and outside the profession," reported the Financial Times, "say the very act of selling out would destroy the value of the business, as young lawyers who had been aiming to become partners would immediately leave and go into a better-paid industry such as banking. Young lawyers would stay only if the new owners raised pay sharply so that salaries and bonuses were competitive with those at leading investment banks."
This, of course, is precisely what happened to the stockbroking and stock-jobbing professions after Big Bang. Partners sold out for huge sums and firms were absorbed into anonymous, all-purpose "investment banks". With the checks and balances of the partnership system replaced by bonus-driven salary packages, the way was clear for "rogue traders", most famously Nick Leeson, whose reckless gambles brought the bank Barings to its knees.
Nor was the law the only middle-class profession to face the asset strippers in 2007. In early November, the Heart of Birmingham primary care trust announced plans to let private firms run general practitioners' surgeries. According to the trust, Asda and Tesco had expressed an interest, as had Sir Richard Branson's Virgin group. As the Sun reported, "the trust said the non-health organisations ... were confident they can replicate the best aspects of the GP partnership's relationship with its patients. They do this with their customers on a daily basis." The British Medical Association attacked the proposal, with one member of the GP Committee claiming that "continuity of care" for patients would be disrupted if the private firms took over surgeries, while some smaller practices would be forced out of business.
By the early weeks of this year, the government was in a confrontation with family doctors over extended opening hours for surgeries. From the doctors' ranks came murmurings that this was merely a dummy run for a much bigger battle, started by ministers, to force doctors into anonymous "polyclinics" run by private companies. On January 29 the London Evening Standard reported: "A private American health firm has won control of three GP surgeries in London. The deal with United Health Europe opens the way to the privatisation of family doctors' practices. It comes after a government push to put primary care into corporate hands. Doctors have warned that patients could suffer as conglomerates offer 'cut-price deals to win contracts'."
If that sounded an extraordinary sell-out by a supposedly Labour government, it was of a piece with the news on January 28 that commercial companies were for the first time to be allowed to award nationally recognised qualifications based on their own workplace training schemes. In a parody-defying move, the government announced that the first three accredited schemes would be run by the burger chain McDonald's, the airline Flybe and the train track operator Network Rail. The Guardian that day reported: "Staff at McDonald's will gain the equivalent of A-levels in running burger restaurants after the fast-food giant won government approval to become an exam board."
Elsewhere, plans to slash the Post Office network were being finalised. Of the 14,000-strong branch network, 2,500 were to close, leaving customers and communities stranded. The Telegraph described it as "an act of community vandalism" that would "rip the hearts out of many of our small towns and villages".
For generations, the job of sub-postmaster and sub-postmistress has been part of the very backbone of middle-class respectability. Yet despite the terrible sadness of the destruction now being wreaked on the Royal Mail, the way it came about is instructive. The Conservative government of the early 1990s announced plans to privatise the Post Office, but backed down in the face of enormous public protest. Undaunted, ministers and bureaucrats merely put the country's name to a European Union scheme to liberalise all EU postal services, which would have much the same effect without too much in the way of pesky public debate.
When the branch closure programme - coupled with the abolition of second deliveries - evoked protest, the Royal Mail and the government were able to claim they had no choice, as the service had to be made leaner and fitter in order to compete with both private delivery organisations and foreign post offices.
Lawyers, GPs, sub-postmasters ... like bewildered characters in a superior television thriller, all seem destined by some shadowy authority for punishment for crimes the nature of which has never really been spelled out. Nor are they alone. The bank manager, in times gone by a pillar of the community, has virtually disappeared in his old form. Lending decisions have been almost entirely centralised, using complex computer risk-assessment systems. Managers and staff are expected to concentrate on selling financial products - insurance, savings, investments and the like.
If the unrestrained free market threatens the status and earnings of the middle class on one flank, the activities of government mandarins pose quite a different threat on another.
