The Prime Duty of the State

It has been a primary axiom of government for millennia that the first duty of a government is to defend itself and its people from enemies who would wish to despoil either the public or the personal assets of the members of the community. This requires maintaining a sufficient police system to keep private individuals safe and secure, and sufficient armed forces, sufficiently well equipped, to secure the position of the nation in the world.

Some states are democratic in nature, some are autocratic; and these differences mean that the means by which governments fulfill their primary duty vary enormously. In Britain, we have been lucky to have a generally democratic and fair system; with a reasonable status among nations: though we now know that these are significantly in danger.

People are decreasingly confident that the system is fair, and that the state has added to the duties of defence and law-and-order the obligations to educate the nation in a fair and sufficient system of schools and higher institutions and the obligation to maintain systems of health provision and social care that meet the recognised needs of an ever-changing population. This past week's budget has again shown the utter failure of a regime of Osbornian austerity to correct the disastrous mistakes of the Thatcherites or the idle complacency of the Blair-Brown era. The promise to patch and mend the schools and the health service, and to ignore [for the time being] the increasingly urgent needs of social care and the police and the military, are generally recognised to be not good enough.

As if to epitomise this situation, the Queen's Guard at Buckingham Palace today will be provided by the Royal Navy. Some beancounters in the Admiralty and the Army have recognised that so many of the navy's submarines and surface ships are stuck in harbour because of poor maintenance and a shortage of sailors and of supplies that some seventy sailors can be scraped together to relieve the pressure on the diminished Household Division.

This is not a vainglorious bleat about Britain's lost glory. It is not even a hint that we should try to restore the Empire. But it is recognition - shared with a significant cohort of Tory MPs - that the cuts in defence are dangerous. The more the police is diminished, set against the terrorist threat, the more the army and the navy may be needed to "come to the aid of the civil power" as substitute police and firefighters. If those troops are not there, the nation is in danger.

Against this argument, the government is bleating that the UK has the biggest defence budget in Europe. So, when did Russia cease to be in Europe? Putin has almost completely rebuilt the front-line Russian forces, replacing the decrepit rabble that Yeltsin left behind and raising national morale hugely. France spends less through the formal military budget than the UK; but by other means it maintains the capability to  design and build now warplanes, warships, tanks and guns. Yet again, the excuses that civil servants are supplying to minister to defend the indefensible has become embarrassing. In the twenty-first century, Britain cannot aspire to rule the waves: but we must avoid sinking beneath them.

Inter-Generational Inequity

It is now a commonplace for even Tory politicians to acknowledge that the under-thirties [on average] have a less affluent lifestyle than the over-sixties. There are, of course, obscenely wealthy young people in sport, entertainment, entrepreneurship [especially in 'technology'] and in the arts: but the median and the average for the age group indicate a lower level of home ownership, a higher level of debt, lower real income and lower expectations than were common among their parents.

There are, of course, desperately poor old people and middle-aged people whose fate can be ascribed to the inhibitions of their ethnicity [especially among low-aspiration native British] or to illness, or to having been failed by the education system [including careers advice], or to drink, drugs, inappropriate social relationships or pure bad luck. Sadly, all these causes of relative poverty afflict a significant proportion of the under-forties [and, indeed, the under-twenties] as well as their grandparents' generation.

More than ever is spent on pensions, schools, the heath service and benefits each year: but the 'deprived' cohorts continue to increase and state provision misses millions of cases of need. The idea that we have  a welfare state is no longer uttered: 'universal credit'  as a pair of words should imply a sort of superior welfare state that reaches everybody who needs it and makes sufficient wealth available for every recipient to have a modestly comfortable lifestyle; but it has no such resonance.

The great benefit that universal credit is meant to confer on its recipients is that it provides them with an absolutely minimal standard of living whilst they are goaded into taking a minimum-wage job. Thus it is part of the downward escalator by which the British people are being habituated to lower expectations, as economic growth stalls and productivity continues to plummet.

