The following is the text of a speech to a joint meeting of the Christian Socialist Movement and the Co-op party on Tuesday 27th September, by Ann Pettifor, director of Policy Research in Macroeconomics (PRIME), co-author of “The Green New Deal” and a fellow of the new economics foundation.
“I have just returned from a lecture tour of Australia where I came across the story of the Sydney Diocese and what the Aussies call the GFC – the Global Financial Crisis.
The Sydney Diocese, far from chasing the money-lenders from the temple that is their faith, invited them in, borrowed money against the diocese’s collateral, and used the borrowed money to invest – some would say gamble – on the stock market. When the financial crisis broke in 2008, stock market losses were amplified by the church’s huge borrowings. Archbishop Dr. Peter F. Jensen broke the bad news while addressing the church’s annual Synod in 2010, and according to ABC, said that the synod’s “losses total more than $100 million.”
The Archbishop counselled against recrimination, according to the Sydney Daily Herald (13 October, 2010). “He even took a little of the blame himself: “Looking back, I can now see many of the things I should have done, things I should not have done and even clear moments when I should have spoken up or insisted on different behaviour.”
The crisis of the Sydney Diocese alerts us to the way in which the finance sector has corrupted our most cherished institutions, including the temples of our faith, and how Christians too have fallen prey to their siren calls to borrow for speculation –.
It reminds us that we Christians and people of faith, in the period before the financial crisis “should have spoken up or insisted on different behaviour.”
For too long, we have failed in our duty to condemn the use of interest and money as ‘despotic power’ (to quote the Cambridge sociologist, Geoffrey Ingham) and to protect society from the exploitation of usurers.
Not only do we fail to condemn usury; many of us have forgotten its meaning.
I take it to mean the power of those with money, to exploit those without by charging high rates of interest on loaned money. And given that banks are in charge of the production of money; that banks can create credit or money out of thin air – this has indeed become an awesome and despotic power.
And now it is too late to condemn usurious practices. For today we face the potentially catastrophic consequences of the powers of ‘light touch’ de-regulated finance, used to blow up/inflate a credit bubble – and create vast private debts.
If voters don’t trust Labour with money – it may be because we have taken our eye off the ball – their private debts and the threats that austerity poses to their livelihoods and incomes – and their ability to repay these debts.
Thanks to de-regulation and ‘ulta-light-touch regulation’ by both Conservative and Labour governments, private bankers recklessly over-extended credit from the 70s through to the 00s, and now have vast, often unpayable debts on their balance sheets.
Central bankers and Chancellors stood passively by, as private bankers inflated this immense credit bubble. This was a form of inflation to which they turned a blind eye.
According to the McKinsey Global Institute, this credit bubble generated vast private, not public debts –which now amount to more than four times UK GDP – 469% of GDP.
This mountain of private debt eclipses public sector debt. It is about 6 times the level of public debt. (See chart below.) And as a key part of this, between 1987 and 2010 the finance sector’s indebtedness has grown by over 400%, standing at over 200% of GDP.
A large proportion of these private debts will never be repaid – because they exceed income by multiples. If some debts are to be repaid, that will only be out of income gained from employment and profits. But employment is falling, and unemployment rising.
It is this frightening prospect, coupled with rises in energy and commodity prices, that is inducing fear and insecurity in British voters.
And so they have begun deflating and de-leveraging this vast pool of private debt – and dragging economic activity as they do so.
It is this deflation and de-leveraging which is spooking consumers, bankers and ‘the markets’. Not the government deficit.
But Labour’s spokespersons appear blissfully unaware of this private debt crisis. Instead our leaders – like the Coalition leaders – focus endlessly on the far less significant public deficit, promising to ‘cut the deficit’ and “conceding there would be cuts” – i.e. more austerity – if a Labour government were to be elected.
Ed Balls’ speech yesterday began to move away from the Coalition’s agenda, with his very welcome proposal for investment in public infrastructure.
But the proposal to cut VAT won’t work, because it is based on the flawed notion that over-indebted consumers want to consume more.
They don’t and they can’t.
