Time for the Radicals 63

A financial system in which the face value flow of funds was vastly greater than the face value flow of goods traded is a bubble. The “bailout”, or payment of vast sums of ordinary people’s money to bankers to keep this crazed system going, could never make it sane.

Allowing bad banks to go to the wall was not just possible, it was essential. Instead the poor are in deep hock simply to maintain the lifestyles of awesome consumption led by the political and financial elites. That is the immediate cause of the services cuts and tax increases sweeping the Western world. The fact this is no solution at all to funny money explains why trillions were wiped off world stock markets last week. The explanation is simple; those trillions never existed in the first place.

There is some quite good analysis of the current situation by Will Hutton . But while his analysis of the problems is basically correct, he demands a radical solution and then proposes a sticking plaster. Reducing the stock of debt by deliberate inflation is not going to solve the problem for a decade, and is predicated on making part of the situation still worse by creating yet more, even more worthless, fictitious money.

Britain is not immune to this at all. UK debt is about 410% of GDP – worse than Italy. Crazed right wing ideologues believe that, as in the UK there is a much higher ratio of private sector to public sector debt, this does not matter. That is nonsense. It might have some validity if that private debt related to the purchase of capital machinery for manufacture, but actually the vast majority of it is related to consumption, and of course most of all to sustaining a housing market inflated to ludicrous prices. Much of the rest relates to credit card funded holidays in Ibiza.

A total collapse of the UK housing market is one of the necessary and highly desirable outcomes of the current crisis. The really radical action that is needed is a repudiation of debt by governments and by ordinary people.

Government could have paid individuals and companies their full bank deposits, and let the bad banks collapse, for less than a quarter of the cost of the bailout. That approach is needed now, with government repudiating debt while guaranteeing individual deposits as the banks fall. We should then make new banking institutions based on the financing of actual trade and investment projects, not on speculation in derivatives. There will be awful dislocation effects, but less extreme than the suffering over the next thirty years of everybody working for the bankers.

Governments, of course, will not be that radical. But people with time will see that they have been duped; a (in one sense) fortuitous series of events has done more in this last five years to improve the vision of the blinkered masses as to the true nature of their masters, than anything in the preceding six decades. I would dearly like to see a repudiation of private debt, with neighbourhood solidarity in physical resistance to throwing people on the streets, to bailiffs and to essential service cut-offs.

I think there is a serious possibility that this will not sound as improbable in a few years time as it does today.

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63 thoughts on “Time for the Radicals

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  • John Goss

    I’ve just posted this into the previous blog, but I think it fits just as well here.

    Colin, I think that is a shrewd observation, that the Euro is so important in the current crisis. The £ is neither strong against the $ nor the Euro and I suspect there are going to be tough times ahead for everyone. Savers are going to see their savings diminish in real terms. Though I have no affinity to China I am glad they are helping to stabilise the euro. But the whole problem in the west is over-borrowing, indebtedness and banking practice. I have connections with Romania and I learnt last year that Ceaușescu had paid off the country’s national debt (at some cost to Romanians admittedly) by 1989. What a strong position that left a communist country in for growth. Some, and I won’t speculate on who, did not want a communist in such a strong position and he was shot together with his wife (presumably by professing Christians) on Christmas Day, 1989. People in the villages now, and some in the towns, complain about how much better it was under Ceaușescu, when they all had work.
    When the depression comes it is necessary to remove a lot of power from the banks and insurance companies. Liquidity ratio is a nonsense – that a bank can lend out seven times as much money as it has deposited with it is ludicrous. Bankers should be paid for their services. But the claim that all the upcoming stars in the banking industry will leave if they don’t get these equally ludicrous bonuses for getting us into this messy stinking mire is also a nonsense. Let them go! They will be going soon anyway!

  • colin buchanan

    Craig, you are absolutely correct: we must have the sanititation of the financial system i.e. it must be put through bankruptcy with the taxpayer as priority creditor. Your also right to see that the financial system must be refounded as a motor for reconstruction of the real economy. I agree as well about private debt, the state must take over mortgaged property and renogotiate terms of occupation- most of the housing stock has to be nationalised. We need bottom lines: no evictions, none without food, none without heating and water. To do this we must renationalise the utilities which are anyway parasites which put an intolerable strain on budget. Given the likely fate of the pound I also think we need an emergency import substitution programme involving home based production of basic essentials such as clothing, food, domestic goods etc. None of this can be achieved on the basis of our present foreign policy of hostility to just about everyone: reconstruction is unthinkable without international cooperation and good neighbourliness. We must tie national reconstruction with a renewed campaign against war starting with a campaign to end the bombing of Libya. All this or anything roughly along these lines looks a long shot at the moment everything is becoming more fluid and a space for a simple, radical pragmatic programme may appear.