Next in the affections of the denizens of Middle Britain to the value of their homes (and often linked intimately with that value) is their children's education. Since the late 1980s, the official emphasis has been on parental choice within the state system. By last year, however, it was becoming clear that, in the wonderful world of public education, "choice" was not meant to involve actually choosing anything. Indeed, making effective school choices was thought to be vaguely reprehensible. In November the admissions regulator, Dr Philip Hunter, declared that schools should select pupils by lottery to prevent middle-class parents monopolising the best comprehensives. The policy should be used even if "deeply unpopular with groups of articulate parents".
The Department for Children, Schools and Families broadly agreed with Hunter. That in doing so it was tacitly admitting that parents, rich and poor, would try to avoid like the plague a large number of the schools for which it was directly responsible would not be lost on Hunter's "articulate parents" - or even, perhaps, on the inarticulate ones.
At this point, the neutral observer may find his sympathies starting to drift. Does not the school lottery affair highlight a problem with going to the defence of Middle Britain at this time? Is it not merely a defence of semi-closed shop arrangements that may be agreeable to those on the inside but less so to those who are not? After all, if Tesco can provide cheap legal advice from a corner booth and medical services in a similar (albeit, one would hope, rather more private) location, what is so wrong with that?
We would argue on four grounds that there is likely to be a great deal wrong with it. First, from the customers' point of view there is little - indeed, no - reason to believe that the public, as a whole, will enjoy better or cheaper professional services from corporate providers than they do from local partnerships. Some of these providers will doubtless seek to cherry-pick the best customers, as (quite legitimately) did the pioneering telephone insurance service Direct Line and its banking equivalent First Direct. Those customers will receive favourable offers. The others will not, being offered instead standardised "quickie" services. In law and medicine, in particular, where personal advice and consultation are so vital to the provision of the service, this could prove a very bad deal indeed.
Second, the transformation of independent professionals, who are effectively self-employed, into salaried corporate employees will be bad for everybody. It will rob ordinary people of sources of confidential service and bloat further the power of large corporations. Professionals provide an important counterweight to other forms of power, and can assert their independence in ways that corporate employees cannot. Pro bono work is different in kind from PR-driven "corporate social responsibility".
Third, an independent professional class has value beyond its utility as a source of advice and as a bulwark against the power of companies and the state. It provides a continuum within which aspirations can be satisfied while delivering a public service. If social tranquility matters more than shareholder value, the independent professional class should be shielded from corporate and other depredations, not exposed to them.
Fourth, as we have said before, if these dumbed-down, commoditised, supposedly cheap, corporately owned services are so good, why do we rarely hear of members of the wealthy elite using them? Why do the New Olympians prefer to stick with the traditional one-to-one relationship with doctors or solicitors?
The reply could be that they can afford it; but so, at present, can most people, thanks to the ways in which the National Health Service and the legal profession are structured. The local GP's surgery may be down at heel compared to the Harley Street consulting room, but the two are fundamentally the same thing.
School lotteries may appear to raise a separate issue, involving as they do the middle class solely as a user of one particular type of public service. But the neat symmetry of the whole affair is a near-perfect illustration of the way in which Middle Britain has been "had". For 10 years, the government supported the whole notion of parental choice while suggesting it would become increasingly irrelevant as all schools were steadily improved. With the lottery, the illusion is ended - the government opposes the whole notion of parental choice precisely because it exposes the fact that there has been no such improvement.
Middle Britain has been conned, well and truly.
Where did all the money go?
By no stretch of the imagination could the public sector be considered to be starved of cash. In the eight years between 1999-2000 and 2007-2008, public spending in Britain rose by 29% when adjusted for inflation.
Even so, the local police station that was once open 24 hours a day, seven days a week, is now open only between 8am and 4pm and closed all day Monday. The local sub-post office is closing for good, the library is short of books, and the weekly refuse collection is fortnightly.