The current crunch-point that is having the greatest political wind-space at this moment is housing, and it is almost certain that the upcoming budget will offer increased spending on housing. The key fact to remember about the house building sector is that they have satisfied their market very satisfactorily since the credit crunch: in the sense that the people who have [or can borrow] the money to buy flats and houses have had plenty to choose from. In some areas they can not find exactly the sort of property that pleases them, because all the pretty cottages with roses round the door have been bought already, and conservation zones have not been upset by much development; but in general the affluent have been able to buy more-or-less what they wish. The great lack is of 'affordable' housing, which in the welfare state era was provided largely on a rental or rent-to-buy basis by local authorities and housing associations. In one of the many cretinous supposed 'achievements' of the Thatcherites, the local authority housing was largely sold at knock-down prices to existing tenants [thereby breaking the cycle by which tenants saved the money with which to pay a deposit on their own home, and thus they freed the house for the next aspirant]; and then the government banned the local authorities from spending the pittance they received for the sold houses on building replacements. The reduced stock of social housing very largely became occupied by the 'hereditary paupers' who were created by the destruction of industry. Everybody with any social awareness knows the nature of the housing crisis. Blairites and the Cameron-Clegg clique ignored it. Now it is so acute that it is a major electoral concern, as is evidenced in all the opinion surveys.

Some pathetically inadequate steps will be announced in the upcoming budget, which the infinitely-untrustworthy John McDonnell will mock as he repeats his promise to borrow to spend to solve social problems.

Behind this lie the simple facts that the present socio-economic disaster that is epitomised in the housing situation was politically created, at the behest of Economists. In Economists' terms, the housing market works well: those who can afford to buy houses and flats can get houses and flats, more or less where they want them. But the mass of the rising generation cannot afford to buy the houses that are available: their purchasing-power is insufficient because of the failure of the economy to achieve the necessary state of productiveness. Many of them have been taken so far down the scale of real incomes that they cannot even afford to hire clean, safe accommodation at a reachable distance from where they could hope to get a genuinely remunerative job. Nothing that the current Tory deadbeats can countenance will solve the problem.

Housing is the touchstone of a much more general social and economic failure - by the political system. The inequity to which is gives rise works hardest against the young: but the older generations of their families are increasingly drawn in to sharing the consequences. The voters'revolt, as it grows, will include more parents and grandparents: they are less likely to be conned by Corbyn and McDonnell; so the political means by which this societal problem - like the Brexit crisis - will be resolved is yet to become apparent. Time is short.

QE For Ten Years: Saving the Banks and Smashing Society

My last blog began with a second reference to the ten years that have elapsed since the collapse of Northern Rock told the public - and the unobservant Econocracy - that there was a crisis already well developed in the world of banking. More than a year before the Northern Rock event hit the British system, the USA had had its own crisis in the collapse of several institutions which the Clinton regime had induced to accept 'sub-prime' mortgages. The term sub-prime was not in common currency in the UK, and the USA was far away, so not much notice was taken of those events even in the London money market.

Within the US financial system, it had slowly become apparent that the sub-prime mortgages had been sold on [in the manner described yesterday] as parts of securities which were just bundles of debts where the borrowers would [in the main] carry on making the payments they were contracted to make: thus the buyer of such a security was effectively buying a cash-flow of future payments. The original lender of the money would retain the duty to collect the payments and pay the interest on the security, and there would be an allowance for the proportion of the borrowers who would default on their payments. So the original price of the security was based on a supposedly objective view of what it would yield to its owner during the term for which it was valid. On that basis, the security could be sold on, for inclusion in larger or more inventive types of security. The sub-prime mortgages were a category where the borrower was very likely to default, and the continuing decline of the old industries in what were quickly becoming known as the 'rustbucket' areas meant that many families lost their main earnings and could not afford the repayments. Defaults on payments of sub-prime mortgages seemed, at first, an American problem: but during 2007 an increasing proportion of securities traders became worried about UK securities that included packages of mortgages issued by banks and building societies whose lending had become [by all historic comparison] reckless.

Among these was Northern Rock, which was borrowing credit in the wholesale market [see last two blogs in this series for details] in order to lend to new customers. The lending was reckless: more than 100% of the asking-price for the house was available to clients who were taken at their word as to how much they earned. This sort of lending [in which the Rock was only the most conspicuously adrift from traditional caution] led to clever traders realising that securities based on Northern Rock loans, and securities containing a 'repackaged' share of Northern Rock, may not perform as promised. So the wholesale market stopped buying Rock securities: and the Rock had no ready money in its tills beyond the usual daily turnover. Hence, as customers heard the rumours and queued with their documentation to demand their own money, the firm failed and [as explained previously] the government instructed to Bank of England to provide the money that the customers were demanding. After the crisis the residue of the Rock was sold off: its trading branches were taken over by Virgin Money and most of them are still trading, and the mortgage debts were sold to firms that managed the run-off so that most of the securities that the Rock had sold were successfully [and profitably] carried forward to their terminal dates.

