Answering Cleggy's Questions

On BBC's Andrew Marr Show, today, Nick Clegg, in an attempt at a pre-emptive strike against Ed Balls, asked two questions.

Who was it who allowed the Bankers to enjoy huge bonuses, and secondly, who was it who oversaw a massive deregulation of the Banks and the development of the expansion of credit, which eventually resulted in the Credit Crunch.

The questions themselves display something really odd about the Liberal-Tory Government. It appears that almost a year into their administration, it has still not sunk in with them that they now the Government, and not the Opposition. Rather than taking responsibility, not just for what has happened, but for what is now happening, their answer to everything is to answer as though Labour were still the Government, and simply respond “Not Me Guv'”. That was apparent in a response from another Liberal-Tory Minister today.

In response to the announcement that spiralling fuel prices were threatening to cause some firms to lay off up to 25% of their workers, Transport Minister, Phillip Hammond, began by blaming “Labour's Fuel Duty”! He seems to forget that he is now part of the Government. In June last year, his Government put forward a Budget, and in the Autumn it released its Autumn Statement, and CSR!!! If he and his Government, objected to “Labour's Fuel Duty”, then why didn't they scrap it in their Budget or in the CSR? That is especially a relevant question, given that Hammond's Tory wing of the Liberal-Tories, had proposed before the election the idea of a Fuel Stabiliser, which would have reduced Fuel Duty when world oil prices were high, and increase it when they were low. They have not only failed to introduce such a stabiliser – and for good reason, because it is economically illiterate – but have also failed to change the Fuel Duty, or the Fuel Duty Escalator. Once a Government has passed a Budget then whatever Tax and Spend policies are in place are its responsibility, and its alone.

That the Liberal-Tories refuse to take responsibility for their actions, for their taxes and spending Cuts, even now shows just how worried they are about the consequences they are likely to have. It is very poor journalism that reporters continue to allow them to continue to answer their questions by simply blaming Labour, and acting as though they were the Opposition, rather than demanding that the Liberal-Tories take responsibility for the unfolding economic catastrophe that will result from their policies.

But, let us answer Cleggy's questions. The answer to his first question is simple. They are the Government, and these huge bonuses are being paid NOW.

The clear answer is that he and his Government are responsible for those bonuses being paid out, he and his Government, including Vince Cable, who told us how much they were going to reign in those Banks only months ago, are responsible for grotesque amounts of money being paid by Banks owned by the Capitalist State, in bonuses to the very people who only two years ago were responsible for bringing the world economy to the brink of collapse.

But, the real answer to Cleggy's second question is not what he and the Liberal-Tories want to hear, or what they would try to make everyone believe either. The first part of the answer to this question, goes back to the Tory Government of Ted Heath.

It was under that Government, that the first measures to relax controls on the Banks and Finance Houses were undertaken, and which resulted in the Barber Boom. Under Chancellor Anthony Barber,

“there was a major liberalisation of the banking system under the title of 'Competition and Credit Control', leading to a high level of lending, much of it to speculative property concerns. ..

Barber also reduced direct taxes. High levels of economic growth followed, but the traditional capacity constraints of the British economy - especially currency and balance of trade concerns - quickly choked the economic boom.

The banking system fell towards crisis as the bubble burst.

During his term the economy suffered due to stagflation and industrial unrest. In 1972 he delivered a budget which was designed to return the Conservative Party to power in an election expected in 1974 or 1975. This budget led to a period known as "The Barber Boom". The measures in the budget led to high inflation and wage demands from Public Sector workers. He was forced to introduce anti-inflation measures in September 1972, along with a Prices Commission and a Pay Board. The inflation of capital asset values was also followed by the 1973 oil crisis which followed the Yom Kippur War, adding to inflationary pressures in the economy and feeding industrial militancy (already at a high as a result of the struggle over the Industrial Relations Act 1971).”


In fact, the start of financial deregulation begun under that Tory Government, and the pumping of liquidity into the economy was the real cause of rising inflation in the second part of the 1970's, because it fed the rising cost pressures from imports, which in turn fed through into rising wage costs and secondary price rises.

