[Mike Phipps reviews The Failed Experiment – And how to build an economy that works, by Andrew Fisher, published by Comerford and Miller, price £9.95 ]
I enjoyed this book. It starts with one of the clearest explanations you will read of how the Northern Rock Building Society and the business model behind it inexorably led to disaster.
At the time of the financial crisis, banks held roughly £1.25 in reserve for every £100 they issued in credit, often in the form of mortgages. Many of these “assets”, created out of thin air, were bundled up and sold on as “collateral debt obligations” (CDOs).
But why did other banks buy them, when it was obvious that many of these mortgages were being defaulted on and that the debts involved could never be recovered? The answer is simple: it was often impossible to verify what was good or bad. The buyer of one type of CDO product would need to read 1,125,000,300 pages of documentation to understand what was being acquired.
Instead, banks relied on credit rating agencies to assess the value of the CDOs for sale – but the bank selling the product paid the agency that gave the rating, a conflict of interest if ever there was one. When the credit crunch hit, banks stopped lending to each other altogether, leaving themselves dangerously exposed. A lack of regulation by politicians – either ignorant or compliant – created a situation reminiscent of the 1929 crash.
In the case of Northern Rock, the Government spent £100 million trying to sell it and then nationalised it anyway. Other banks in trouble were bailed out by public money, even though it was only the deposits of the very wealthy that were threatened.
As more banks were hit, the Government nationalised their losses while allowing them to continue privatising their profits. “The bailout of the finance sector was the greatest transfer of wealth in human history,” notes Fisher.
The decline in bank lending hit business, triggering a recession. For government, that meant less tax and a bigger benefits bill. As the budget deficit widened, governments cut back, sparking a spiral of decline.
Much of the book looks at how we got here – the origins of what Fisher calls the “great experiment” under Thatcher. In the early 1980s, the poorest half of the UK held 11% of the nation’s wealth. Twenty years later that share had fallen to just 1%.
The central policy of those years was privatisation, marketed to voters as “popular capitalism”. But after 18 years of Tory rule, UK individuals owned half as many shares as they had twenty years earlier. Foreign ownership of UK company shares had more than trebled – a trend that continued under New Labour.
Thanks to New Labour private finance initiatives (PFIs), by 2011 around £300 billion of debt was owed by public bodies in return for just £50 bn of new assets. The bankruptcy of health trusts that ensued led to the closure of frontline services.
The “right to buy” council housing has had similar effects. One third of properties sold are now in the hands of private landlords, with housing shortages driving up costs.
The tax burden has shifted onto the poor too, with VAT raised and business taxes slashed by £50 bn in the New Labour years alone. The last 30 years of financial deregulation, privatisation, industrial closures and the squandering of North Sea oil has hugely damaged the economy, now suffocating under a welter of personal and corporate debt. This brings us right back to the publicly subsidised banking sector, which dominates and distorts the real economy – or what’s left of it.
Fisher’s solutions are straightforward and hinge on economic democracy: public ownership of services, investment in infrastructure and social housing, a land value tax and nationalisation of the banks to make them a force for economic development, tackling unemployment and rebuilding infrastructure.
He proposes a clampdown on tax havens and a Tobin tax on speculative financial transactions – which the Con Dems are currently fighting in the European Court of Justice. The right to co-operatise at work, a citizen’s income – most of these policies have been around a while. Many are popular. Now if only there were a party that was standing on them that I could vote for…
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