Voters supported the increase in spending: they had been unhappy at the shabby state of the public realm in 1997 and wanted to see extra investment. They now want to know what has happened to all the money.
The government's answer is twofold. First, it says the money has led to an improvement in services, which is true but only up to a point. Given the colossal increase in spending - particularly on health and education - it would have been miraculous had there been no benefits; the question is whether the improvement matched the scale of the investment. Sad to say, it does not. In the NHS, for example, productivity has been falling; in education, there is no evidence that extra money has meant higher achievement. The government argues that, after the hard rations of the 18 years of Conservative rule, it will take time for the extra money to show up in higher productivity.
While stretching the boundaries of plausibility, this explanation is a lot more convincing than the second reason for the economies made by ministers, namely that they have a duty to make sure that precious resources are spent as efficiently as possible. If that means temporary opening hours at police stations that might have only two callers a day, or the closure of "uneconomic" post offices, then so be it.
This is undermined by the glaring examples of New Labour's non-efficiency once big corporate and financial interests become involved. These include the £2bn bail-out for the failed Underground maintenance contractor Metronet; the doubling of the cost of the new IT system for the NHS from £6bn to £12bn; and the systematic closure of hospital beds to pay the fees on Private Finance Initiative contracts.
Clearly, there have been beneficiaries of the surge in public spending over the past eight years. It is, however, not immediately apparent that the real gainers have been either the public or those at the sharp end - the nurses, the refuse collectors, the librarians, or the police.
Labour used to be accused of allowing producer interests to "capture" the public sector. It is still open to that charge. But now the producer interests in question have bigger salaries, drive more expensive cars, and appear to have been singularly unsuccessful in delivering for the public.
© Larry Elliott and Dan Atkinson 2008.
· Extracted from The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future by Larry Elliott and Dan Atkinson, to be published by The Bodley Head on Thursday, price £12.99. To order a copy for £11.99 with free UK p&p go to guardian.co.uk/bookshop or call 0870 836 0875. For more information see the authors' blog at www.thegodsthatfailed.co.uk.
· This article was amended on Tuesday June 3 2008. In the article above we mentioned Public Finance Initiatives. We meant Private Finance Initiatives. This has been corrected.
The fightback starts here
The excesses of banks, big business and the super-rich have shattered our economic system. In the final extract from their new book, Larry Elliott and Dan Atkinson put forward their principles for a fairer and more cohesive society
- The Guardian,
- Wednesday June 4 2008
For those with long memories, today's financial crisis evokes nothing so much as the 1978-79 "winter of discontent", when Britain's trade unions, after weeks of often bitter strike action, smashed through a government pay limit. In place of the mounds of uncollected rubbish on the streets are mounds of suddenly worthless securities that nobody wants to buy. For the trade unions who believed their size and membership made them too big to ignore, there are the banks and brokerages that are, apparently, too big to fail. For the flying pickets, there are the financiers in pinstriped suits informing one and all that the failure of taxpayers to bail them out of the consequences of their huge mistakes would threaten a global meltdown.
It's a depressing picture, certainly, but it prompts another reflection. The tables were turned on organised labour after the late 1970s, in both Britain and America. Might capitalism's winter (and spring) of discontent also prompt elected governments to reform an economic system that has been shattered by the excesses of the New Olympians? Might policymakers at last attempt to rein in the reckless orgy of speculation? With even the banks themselves admitting their mistakes, no more promising moment has presented itself for more than half a century. We can envisage a US president within the next few years dusting down a copy of Franklin Roosevelt's 1933 inauguration speech, when he said the "practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds
of men".
It is against this background that we set out our own proposals for reform - a New Populism to replace the New Olympianism.
First and foremost among its principles is the subordination of finance. Before the current madness, from Washington in the 1930s to London in the 1940s to Paris and Bonn in the 1950s and 1960s, financial-sector activities were kept on a tight rein, their destructive potential fully realised and their proper, auxilary role in relation to the real economy kept firmly in focus. It is time to remember that banks and other large corporations are creatures of law, and it is the public's right and duty to supervise them.