As Labour began to cut Public Spending after 1976, and to try to control wages through the Social Contract, the consequent reduction in growth from the removal of Keynesian stimulus, simply fed through into rising unit costs due to under utilisation of capacity, which in turn led to stagflation. Given the fact, that by the late 1970's the Long Wave downturn was well underway, its unlikely that Keynesian stimulus could have saved the economy, but its removal then as now was certain to reduce growth even further. Then as now the pumping of large amounts of liquidity into the economy fed higher prices and inflation – also then as now largely from imported costs – which were not attenuated by the slower growth of the economy.

The Barber Boom was itself a continuation of the “Dash For Growth” introduced by Tory Chancellor Reginal Maudling, in 1963, and which was largely responsible for an earlier period of inflation, and the subsequent Sterling Crisis of the 1960's.

But, Maudling's Boom was not accompanied by the kind of deregulation of the Banks and Finance Houses, and of Credit of the later culprits.

The next culprit, after Barber, was in fact Nigel Lawson, who was responsible for the Lawson Boom, and the Big Bang under Thatcher. It is often claimed that the Thatcher Government introduced Monetarist policies in the early 1980's. In actual fact, this is incorrect.

The term “Monetarism” is most closely associated nowadays with the economist Milton Friedman. Friedman's analysis of the Great Depression was that it had been caused by a too tight Monetary policy by the Federal Reserve in the US, which reduced liquidity precisely at the time it should have been expanding it, in order to stimulate economic activity. Monetarists, like Friedman argue that the economy can be regulated by the use of Monetary policy in ways which do not have the problems associated with Keynesian Demand Management, because the Monetary policy is seen to promote a more dynamic private sector, and thereby stimulate Supply, as well as employment, whereas, Keynesian policies it argues can promote the State Sector, whilst “crowding out” the Private Sector. Given the fact that by the early 1980's, the world economy had already gone through the “Second Slump” of the 1970's, only once more to be enmeshed in a further global downturn, the appropriate “Monetarist” response would have been to control Government Spending, whilst increasing Money Supply in order to stimulate private sector investment and growth.

But, Thatcher's Government, whilst proclaiming that it would cut Public Spending by introducing “Cash Limits” on Departmental Budgets, at the same time, proposed to reduce rather than increase Money Supply. A similar policy was introduced under Reagan in the US.

In fact, this was not a Monetarist response, but a Misean, response. Mises argued the opposite to Friedman in relation to the Great Depression.

In fact, Milton Friedman, recounted that on one occasion, Mises had stormed out of a meeting accusing Friedman and other economists of all being Socialists! Its been said that all theories of crisis are taken from Marx. Mises theory rests essentially upon one element of Marx's analysis of crisis, and that is the potential under a system that has developed Credit, to create “fictitious Capital”, and for this to prolong growth to a point where a crisis becomes inevitable.

In fact, Marx showed why such a crisis is inevitable with or without such Credit. Credit becomes only a means by which the crisis is intensified, and provides a potential spark for its eruption. But, for the Miseans, who believe that the Capitalist Economy if left to its own devices is self-correcting, Credit, especially Credit initially created by an interfering State apparatus based in the Central Bank, upsets this natural harmony, and creates a “Crack-Up Boom”, which when it bursts brings the kind of crisis that was seen in the 1930's.

It is, in fact, not surprising that Thatcher's Government adopted the Misean approach in its initial strategy.

In the years before the 1979 Election, Thatcher and some of her closest advisers, like Keith Joseph, were guided by one of Mises closest adherents and students, Frederick Hayek, who was based at the London School of Economics.

As the BBC Documentary Tory Tory Tory,(see video 1 below) set out, Hayek even pulled together a group of people who were to act as what we would now call a Think Tank, for this project. The series showed how, Sir John Hoskyns, who was a Systems Analyst, used the tools of Systems Analysis to pinpoint where the Tories needed to strike, establishing the Labour Movement's weak spot within the Trades Unions. In reality, although in the early years Thatcher's Government stuck to its attempts to restrain Monetary Growth, it quickly found that it was unable to stick to its Cash Limits for Government Departments. Friedman himself, soon gave up on the Thatcher Government declaring that the Civil Service and State bureaucracy had captured the various Ministers, and it was this opposition from within the State, which prevented the Spending Cuts actually being carried through.

