So what’s the truth about the credit crunch?

There is a conventional wisdom that the current economic crisis is grounded in what has become known as the credit crunch – the freezing-up of the credit system.  Hence the pouring of vast quantities of taxpayers’ money into the banking system to free things up.  But there’s a growing school of thought in the United States that suggests that this simply isn’t the case – and that the gargantuan quantities of money thrown at bankers, with no strings attached, was handed over on the basis of a false analysis.

One example is this article from the Wall Street Journal, which quotes a number of reports suggesting that the credit crisis was simply not as bad as it was painted.  The most noted of these is a paper prepared by economists at the Federal Reserve Bank of Minneapolis in October, which suggested that inter-bank lending – widely presented as being the core issue in the credit crunch – was in fact running at healthy levels.  And a survey of small business in November confirmed that lending was at healthy levels. Now neither of these reports is arguing that the economy in the US is in anything other than a dreadful state – simply that this particular widely-trumpeted feature of he current travails is simply not happening.

The real reason for the economic problems, critics argue, is simply that the what was generated in the boom years was paper wealth, not the real thing; when the bubble burst, people stopped spending, and both individuals and businesses simply stopped applying for loans as a result,  argues Joshua Holland in a recent Alternet piece.    As Holland argues, the issue is crucial; if there is no credit crunch, then the case for throwing money at banks evaporates.

So, if not needed to free up the financial system, what happened to the money.  American columnist David Sirota argues that it was all about corporate profit:

We were punked by those politicians and pundits who said what we had to do to fix the problem was not to both inject capital into the real economy (spending on infrastructure, health care, unemployment benefits, mortgage relief, etc.) and target reasonable amounts of well-overseen taxpayer cash to the specific banking sectors that required immediate aid, but instead to exclusively throw an ungodly amount of unregulated money at Wall Street while completely ignoring the real economy, and more specifically, to throw that ungodly amount of money at Wall Street with absolutely no strings attached.

That argument was not backed up by fact. It was a lie – and a lie with a motive: to make sure as much taxpayer cash as possible was given to one of the largest segments of campaign contributors, and that that cash could be used to subsidize executive pay, shareholder value, shareholder dividends bank consolidation and financial industry profits. And to date, nobody has been able to answer really simple questions that make this point as clear as possible.

As just one example, consider the fact that when aggregating what both the Treasury and Federal Reserve bank has have done, taxpayers have allocated $8 trillion to the financial industry. In a country where 18,000 people die each year because they lack health insurance (that’s six 9/11’s every single year), most believe it would cost about $75 billion to $100 billion a year for universal health care. So just to account for critics, let’s say it costs $200 billion. How does giving $8 trillion to the financial industry save more lives, better help the economy (whose fastest growing sector is health care) and better benefit society than using that $8 trillion to finance universal health care for the next 40 years and save 720,000 American lives?* The fact that Congress didn’t even ask such a simple question and simply allowed that $8 trillion to be allocated to its campaign benefactors on Wall Street means we were punked in a historic way.

I’ve focussed on the United States because this is where the evidence appears to be emerging into the public eye.  It would be very interesting to hear the truth behind the vast handouts of taxpayers’ money to the British banks.

With hindsight …

Among those who will look back on 2008 with some embarrasment are the economic pundits who failed to see what was coming; pieces are already appearing in the media asking why the economic turmoil of the past year came as such a surprise.

That most stimulating of columnists, Anatole Kaletsky in the Times, offers a review of the events of the past year which offers, as well as a mea culpa for not forseeing what happened, some intriguing thoughts about what happened and why.  He offers one very simple explanation:

Almost all predictions for 2008 turned out to be wrong because economics ultimately is driven by unpredictable human behaviour, not by fixed scientific laws – and this is especially true in a crisis. The biggest surprise this year lay not in economic events but in the reactions of financiers, businessmen, regulators and politicians.

Difficult to argue with any of this – but the explanation that he goes on to give can be read as a devastating indictment of the self-deception and hubris of those who live by the market.