  • John Goss

    Craig, if governments and banks default on their debts, there is precedent for individuals to do the same; and I agree too with Colin that the taxpayer should be the priority creditor when the financial sector pops its clogs.

  • Beeston Regis

    Fraud and corruption is part and parcel of the financial system.
    Only a complete collapse will clean up the stinking mess.

  • mary

    Have just read Gilad Atzmon on the protests arising in Tel Aviv. There are some aspects of the Israeli situation that are similar to ours especially on the affordability of housing. He maintains that the protests bear no comparison to Tahrir Square as some writers have been suggesting.
    The BBC’s take on the protests – {http://www.bbc.co.uk/news/world-middle-east-14433245}

  • Hydraargyrum

    I left the UK in 1988, been in Appalachia since 1996 and have traveled a fair bit in the US. It was obvious that the “boom” under Alan (“The Maestro”) Greenspan and then (“Helicopter”) Ben Bernanke was totally unsustainable and was built on no more than a massive pyramiding of debt. I knew just a handful of people that would openly question what was going on back then, particularly as if you did you’d be automatically dismissed as a crank. When the collapse began happening in 2007, I’d actually argue earlier, the only shock to me was that it had taken so long to happen. What is interesting now is that many of my neighbours and friends locally have completely ceased to accept the b*llsh*t that is dished up to them in the media here. I listen to a local talk radio show and its really fascinating to hear how callers views have shifted over the years – particularly since 2007. Blind acceptance was the norm. Now its CONSTANT complaints about the “banksters”, the Federal Reserve (and how it should be audited, even disbanded), Wall Street, inflationism, TARP/bail-outs, cronyism, etc. But rural Appalachia is different from much of the rest of the US. Sadly, and I think eventually tragically, there are too many people – particularly in the South and in exurbs of the big cities – that are just so propagandized (and dependent) that they will be easily manipulated to continue voting for just another set of Corporatist tools that promise to keep our essentially phony economy going. The dollar will continue to be debased for as long as this happens. Eventually I see debasement occurring at such a rate that – certainly around the rural region I live – the official economy will be increasingly supplanted by the underground economy. There is a history of a substantial underground economy here in food, alcohol, locally grown “herbs”, labour and energy – try paying for a load of firewood here with a cheque. 🙂 Our local underground economy is definitely on the rise, with people increasingly bartering goods/labour. This will further erode the tax base, too, and even greater quantities of debt will have to be created out of thin air with more debasement. A silver lining in all this is that the cost of maintaining the US empire and national security state is also beginning to be seriously questioned, but that’s another topic.

  • OrwellianUK

    The underlying issue is that first and foremost, this is an energy crisis, not a financial one. All economic activity requires energy (including the extraction of more energy). Our primary energy sources, Oil, Coal and Natural Gas are peaking in production or are about to peak and are becoming more expensive and returning less energy output for input. This is now a planetary limit and there is no way that this can be fixed with ‘technology’, ‘hydrogen’, ‘Shale Oil’ or some other pipe dream. Decline of energy production and the monolith of industrial complexity underpinned by it is inevitable now.

    In the meantime, our hopelessly de-regulated and corrupt financial system which should be based on the value of the planets natural resources and the available energy to convert this into tangible wealth, has been systematically detached – ‘leveraged’ and inflated to vastly more than the value of the primary resource base under the illusion that money in itself has value, rather than what it actually is – a claim on energy. Examples include an estimated $1600 Trillion derivatives bubble and 100 times more ‘paper’ gold (contractual claims on gold) than physical gold. All the printing of money is excess claims on the same shrinking pie.

    This has taken place because our Fiat money system is deliberately debt based which has always facilitated the flow of most of the wealth and energy towards the pockets of the already wealthy. When governments ‘borrow’ or when banks ‘lend’ they are literally creating money – out of thin air – backed up by nothing except the thinly regulated fractional reserve banking rules and the assumption that ‘Economic Growth’ will take place in order to generate the income to pay off the debts with interest.

    However, Economic Growth – another ‘sacred cow’ that is not allowed to be questioned, requires a corresponding growth in our energy supply/resource consumption in order to fuel it. Now that our production of energy and other resources has plateaued (in the last 5 years), growth is no longer possible. We have seen the results of this in the Western Economies and will soon see it in the economies of China, India and Brazil etc, who have until now been propping up the global economy but are already running into massive energy/resource constraints as well as other issues, due to unchecked and relentless ‘Growth’.

    Absurdly, our politicians answer to the problems of growth is to try and kickstart even more growth. In other words, they are using the same thinking that created the problem in the first place to try and solve the problem. We should accept the fact that we have been living in an age of unparalleled extravagance, and the complex, globalised infrastructure built during that period will not be sustainable now that the energy resources which have underpinned that age are beginning to decline away. We have squandered more than half (the better half) of an energy gift laid down by Nature over millions of years in the space of a couple of centuries.