Behind this happily makeshift resolution of the crisis caused by one smallish [albeit prominent] firm, the financial markets as a whole were beginning to panic about the multi-trillion pound market in securities that had been built up by 'innovative' firms that had been making their own paths to untold wealth by taking the fullest advantage of the market freedom created by the Thatcherites on the urging of the Econocracy in 1986. Within a year of the Northern Rock crisis, there was an emergent crisis throughout the market. Nobody could be sure which securities contained how big a proportion of debt that might become 'sub-prime' if the root provider of the cash flow failed. So the Bank of England was instructed to copy the US Federal Reserve, which had already begun an indefinitely large open-market operation which it called QE: Quantitative Easing. Though the detail is mind-bogglingly complex, the principle is simple. The banks were told to form an orderly queue, and slowly to arrange their portfolios of securities so that they could present government bonds at the Bank of England which would [in essence] 'print money' with which they bought the government securities [and just kept them in their vault, metaphorically]. Thus any bank could get cash by selling government securities to the Bank, and use that cash to fund the orderly winding-down of the 'assets' in the market. Those that were considered 'toxic' were disposed of cheaply, and holders of the rest of the mass of securities could resume trading, albeit cautiously. Nobody realised, when Britain adopted QE in 2008, that the queue would continue shuffling to the Bank asking for cash until now: but that has happened. it has saved the banks and the wholesale securities trade that lies behind the banks; but it has been ruinous to the economy in which human beings depend, and to the society that binds humans into a community. This is the subject for the next blog. 

People and Political Economy Versus Econocracy

Yesterday a Times leader-writer who frequently writes an Economics column for the paper recognised the Manchester action group that created the Post-Crash Economics Society, and the related movement that has spread around the world [as frequently mentioned in this blog]. He noted that a very few university teachers have cobbled-together courses that give an introduction to the different approaches to the subject that have been taken over the last couple of centuries; and that the vast majority of the established teaching cohort - the Econocracy - have adhered rigidly to the pseudo-mathematical formularies that are their only stock-in-trade. That stock is being demonstrated to be putrid. I was a university teacher, specialising in the History of Economics, for a couple of decades until 1988. During that time I assiduously researched the question of how Economics was taking an increasingly perverse approach to the world; and meanwhile my colleagues selected me to be Dean of the Faculty and eventually Pro-Vice-Chancellor, which I like to think indicates that I was taken seriously as a person.

By 1988 it was clear that common sense and Economics were becoming implacably opposed. The Thatcherites were busily destroying industry, blinded by the mantras of open competition and monetarism that undermined the traditional support from the state budget for the economy [which was repaid as economic growth produced the tax revenue that increased the state's capacity to spend on infrastructure developments, research and product development, and popular welfare]. So I bailed out of academic life, into one of the great support organisations that underpin the skills on which the City of London depends for its unique depth of resources which constantly renew its role as the world's leading financial centre. I have continued to watch the consolidation of Thatcherism into 'austerity', which in turn gives the government the ludicrous notion that state spending [on almost anything] is a 'bad thing'.

There are, of course, the glaring exceptions: of which the most conspicuous are HS2 and Hinckley Point, where the state is in for tens of billions of pounds of useless and unwanted spending. Otherwise, spending by the state is a bad thing: especially on peoples' welfare.

Today's News on the BBC is headed by the facts disclosed in a report on tower blocks that has become critical in the light of the Grenfell Tower tragedy. Sixty-eight per cent of the tower blocks in the UK have only one staircase, almost 40 per cent have some form of cladding [of which a yet-to-be determined proportion are flammable], and only two per cent have sprinkler systems. Sprinklers have been proven as a valid means of quenching fires, and thus preventing their spread, for centuries. When Britain had extensive factories and warehouses, the insurance companies employed inspectors who had the right of entry to premises to check that the sprinklers were installed and operational: if they were not, the insurance was immediately cancelled. Factory Inspectors also had to duty to check on the effectiveness of spinkler systems, and could close units that were non-compliant; and in most local authority areas buildings were only licensed for use if certified as compliant with local specifications by the Fire Brigade. The present shoddy government have made it as clear as they clarify anything - which is not very far - that they will expect local authorities to use their own resources, to the extent of using up all their reserves to begin to introduce measures to address the fire hazard in the blocks that they control.

The Econocracy supports the government line: state spending, bad. Occupiers should pay competitive prices for their flats; and if they want safety measures built in they must pay more for that assurance. If their earnings or benefits or pensions will not cover the higher rents, they must move their homes; or get better jobs. For myriad reasons, such as access to schools and hospitals, proximity to relatives who need or provide care, lack of skills or lack of drive, millions of people cannot get better jobs or pay higher rents. The Econocracy has no patience with such people: they clog up the system and prevent the 'model' from functioning as they think it should, in all its clockwork simplicity. 