In fact, under Thatcher, despite the rhetoric, the size of the State continued to grow. But, the control of the Money Supply, as in the US, and in the context of a global downturn, did have the effect of forcing employers to cut costs, and to oppose pay increases, in a way that a lax monetary policy would not. It created the conditions for the huge industrial battles of the 1980's, and for the defeat of the Labour Movement.

Having achieved that at huge economic cost to the country – a large part of the wealth that Britain should have enjoyed during the period, from North Sea Oil and Gas, and which other economies like Norway were able to set aside in huge funds for the future, was squandered on financing mass unemployment – and social costs, as the fabric of society was torn apart, resulting in Inner City Riots, and a generation consigned to hopelessness, and State dependency, Thatcher did then turn to Monetarism. The road was now open, on the back of a broken and cowed Labour Movement, to open the Monetary spigots to create a new Boom, out of which Capital would extract large amounts of profit.

That is the context to the Lawson Boom.

Unlike Maudling, and on a far grander scale than Barber, Lawson not only opened the monetary spigots, but completely deregulated Financial Services. Away went all those limitations on how much people could be allowed to borrow, for a mortgage, and so on, away went many of the restrictions on who could set themselves up to lend money, and away went many of the restrictions on trading in the City of London. Its apotheosis was the Big Bang of 1986.

But, the consequences of the Big Bang, and the deregulation of the Banks and Financial Markets were not hard to predict, nor long in their fruition. Thatcher's Government, encouraged all and sundry including Sid to buy shares, particularly in the newly privatised companies, providing their friends in the City with plenty of work and Commissions. They also encouraged everyone to set up their own Private Pensions with all of those nice friendly Insurance Companies and others, who we now know were guilty of all kinds of misselling and other practices now that the deregulation had freed their hands. And, of course, all of this money that Lawson had printed, and was sloshing around in the economy, and all of the encouragement to buy shares and pensions, or to take out mortgages to buy the also newly privatised Council Housing, or to remortgage your rapidly inflating house, in order to buy some of those shares, or some new gee-gaw created precisely the kind of fictitious Capital that Marx had described, and the “Crack-Up Boom” that the Miseans talked about. Share prices began to climb sharply, and everyone thought they were geniuses able to make money on a one-way bet. It had all the hallmarks of the period prior to the 1929 Wall Street Crash. And sure enough, in October 1987 an even worse crash than 1929 happened. It came to be called Black Monday. But, similar to the events after the Tech Wreck of 2000, the money that flooded out of shares simply flooded into other assets, in particular into houses.

In 1988, not only did shares more than recover their losses from the Crash, but houses prices began to soar, as former adherent of Ayn Rand, and sound money, Alan Greenspan, commenced on a 20 year programme of pumping liquidity into the economy every time the markets showed any sign of falling - The Greenspan Put, and similar policies were adopted in the UK, and other Central Banks.

But, just as all of the fictitious capital created by the pumping of lots of money into the markets led to Black Monday, so the fictitious house prices that resulted from the same root also came crashing down a year later in 1990. Prices fell by 40% within months, and thousands of people found themselves evicted from their homes, as rising unemployment, and large rises in interest rates made paying for their homes impossible. Not until 1996, did house prices return even to their nominal 1990 levels. They did not return to their inflation adjusted level until after 2000. Yet, the continued pumping of huge amounts of money into the economy, did continue to push house prices up into the stratosphere, and home ownership became increasingly impossible for many people from the late 1990's onwards. In other words, if those previous bubbles had serious consequences, then the much larger bubble blown up now implies an even bigger bust. House prices are now around four times the level they should be at, as the graph below demonstrates.

Many economists expect prices to fall by 50%, similar to the 60% fall experienced in Ireland, and the continuing falls in Spain and other parts of Europe. In fact, under current economic conditions, and the tendency known as “return to the mean”, it is likely that any falls will be much larger than that, taking prices down significantly below what would have been necessary to get to the mean.

Its true, that part of the responsibility for that will rest with New Labour, and the fact that it continued the Love Affair with the City, and easy money that previous Tory Governments had put in place.

But, the reality is that the majority of the building of Britain's Financial Structure we now have is the responsibility of Cleggy's Tory compatriots. He and they should take responsibility for that.