    It’s now time to pay the bill for this lifestyle.

  • Stephen Morgan

    Usury is a sin, as well as being an entirely unproductive role to adopt in society.

    Of course some people don’t need to worry about their debts. Lebedev, the one what owns the Independent and the Evening Standard, owes more than all of us put together will ever earn, to the now publicly owned RBS. A part of the reason they went bust. No indication that any of that money will be returned, or even that the government wants it back.

    We haven’t had the scandals, and associated jail time or potential jail time, that have gone on in Iceland and Ireland about the bankers making off with their companies money in fake loans to themselves and their cronies.

  • Canspeccy

    “the vast majority of it is related to consumption”
    Not consumption, speculation — on real estate, commodities, derivatives.
    Uncontrolled private credit creation created a Ponzi economy where borrowing ceased to be related primarily to productive purposes, but to speculation.
    Debts will be repudiated, but slowly, through inflation. Wages will remain flat, while real income falls. The pound/dollar and other western currencies will fall in value relative to those of India, China, etc.
    In due course wages in the West will converge with those in Asia. That is the basic policy objective. Then there will be a chance of economic recovery in the West. In the meantime government policy will be to keep the people from poor countries flooding to the west — to help drive down your standard of living — while keeping the lid on as the plutocracy juggle their real assets to avoid the ravages of inflation and maximize the profits of wage arbitrage.
    They don’t seem to be doing too well at keeping the lid on in Tottenham.

  • Canspeccy

    “The underlying issue is that first and foremost, this is an energy crisis”
    I don’t think so. The other day BP announced they would return some North Sea oil fields and extract more oil than the first time around. They are using new technology, fracking or whatever, to get some of the 60-70% of the oil that remains when an oilfield is “exhausted.”
    BP are using other new technology in Iraq to enhance recovery of oil from the Rumailla field. Instead of expecting the oil to gush to the surface, they are using electric pumps.
    The tripling in energy prices over the last decade has made vast new energy resources available. It has made Canada No. 2 or 3 in the World in oil reserves, because it has made extraction of tar sands oil economic.
    Fracking has turned North America from an importer to an exporter of natural gas.
    Then there’s methane hydrates. Simply staggering quantities.

  • steve

    @Craig – What are your views on this video and the solutions suggested. (Have you got 46mins to spare?)http://video.google.com/videoplay?docid=-2550156453790090544#docid=5352106773770802849

  • Jaded.

    It’s these loons with vested interests who really control Western governments. I completely agree with Craig that it won’t be pleasant getting out of this mess. However, if the only alternative is going along as we are, then as time goes by getting out of this mess will only become increasingly less pleasant! Right, so how about we have some solutions for actually getting power to be able to impose the solutions you are all coming up with? That’s the $64,000 question. My idea is to initiate a massive campaign nationwide to only vote for independent candidates in all public elections. I think people will take to that, as you aren’t actually telling them who to vote for. All you are saying is ‘look, we all know everything is really screwed up, we all know everything is seriously bent and we have to get out of this mess for our sakes and the sakes of our children’. Can some of you tell me what you think about this idea or offer up some alternatives please?

  • colin buchanan

    Independent candidates who can agree on three simple things whatever their ideology or views on wider questions:

    1) End the wars

    2) End hegemony of City of London

    3) Rebuild real economy

  • John Goss

    Stephen Morgan writes: “No indication that any of that [RBS] money will be returned, or even that the government wants it back.”
    This is why it’s paramount to ensure the taxpayer is the priority creditor. Anyone remember the Rolls Royce RB211 engine? The Tory (Heath) government, ideologically opposed to nationalisation, nationalised the RB211 when RR went into receivership. Production of engines was costing more than the sales price. 3 months later it was back in Rolls Royce custody, and the taxpayer had been duped. The same with RBS, and other nationalised banks, the taxpayer foots the bill for bankers, who have already failed their customers, to further mismanage while rewarding themselves with huge bonuses from the national purse. Am I missing something – or is this nonsense?

  • mary

    @LfStL From the Wikipedia page on Harry.
    ….The blog is frequently critical of prominent anti-Zionist activists such as Gilad Atzmon,[30] Keith Burstein and Alexei Sayle [31] and in particular academics who criticise Israel such as Norman Finkelstein,[32] Noam Chomsky,[33] and Schlomo Sand.[34]

  • Tom Welsh

    Well, Craig, you do seem to enjoy dispensing harsh medicine. The trouble is that your remedies punish everyone – especially those who havepaid their way and managed to msave something – for the crimes of the few. Moreover, those few will be almost immune to your measures!

    Consider someone like me – approaching retirement age (although never likely to be able to afford to stop working), with just about enough to get by on and a small amount of savings. Plus, of course, the house which is about all I have to show for a lifetime of work. Now I know perfectly well that it’s nothing special as houses go: people around here would say it was a big house, but it’s really pretty small and boxlike. Yet it’s the only valuable thing I own.