Kaletsky points to three fundamental causes that led to the meltdown in September, when things really started to collapse:

The first big accident was the surge in oil and food prices in spring and early summer. This actually did more harm than the original credit crunch to consumer and business confidence and, therefore, to the prospects for economic recovery. We now know that this surge in commodity prices was a purely speculative phenomenon, unrelated to any real shortages of supply. But because of the quasi-religious faith that “the market is always right”, politicians and regulators refused to intervene directly in the oil market to curb speculation, leaving consumers and businesses severely weakened when the Lehman crisis hit.

This is a theme that Kaletsky has discussed before.  Movements in oil prices in particular had nothing to do with fundamentals.  We have in the past year seen a roller-coaster ride in oil prices which has left the argument that the market accurately reflects the realities of supply and demand in complete tatters.  As with so much that has happened in the past year, the movement in oil prices is the entirely predictable outcome of speculation.

The second accident was the series of regulatory blunders that climaxed with the Lehman fiasco but began several years earlier with the adoption of “mark to market” accounting and the perverse incentives created by “market-based” capital requirements determined by private rating agencies’ potentially corrupt judgments. These blunders, all of them ultimately motivated by the fundamentalist credo that “the market is always right”, continued throughout the credit crunch. Instead of quickly implementing a government-led Plan B to end the credit crunch, as I had expected, politicians kept waiting for implausible market solutions and refused to intervene until it was almost too late.

Difficult to argue with this one, except that the regulatory blunders have been going on for a very long time.  Much of what has happened in the Anglo-Saxon economies can be directly attributed to lax regulation.  Indeed, one of the sillier comic turns of recent months has been George Osborne’s repeated calls for bankers and hedge-fund managers who have broken the law to be prosecuted. It’s an obvious cop-out; regulation is so lax that irresponsible speculation has been by and large untroubled by legal sanction.  Osborne knows that focussing on criminality is as good a way as any of keeping his chums – the people who, inter alia,  finance the Tory Party – off the hook.  Politicians in the English-speaking world in particular have been so mesmerised by the language and ideologoy of the market that Plan B was never on the cards.

The third and perhaps most damaging misjudgment has been to subsume macroeconomic management into political morality. As a result of moralistic witch-hunts against debt and consumption, pragmatic Keynesian solutions to the credit crunch have been thwarted by an unholy alliance of ideological monetarists who believe that the market is always right and ideological Marxists who believe that it is always wrong. Even worse, consumers and businesses have started to see recession as a moral retribution for past excesses, rather than a technical problem that macro-economic policy could – and should – readily resolve.

This point needs sofurther exploration.  I for one am at a loss to find the ideological Marxists who have influenced policy-makers in this way; and where are these moralistic witch-hunts?  The response of policy-makers has surely been exactly the opposite; fiscal stimulus packages in Britain, massive state handouts to failed bankers in Britain and the United States.  The problem with Kaletsky’s analyisis here is the implication that we can get away without considering the role of debt and consumption in creating this crisis – especially since his criticisof free-market fundamentalists earlier in the piece seem to argue that it is the very ease with which ideologically-driven policy-makers have accepted the ideology of debt and consumption that got us in this mess in the first place.

The implication is surely clear here.   We need to rediscover economic regulation, put a cap on greed and consumption, and reconsider what- and whom – economics is for.   This implication seems to flow clearly from Kaletsky’s argument, and it is a huge pity (a failure of nerve, one might almost argue) that he shies away from this conclusion in the end.

Whatever happened about bank charges?

As the story of recent events in the banking sector unfolded, and as unprecedented amounts of taxpayers’ money was thrown at Britain’s banks, leading to their effective nationalisation, I’ve been wondering what has been happened in the ongoing litigation relating to penalty charges levied by banks on their customers, and about the implications of the changes in the banking sector.

Officially, a decision in the High Court in April 2008 ruled that bank charges were subject to a fairness test and that the Office of Fair Trading did have the right to assess them.  An appeal by the banks concluded on 5 November 2008 and a decision is expected in early 2009.