Even if consumers were persuaded to open their purses and ignore their debts – most of the gains from consumption would anyway leak away to China – as they did under the weak stimulus introduced by Chancellor Alastair Darling.
So while Ed’s speech was welcome, it sounded very much like a re-run of the timorous, and ecologically dubious Darling stimulus of VAT cuts and ‘cash for clunkers’.
So it is no wonder the electorate are anxious and insecure about Labour’s intentions and its economic credibility.
By insisting that a Labour government will cut spending, and cut the deficit – the party’s spin doctors worsen the anxieties of voters; continue to focus on just one sector, and not on the issues of greatest concern to voters: their debts and the threat of unemployment and loss of income.
Unfortunately this failure to see the bigger picture is mirrored in political debates on the global stage.
Let no one underestimate the economic threats facing Britain and the world today.
As Christine Lagarde of the IMF has tried to warn us, we are threatened with the gravest economic crisis since the great depression.
And as Ed Balls hinted yesterday, this may turn out to be the greatest economic crisis in our history – given the unprecedented global integration of finance, and today’s size of world population.
And don’t let’s underestimate the intelligence of ‘markets’.
The fear – real fear – and volatility in financial markets stem from a growing awareness of the true nature and extent, not of public deficits, but of private bank insolvency and of the utter wrongheadedness of the present policy stance.
By focusing on government deficits, politicians and central bankers are applying the wrong remedy – austerity and measured deficit reduction – to a different problem: the broken private banking system.
By applying policies that slash economic activity, raise unemployment and threaten more corporate bankruptcies; by cutting incomes, ‘austerity’ – as Ed said yesterday – is adding more defaulters, and more unpayable debts to the already weakened balance sheets of over-extended British and European banks.
And ‘the markets’ can see this, even if politicians and policy-makers cannot.
As the crisis unfolds in horrifying slow-motion, governments on the global political stage are reacting with harsh right-wing policies that punish the innocent, cut the public sector and avoid the bankers. In Britain, powerful elites are incorporated into ministerial decision-making.
There is more than a whiff of the corporate state.
And the scapegoat both here, and in the Eurozone? As always: government finances.
But the real cause of this potentially catastrophic economic failure has little to do with government finances. They are merely symptoms of failure.
The real cause of this historically unprecedented crisis is the broken global banking system.
A system that is both morally and financially bankrupt – broken on the back of de-regulated finance.
As a member of the Labour Party since 1973 (one who resigned briefly over the Iraq war) I make this challenge to Ed Miliband and our Party leadership: affirm with clarity and conviction the principle that Labour will never again be captive to bankers, nor be seen to be in the pockets of bankers.
That we will never again be captive to neo-liberal central bankers like Alan Greenspan and private bankers like Fred Goodwin.
That Labour will instead finally begin to focus on the consequences of those neo-liberal policies: a vast mountain of private, individual, household and corporate debt – 469% of Britain’s GDP.
The Labour Party has given Britain some of the greatest governments in our history. But just as in the 1930s, Labour remains in danger of capture by the very technocrats that created and supported the reckless de-regulation of finance.
Senior Labour figures continue to dally with international banking elites; to use the power bestowed on them by Labour members, to leverage personal financial gains. To settle scores and to distort debates through the publication of their memoirs.
As a result Labour’s new leaders can make no effective challenge to the finance sector; have developed no substantial narrative or alternative, no comprehensive resolution to the crisis of private debt; only initiatives, political games and point scoring.
So it is urgent that just as it did in the 1930s, the Labour movement must once again wrest the party from the hands of those who supported and implemented the interests of the finance sector.
To regain credibility with the five million voters it has lost; to win back the commitment of the British people as a whole, Labour must chase the money-lenders from the temple that is our democracy.
And Labour must propose a Plan B. Let me sketch the elements of a Plan B.
First, to avoid plunging the British and global economy into a deeper great depression, there is an urgent necessity for both the orderly re-structuring of debts, and for fiscal stimulus.
Until large proportions of private personal, household and corporate debts are acknowledged as unpayable, and a percentage written down, or written off, in an orderly way – there can be no hope of economic recovery and financial stability.