Furthermore, they, the financial New Olympians, have had their chance. The result of letting them off the leash has been a disaster.
Next comes personal and social security, the principle that society should insure its members against misfortune, protect their savings and make proper provision for their old age. This is what we tried to do in the past, and, in Britain, are trying again to do, with very mixed results, using a range of entitlements of frequently baffling complexity. The loss of a person's job ought to be a problem, not a cosmic disaster.
Savings in approved schemes ought to be guaranteed. Why are the sort of high-quality pensions on offer in the postwar period now "unaffordable"? It would rightly be thought extraordinary were policymakers to agonise today over the difficulties of ensuring the average family could buy an Austin Cambridge car and a black-and-white television - our society is greatly wealthier than it was 40 years ago, and very much improved cars and consumer goods are relatively much less expensive. Why retirement schemes should be any different is not clear.
A third principle is accountability, or "democracy", to put it slightly differently. The leaching away of powers from national parliaments to the New Olympians' mandarin allies in bodies such as the IMF, the World Trade Organisation, independent central banks and the European Commission would be obnoxious even without the economic and financial turmoil that it has created. So great is the democratic deficit that people increasingly either do not bother to vote or vote for non-mainstream parties. The answer from left-of-centre parties, terrified of crossing the Olympian orthodoxy, has been more of the same. Thus the UK's Labour party is losing votes to the British National Party and the Irish Labour party is losing votes to Sinn Fein. The response of both parties has been to cede more powers to Brussels and to insist on the need for another world trade agreement that will transfer more authority to the WTO.
There have been suggestions that Gordon Brown is planning a bill reasserting the primacy of British law over EU law. That would be a most welcome blow against the Olympian system, but we fear it is unlikely to be proposed by Brown, a fundamentally conformist person with an apparent yearning for respectability.
A fourth principle is the undesirability of a semi-detached super-rich class. Not only does such a class pull money values completely out of shape - in the housing market, for example - but it tends to be the fons et origo of the horrendous errors from which the world economy is now reeling. It was super-rich investment bankers and derivatives traders who dreamed up the collateralised debt obligations and exotic derivative products that have caused such chaos in the past year or so. It was the super-rich who have demanded cheap money for most of the past decade and cheered on the inflating of the credit bubble.
This leads to our fifth principle, the protection and strengthening of an independent middle class. As we described yesterday, the super-rich and their political allies are destroying the middle class. Lawyers and doctors are to be faced with a stark choice between corporate employment and unemployment, while de-skilling and outsourcing are eating into occupations such as accountancy and journalism. Much of this is attributed to "market forces", when in fact it stems from legislative changes designed to tear down time-honoured protection for professionals. But even were the market driving all these changes, we believe the value of a professional middle class, independent of both the state and of corporate power, greatly outweighs any efficiency losses, and that the market ought to be curbed.
Which leads neatly to our sixth principle: social stability and tranquillity are more important than market efficiency or shareholder value. In other words, to the specific protections from the market for the professions ought to be added a general protection for everybody. If market forces dictate the concreting over of the south of England, or the obliteration of British manufacturing, or the closure of the rural post office network, then they should be resisted. This is, of course, an impeccably conservative as well as a centre-left position. This is TE Utley, writing in the Daily Telegraph in 1977: "I simply do not believe that if society decides that some evil produced by the spontaneous forces of competition (ie, mass unemployment in an area like Ulster, afflicted by civil disturbance, or the destruction of the farming industry) calls stridently for governmental action to temper it, that action is bound to prove disastrous, however prudently and deliberately it is conceived and carried out."
Our seventh and final principle may surprise some readers: liberty of the person. Hang on, you may say. You propose all sorts of controls on financial and business activity. It is a bit late in the day for you to start banging on about individual freedom.