Straws in the wind

Much of course depends on the outcome of the appeal.  In the meantime the OFT has been investigating, and there are some indications of the way things are going.  For example, one report claims that RBS staff have been told that OFT has “serious concerns” about the charges levied by the banks; another, more recent report quotes a leaked internal email to the effect that the same bank is gearing up to issue refunds pro-actively, i.e. without customers being required to claim.  This may be no more than rumour, but if so it suggests how the banks are starting to think.

Public ownership?

The interesting political point, regardless of the outcome of the court cases, is really this:  is it acceptable that organisations that are now largely in public ownership – having been bailed out with gargantuan quantities of public money – should still be able to help themselves to up to £40 of their customers’ hard-earned cash for going a few pence overdrawn?  Can the obvious lie that these charges reflect administrative costs be sustained?  

And can people who have, through a combination of greed and ignorance and incompetence, led their industry to the brink of collapse, really find the sheer bloody arrogance to go on levying charges of this order on people who will increasingly struggle to make ends meet?

And will New Labour in Government do anything about it if they do?

Harold Pinter 1930-2008

I was very sad to hear of the death of playwright and Nobel Laureate Harold Pinter yesterday.

Pinter was one of those rarest creatures in the British artistic establishment, someone who believed it was imperative to speak truth to power.  Nothing made that clearer than his acceptance speech for his Nobel Prize in December 2005, made at a time when he was already seriously ill.

My clearest memory of Pinter is his performing his own sketch Press Conference at the Lyttleton theatre in February 2002.  Pinter played the former Head of the Secret Police in an unnamed dictatorship who has become Minister of Culture, giving a press conference in front of a group of supine journalists:

“We believe in a healthy, muscular and tender understanding of our cultural heritage and our cultural obligations.  Those obligations naturally include loyalty to the free market … Cultural dissent is acceptable – if it is left at home.  My advice is – leave it at home.  Keep it under the bed.  With the piss-pot.”

How the great and the good of our own British cultural establishment must have squirmed at that one.  He will be sorely missed.

Cognitive behaviour theory and market ideology

I’ve only now caught up  with a fascinating piece in the Guardian by Darian Leader examining the Government’s recent decision to place much greater emphasis on Cognitive Behaviour Theory (CBT) in combatting the UK’s growing mental health problem.

Put briefly, CBT is an approach to therapy that seeks to correct erroneous thinking patterns to enable behaviour to change so that patients are better integrated with their environment.  Problems arose because patients’ thinking conflicted with reality. So, for example, depression is seen as the result of the individual’s bias towards negative interpretations of the world – which obviously feed on themselves when the patient has to deal with difficult situations.  The task is to get out of the cycle.

It’s a school of therapy that can point to an impressive array of empirical evidence, and has gained enormously in influence in recent years.  It is very much a “here and now” therapy, rather than considering in depth the childhood and background of the patient.  It’s also a relatively cheap form of therapy, significant in an environment where  -  in Britain at least – the knee-jerk reaction of most GPs when faced with a depressed patient is to reach for the prescription pad.

It’s always had its critics, of course.  Principal among these is the claim that it treats symptoms, not causes; and that its very cheapness has given it a head start with policy makers faced with a growing problem of depression and a shortage of resources to combat it.

Mental health and the market

Leader’s argument is that it is basically a market-driven approach to mental health.  He describes what he calls the “strange paradox of the modern self”:

“We are told that we are responsible for our own lives, that we have the power to transform ourselves. Yet at the same time we are treated as minors who lack the faculty of critical judgment and must be protected against unscrupulous and dangerous predators.

Today it is plasticity and change that govern our self-image. Personality itself is represented as a set of skills that we can learn and modify. Just as we can alter our bodies through cosmetic surgery, so we can change our behaviour through “work” on ourselves. Reality TV displays princes who become paupers, children who swap parents and geeks who become Don Juans. The possibilities of transformation seem endless. Thatcher’s dream of social mobility has become not just nightly entertainment, but also individual imperative.