Until Labour calls for a Jubilee of debt cancellation – recognising that debt cancellation is a form of regulation and discipline that is vital, because it disciplines both lenders and borrowers; and periodically restores balance to their unbalanced relationship – there is little hope of recovery.
Second, because the private sector is so over-indebted; and because the banking system is effectively insolvent, there can be no recovery until government takes the lead and kick-starts economic activity.
This must be done through a programme of sound investment in public works, financed in part by Bank of England operations, and subsequently by the tax multiplier.
The financing of a programme along the lines of the Green New Deal: not just for socially and ecologically essential projects, projects that will enable us to transform our economy away from a dependence on fossil fuels.
Such a programme is also necessary to stimulate private economic activity.
And note friends, that I use the term economic activity here, not growth. We cannot afford limitless, exponential growth – the ecosystem has physical limits, and it is time that Labour acknowledged this simple truth about nature’s boundaries – and abandoned the language of ‘growth’.
But we can afford full employment. After all, there is so much to be done. Birds, bees and an ecosystem to be conserved. So many to be cared for, educated; so much creative potential to be unleashed.
And let no one believe we cannot afford to care for our elderly and frail; that we cannot afford to transform our economy away from fossil fuels; that we cannot afford for our artists to give vent to their creativity; that we cannot afford to make music. That we cannot afford to be led out of ignorance; to be educated.
“We can afford what we can do” to quote John Maynard Keynes.
Central banks are eager to supply liquidity to private bankers when they wreck both their own institutions and threaten the global economy; they should now act to supply liquidity to governments that need to stimulate economic recovery, create jobs, and with it the income, savings and tax revenues that will help finance the transformation of the economy away from fossil fuels – and repay debts.
Because, friends, public investment will re-start and create economic activity and jobs, something the over-indebted and fragile private sector cannot do. This in turn will generate the income/savings/tax revenues with which individual, household and corporate debtors can repay debts.
Without sound, extensive government investment in that which is both socially and ecologically useful, there can be little hope of recovery.
Without investment in public works, the public deficit will continue to rise. As sure as night follows day.
Above all, without public investment there will be little hope for a return to solvency by Britain’s banks.
Because of their debts and liabilities, Britain’s bankers, like those in Europe, will soon be knocking at the doors of the Treasury and the Bank of England, demanding even more taxpayer-backed bailouts, quantitative easing and negative rates of interest.
Regrettably, the nationalisation of private losses by further taxpayer bailouts will be inevitable, if we are to avoid systemic failure.
But this time, unlike the Labour’s government’s bailout, there must be tough terms and conditions. Large scale monetary reform.
First: a Jubilee that will result in the cancellation or re-structuring of private debts deemed unpayable. These write-offs to be agreed within a fair and proper process – fair to both debtor and creditor.
Second: an end to speculation by bankers in domestic and global markets.
Third: a range of controls over capital mobility to limit speculation, and strengthen democratic, accountable policy-making and ensure the stability of the domestic economy. Such controls to include a ‘Robin Hood Tax’.
Fourth: the full separation of retail and investment banking as one part of large-scale reform of the domestic banking system.
Fifth, effective regulation of interest rates by the Bank of England. Such reforms to lead to the provision of low-cost loans by the banks to SMEs and other productive and socially useful enterprises at very low rates of interest – for loans across the spectrum, short and long, safe and risky. Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration.
In other words, the rule should be ‘tight but cheap’ money.
Sixth: the abolition of bankers’ bonuses.
Seventh: an end to the recognition of Britain’s ten tax havens, and an end to tax evasion and avoidance through the employment of thousands of more trained and motivated tax inspectors.
Labour will only regain economic credibility with Britain’s voters if Labour’s leaders act to displace bankers from their role as the ‘stupid masters of our economy’ (to quote Labour’s 1944 employment manifesto) and once again subordinate finance to the role of servant to the real economy: where jobs and entrepreneurs are created, where socially and ecologically useful and sound activity takes place; where incomes/savings and tax revenues are generated and financial solvency and stability ensured.
For this to happen, Christians in the Labour Party must reassert our core values of social justice, our abhorrence of usury; and challenge once again, the despotic power of finance.
We do that best by chasing the moneylenders from the institutions we cherish most.”