The markets demand their pound of flesh

“The pound of flesh which I demand of him is deerely bought, ’tis mine, and

I will haue it.”  Shylock in the Merchant of Venice.

Despite the relevance of its theme to much of my work, I am not in the habit of quoting Shakespeare’s anti-Semitic play of 1596, the Merchant of Venice.  But William Buiter’s column in the Financial Times of 2 March drove me back to the text. (‘Britain’s lack of credibility hurts sterling.’)

First of all, let’s remind ourselves that Buiter is a distinguished economist, respected for his independent views – and often described by orthodox economists as a ‘maverick’.

But this year Buiter was hired by Citigroup – a bank in dire need of an intelligent, independent-minded economist.

In his column Buiter – controversially in my view – yoked Greece’s fiscal crisis to that of Britain’s, arguing that “Britain’s economic fundamentals are uniquely awful.”  He complained of the  “the understatement of UK public debt through the off-balance-sheet accounting tricks of the past decade (the private finance initiative, unfunded pensions, student loans and other Enron-like constructs)”. He then went on to attack “failures of UK regulation that permitted the financial system’s balance sheet to pass 400 per cent of GDP.”

Nothing controversial in the latter point. But it was his next point that took my breath away. Having demolished the Labour government, Buiter switched his attention to the Tories.

“The Conservatives are untried and untested” he wrote “so the markets will also demand their pound of flesh in the form of immediate fiscal tightening if the Tories form the next government.”

This language is more brutal and direct than that of George Osborne – but it tells us all we need to know about the paymasters of the Conservative Party. And about the way in which, on behalf of  ‘the markets’ the Conservatives  will extract a ‘pound of flesh’ – from underpaid carers, from the mentally ill, from those working in the energy renewable sector and from the young unemployed that will benefit from government investment in infrastructure.

But it also reveals a galling truth: that even intelligent, independent economists have not learnt the lessons of history.

Because their ‘pound of flesh’ is precisely what the international financial markets demanded of the British and American economies after the 1929 crash – another crash for which they were largely responsible.

Only then – between 1929 and 1933 – cuts in public spending were enforced, not through a helpful political party, but through the governors of the Bank of England and the Federal Reserve, aided by that ‘barbaric relic’ – the gold standard.

The result was that government spending was cut, and economic activity slashed – which only intensified the downward spiral of economic failure.

‘The markets’ had been granted their ‘pound of flesh’.

Until the election of Roosevelt, and the appointment of Keynes to the Treasury, both of which events took place in 1933, there was no resistance to their self-mutilating demands.

Today both countries lack either an economist of the stature of Keynes, and a politician of the stature of Roosevelt.  Instead we must look for a brave politician, to that very small nation, Iceland, where the President has, like Roosevelt placed the interests of those that elected him above the interests of ‘the markets’.

Before handing over to the British and Dutch governments the ‘pound of flesh’ they demand, the President has turned to the people, and in a referendum asked if they wish to be sacrificed in this way.

We await their response in the vote on Saturday. But the big question that must be asked of British voters is this: are we going to vote for politicians that will extract such a sacrifice from the body politic, and then offer it up ‘the markets’?

Are we to be governed by unaccountable and economically illiterate markets?  Or will we learn to resist, adopt sound economic policies and demand that democracy prevails?

If we don’t resist, then I fear that both ‘the markets’ and after them, the political forces of reaction – probably fascists – will ultimately prevail.