CBT promises change just as swiftly. Unwanted character traits or symptoms are no longer seen as a clue to some inner truth, but simply as disturbances to our ideal image that can be excised. Instead of seeing a bout of depression or an anxiety attack as a sign of unconscious processes that need to be carefully elicited and voiced, they become aspects of behaviour to be removed.

The market has triumphed here, as our inner worlds become a space for buying and selling. We pay experts such as life coaches to teach us how to change in the desired way. Aspects of ourselves, such as shyness or confidence, become commodities that we can pay to lose or amplify. Depression or anxiety are seen as isolated problems that can be locally targeted without calling into question the rest of one’s existence, in the same way that a missile attack on a terrorist installation is supposed to get rid of the problem posed by terrorism.

This is a modern self for which depth has become surface. In soaps and reality shows characters share their innermost feelings and emotions, as if there were a perfect continuity between interior and exterior life. If there’s any ambiguity, a panel of experts is there, as on Big Brother, to explain people’s motivations. The self is no longer a dark cave; everything is laid bare. In effect, we have been robbed of our interior lives.”

It’s a powerful thesis, and one with which I have a lot of sympathy.  And I think there’s something rather deeper at work here; a sense that the model by which our ability to function normally is judged is conformity to prevailing social values.  But what happens if those values are themselves distorted, or based on a false reading of the world?  For example, we’ve seen in recent months the way in which the values of market economics have been shown to be, at the very least, fragile and at odds with a real world; and we’ve seen a lot of denial by those who wield power and wealth.

Just suppose that those people who can’t adjust to the values of the world around them – who may be showing symptoms of very real mental distress as a result – are the ones who perceive the truth?

The problem with the ideology (as one feels one must call it) of CBT is that it looks awfully like the belief that mental health lies in conformity with a society’s values; it can all too easily result in the branding of the non-conformist as sick.  It’s a problem recognised by writers as diverse as the psychiatrist R D Laing and the historian Christopher Hill; taken to extremes it was an active part of the Soviet Union’s methods of political control, with dissidents being sent to asylums.

It’s hard to get away from the view that there are at least some among the advocates of CBT for whom, wittingly or not, its implication is to reinforce prevailing value systems.  Or to put it another way; the distressed can keep on consuming until they get it right.

Returning thoughts

I’ve not been around to post anything here for a while – and have been watching a descent into financial chaos that it is as dramatic as it was entirely predictable.

Events have taken a fairly predictable course – bail-outs which take money from the taxes of ordinary folk to compensate bankers faced with the consequences of their greed and stupidity, and a rush back to Keynes by British politicians in particular, after years of faithful adherence to the free market dogmas.  And we’ve seen a possibly historic election in the United States, notable not only for the election of America’s first non-White President but also – it is fervently to be hoped – for a comprehensive defeat for the culture warriors who have pushed their religious and social agenda.

Binge and purge economics

How bad, then, is the economy?

In my view, it’s atrocious.  What we are  seeing is the classic bursting of a speculative bubble, and there seems to me to be no evidence whatsoever that the worst has yet happened.  We’ve had years and years of deluded bingeing on cheap credit, and now it’s payback time.  The most disturbing thing, as I’ve mentioned before, is the sheer delusion – by what possible yardstick can a huge acceleration in the price of a house be an indication of wealth?

And we have seen years of redistribution from poor to rich, as public spending has cut back and as increasing parts of the apparatus of decency won over the decades has been sold off to spivs.  To take an example, thirty years ago we had free university education in Britain – yet now we’re told we can’t afford it as a society.  Says who?  In the light of what?  We are a materially much richer society than we were – even taking into account current events – but that wealth is in fewer and fewer hands.

So, following a bit of a gap, there’s plenty to write about on this blog – and I hope to be able to keep up the flow of thoughts in the months ahead, rather more effieicently than I have managed in the last few months.