Not at all. The New Olympians have been keen to assert that their right to move colossal sums around the world, to speculate and to generate credit, is indivisible from the right of humbler folk to live their lives as they choose, but we argue otherwise. The Olympians are in receipt of huge legal and other support from the state; ordinary people, including the self-employed and those running small businesses, are not. And yet, as financial interests have been progressively freed over recent decades, the liberty of the person has been increasingly restricted. Spot-tested at work for drugs, monitored by closed-circuit television, subject to rules prohibiting "inappropriate" language, soon perhaps to be burdened with a national identity card, the individual is having a thin time of it. It is time to restore privacy and autonomy to the private citizen.
Much is made of the need to make trade-offs between liberty and security in the age of terrorism. We are told that we must face restrictions on our liberty to prevent terrorist attacks, and few object to sensible restrictions in this respect. But the New Olympians must concede the same point. They have been merrily transporting the financial equivalent of fissile material around the world for several years now, and the result is widespread contamination of the financial system.
So yes, our principles would give rise to much greater control of finance and big business. The "liberty" of the Olympians' institutions would be severely restricted. And this in turn gives rise to the objection that such controls would be ineffective, because "in a globalised world" there is nothing much that can be done to control the investment banks, hedge funds and others.
This deprecation of interventionism is not new. As long ago as 1867, the writer and lawyer Richard Henry Dana was lecturing the Massachusetts legislature about the undesirability of passing laws against usury: "The market of the world moves with the irresistible power of ocean tides." But the notion is quite misleading, for two reasons.
First, the technology that makes possible almost instantaneous money transfers around the world and split-second dealings in cash and securities also makes possible the tracking of such funds by national authorities. Indeed, large financial movements are tracked already, in the name of anti-money laundering measures. No one suggests this is a pointless activity. Should some form of capital controls be thought desirable, the surveillance and enforcement machinery should not be impossibly difficult to bring into existence.
Second, there is a low-tech reinforcement for this hi-tech equipment. Contracts or deals entered into in offshore jurisdictions, or anywhere else, in defiance of financial controls could be declared void in British law, say. This "negative enforcement" is highly attractive. It requires no police; it relies simply on courts not doing something, ie recognising and enforcing financial arrangements made without authorisation. No one will sign a contract if they know that the other party can simply walk away from it once they start to lose money.
Both these methods of enforcement also give the lie to the objection that financial controls can work only with international agreement. In some cases, the objector is genuine and really hopes for every country in the world to sign up to a grand treaty on controlling speculative activity. In others, the objection is a ploy from those with no desire to see finance put back in its cage, rather like the child who declares he is only too happy to tidy up his bedroom but only when his left thumb stops hurting.
Not that international agreements are to be despised, provided two things are kept in mind. First, that, as things stand, such agreements are likely to be drawn up and enforced by the New Olympians' political and bureaucratic allies. Second, even when drawn up in good faith, such agreements tend to represent the minimum that all countries can sign up to. Individual nations serious about dismantling the New Olympian system will find they need to go it alone, at least to begin with.
So given the above-mentioned principles, and given that, contrary to myth, measures can be enforced, what ought those measures to be?
First, we suggest very much tighter controls on lending and on the generation of credit. Linked to this is a second suggestion, for the forced demerger of large banking and finance groups, splitting retail banking from both corporate finance and securities dealing. This would echo America's Glass-Steagall legislation, which separated retail and investment banking until the 1990s.
Third, even the remaining demerged units are likely, in many cases, to be large entities. We would suggest breaking them up into smaller banks, on the principle that mega-banks make mega-mistakes that affect us all. Instead of institutions that are "too big to fail", we should aim for institutions that are small enough to fail without creating problems for depositors and the wider public.