    Now you come along and say “the best thing would be to inflate the currency massively (thus destroying the value of my savings and my salary) and induce a house price crash (thus ensuring that my only possession of real value becomes much, much less valuable)”.

    I’m reminded of Lenin’s dictum that, “The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation”. One of the most unaccountable of the many inexplicable aspects of public policy in this country has always been that, while governments of every hue never cease calling upon the people to behave responsibly, get a job, save for their future, get a stake in the community, and buy a house – once anyone has taken those steps, they become THE ENEMY, loathsome bourgeois fiends to be dealt with as Stalin dealt with the kulaks.

  • OrwellianUK


    – I’m not going to go in depth but you really haven’t done your research on energy issues. Instead you have paid far too much attention to the PR of oil companies. Go and investigate the Net energy of Tar Sands. It’s at best a return of 2.5 to 1. The process takes an enormous input of natural gas, not to mention fresh water and a petroleum product added to make it liquid enough to pipe. Production rates will never get above 3 or 4 million barrels a day. US consumption of liquid fuels is about 20 million barrels a day. Tar sands are totally unsustainable.

    These ‘vast quantities’ of energy that you talk about are only theoretical. They may exist, but most will never be recoverable. Once it takes the equivalent of a barrel of oil to extract a barrel of oil (or near that equilibrium) there is no purpose to it. Natural Gas Fracking destroys the water table and is an environmental disaster that is already facing resistance from local governments and the public. They have also vastly exaggerated the potential.

    Do you honestly believe anything that BP say after last years debacle? Even if their claims are realistic, the cost in money, energy and environment to do what they will need to do will be enormous and the production rates will be very slow. It doesn’t matter how much is in the ground. It only matters how quick the rate of extraction is. North Sea Oil production peaked in about 1999 – 2001. I guarantee you it will never climb back to that rate of production.

    I’ve heard all these arguments before about how there are ‘limitless’ supplies of oil waiting to be fracked or whatever, but none of the arguments stack up when the principles of Net Energy and production rates are applied to the claims of the oil companies (who know better than anyone that they are not realistic).

    You’re correct about the tripling of energy prices, but that’s why we have such huge problems. Our globalised infrastructure was based on ‘Cheap, Easy Oil’ most of which is going into decline. We are now on the ‘Tight’ stuff which is theoretically extractable but at great cost of money and resources. Prices are going up and we can no longer afford to pay for it, hence the pressure on the economy which caused the recession of 2008.

    It’s in the interest of oil companies to tell us all that everything is ok and that they have huge reserves of ‘unconventional’ oil to replace conventional crude. It’s also in their interests to claim that they can go back with ‘new technology’ and extract vast amounts of oil from old wells. They rely on the fact that most take their claims at face value and they always omit from their claims any details of what the Net Energy and cost will be.

    The reason for this deceit is that the oil companies share price on the markets is directly related to their stated reserves and perceived viability of ‘new’ projects for which they desire gullible idiots to invest. The arguments you have listed are patent bullshit I’m afraid.

  • YugoStiglitz

    “@LfStL From the Wikipedia page on Harry.”

    Yes, agreed.

    But that still doesn’t answer the fact that Atzmon is a Holocaust denier.

    Heh Mary – do you believe that the Jews were responsible for their persecution in World War II. I take that you do hold such a hateful bizarre belief.

  • colin buchanan

    I don’t think Craig can be blamed for the housing crash which is happening anyway and will only get worse. All that matters is that people have a decent place to live, not that their house has some astronomical value. But you do have a point: if mortgage debt is written off or restructured why would anyone bother paying their mortgage. Actually, this situation is already arising since banks prefer not to write off debt and are allowing people to stay in houses without paying anything. If the banks admitted to all their bad debts we would see immediately their bankruptcy. By the way, I don’t buy this about RBS losses being due to Greece: the losses are here.
    You’re right about it being a bad time for savers- there is nowhere to put money except gold. In the event of a general restructuring of private debt there should be ways to reward the thrifty like yourself. Otherwise it wouldn’t be viable.

  • OrwellianUK

    Oh, and just another point to remember: ‘Technology’ is not an energy source. On the contrary, it takes energy to build and run it.

  • YugoStiglitz

    MJ: “Harry’s Place is also recommended by Anders Behring Breivik of course. Nice.”

    I’m curious as to why you think that. Any evidence for that, or is it another thing that you’ve made up?

  • YugoStiglitz

    Although I find interesting what the fascist Atzmon wrote recently:

    “Was Anders Behring Breivik a follower of Front Page Magazine or the equally inciting and hateful Harry’s Place? We cannot know for sure yet – but hopefully we will find out soon.”

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