Fourth, we would suggest subjecting all exotic financial instruments to official inspection. Only those approved would be permitted to be traded. Anyone trying to circumvent the rules by going offshore or on to the internet would face the "negative enforcement" mentioned above - their contracts would be unenforceable in law.
Fifth, we would seek to offer the same protection for our remaining top-class industrial companies as is routine in France or the US - and perhaps go further. Ultimately, the aim must be an orderly downsizing of the financial sector, much as postwar France and Italy sought an orderly move of employment from agriculture to industry. More of the engineers and technical experts from our best universities would end up making things. Some of the famed "rocket scientists" who spend their days in the City cooking up ever more abstract financial entities may even end up making rockets.
Certainly, at a moment when the survival of human life on the planet might depend on our finding new technologies to generate energy and reduce our disruptive impact on natural systems, it seems perverse to the point of insanity to corral our brightest and best technicians on to trading floors.
Sixth, we would sharply increase taxes on the hedge fund operators and private equity partners, to ensure at the very least that they pay the same rate of tax as their cleaners. The loophole whereby income can be disguised as a capital gain and thus taxed at a lower rate was closed by a previous Labour government in the mid-1960s, only, bizarrely, to be reopened by Labour more than three decades later. It is time to close it again.
Seventh, we would suggest deregulating genuinely private businesses and the self-employed (frequently the two are synonymous). One byproduct of the Olympian myth that vast financial institutions are part of the "enterprise culture" has been the imposition on genuine enterprises of the sort of employment and other legislation used to extract at least some payback from the New Olympians for the benefits of limited liability and other privileges. The self-employed and small firms ought to be regulated only with regard to their activities (eg, a jam-maker would have to obey the food and hygiene laws) and not as businesses. Indeed, by greatly enhancing the attractiveness of the partnership or the small firm, such deregulation may divert many talented people from the pursuit of Olympian status to gentler, more rewarding and more socially useful business careers.
None of this will be easy. Some of it may involve abrogating Britain's signature to various international agreements, not least the various European treaties. Nor does much of this New Populism appear to be immediately in prospect, despite the darkening clouds over the world economy. It could move rapidly on to the agenda should the crisis worsen markedly, but it is also possible that it will take time to piece together a Populist coalition.
We have touched already on some of the elements that might join such an alliance: small business people and farmers (if there are any left); independent professionals and shopkeepers. Then there are those filling the basic supervisory roles that ought to be the backbone of society: railway station managers and their equivalents in bus depots and motorway service stations, police sergeants, prison officers, high-street store managers, noncommissioned officers in the forces and similar. We would seek to add two significant blocks of members: manufacturing and export businesses and trade union members. Industry and those working in it have been the biggest losers from the Olympian experiment as productive capacity has been destroyed and millions of manufacturing jobs wiped out. Those owning, running and working in industry know better than anyone the virulence with which New Olympianism has blighted the economy. Both union members and managers have much to gain from a more sensible attitude to industry.
And those within such a coalition will always have the inestimable advantage of the fact that, beneath the shiny packaging, the Olympians' creed is and always has been the reverse of their own. It is Unpopulism, the belief system that sacrifices jobs and productive assets on the altar of deal-making, that demands schools and post offices be "rationalised" (ie closed), that insists on lower tax rates for the rich than for their domestic servants, that has created a vast debt bubble and chronic global instability, and that, even at this late hour, has the effrontery to suggest that the answer to the crisis lies in the even more enthusiastic application of free-market ideals. Unpopulism ought to make the selling of the New Populism a whole lot easier.
© Larry Elliott and Dan Atkinson 2008.
· Extracted from The Gods That Failed: How Blind Faith in Markets Has Cost Us Our Future by Larry Elliott and Dan Atkinson, to be published by The Bodley Head tomorrow, priced £12.99. To order a copy for £11.99 with free UK p&p go to guardian.co.uk/bookshop or call 0870 836 0875. For more information see the authors' blog at hegodsthatfailed.co.uk.
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