We need a new Political Economy, that takes account of people as they are, and has their development and the welfare as its highest goals. The housing situation - with hundreds of thousands of households outside the tower blocks effectively homeless - is a perfect example of the Econocrats' model economy not working: because it is utterly out of kilter with the realities of human existence.

How British Governments Have Made Life a Misery for Millions

Academics in the University of Manchester have published data [mostly derived from well-known official data] which shows that death rates among younger people in the deprived areas of northern England have increased over the past twenty years, while in the south there has not been a similar outcome even though dangerous drugs have become more common and alcoholic abuse has continued. The difference is that more people in the north take intoxicants more prolifically than in the south, and they do this in cold homes where their bodies are less well fed than those of the majority of southerners.

As one commentator on the TV said, as she was shown with the background of a canal and a derelict factory, this was the ambiance that viewers expected to see as she summarised the Manchester data. In the course of this presentation the term 'diseases of despair' was deployed to describe the effects of depression, alcohol and drugs in a society which appears to offer no hope of a better lifestyle. The lives that are to be seen in soap operas and other apparently-commonplace programmes, seem so different from those that the inhabitants of deindustrialised backstreets as to be unattainable. Coronation Street, Victoria Square and Ambridge occasionally present a denizen with a drink, drug, psychiatric or personality problem; and such individuals appear as searing exceptions to the societal norm, that enter into the script with the approval and encouragement of the lobbies who try to highlight those problems; but after a point has been made, the problem is removed from the script, and the characters return to lives that may be far from ideal, but which are far superior to those of hundreds of thousands of the most deprived people.

I used personally to bridle at the use of the term 'deprived', whether used of the people who experience these diseases of despair or the areas where they live; but as austerity has tightened the grip of despair and disease in these places I have recognised that these areas and these people have indeed been deprived. The schools are less well equipped and the teachers are more dispirited than in 'nice' southern towns; the hospitals have less resource and the dedicated staff are less able to give time to patients when the demands on them are swollen by staff shortages; provincial public transport is cut dramatically as London contemplates Crossrail Two; across the country Libraries are closed and the entire social infrastructure is squeezed.

Today, August 9 2017, has a good claim to be the tenth anniversary of the day when it became absolutely apparent - to anyone who understood the financial world to any degree - that there was a major problem emerging from the apparent technicalities of the financial markets which would affect the real lives of everybody in the money-using economy. It took fourteen months until the 'financial crisis' [or 'credit crunch'] reached such an intensity that government action, co-ordinated with the Bank of England and the authorities in the USA and the major European markets, was unequivocally necessary. It was essential that something absolutely drastic was done was done, or the financial world as we knew it could simply cease to function.

How had this happened?

The Thatcher governments were guided by Economists who suggested that 'the market' could grow best without government interference, and that organisations like trade unions impeded the market in finding the optimum way of allocating resources through society. So the Thatcherites deliberately removed support from coal mines and shipyards, and protectionist cover for steelworks and other industries that has previously been regarded as 'essential'. Simultaneously they reduced the excessive 'rights' that had been given to the unions under Labour governments; to the extent that workers' rights were placed at a discount of almost 100%. The result was massive deindustrialisation across much of the country. The Conservatives ignored this dereliction, because the financial services were largely replacing the losses to national income that came from factory closures. The 'big bang' of 1986 set the financial institutions free to develop their own fantasy markets: just at the time when computers placed unprecedented processing capability at their disposal. Transactions could become more complex and take place much faster than had every been contemplated when unknown forces were freed.

The economy continued to grow - in terms of gross aggregate turnover - because the growing financial sector constantly found new ways of creating purchasing-power from thin air, by creating new financial devices; of which one of the most prominent was securitisation. This device enabled the 'retail' banks and building societies to lend far more money than they could have loaned if they had remained dependent on their depositors to provide them with the stock of money to be lent. Now the lenders simply lent more, then bundled the mortgages and the credit-card 'balances' into blocks or 'packages' which they sold to institutions in the new 'wholesale' financial market. Thus money could constantly be recycled through new loans; and it was considered a triumph of innovation: until it became apparent that many mortgages [starting with 'sub-prime' mortgages in the USA] would never be repaid. Concern about the security of the 'securities' escalated during 2008 as more and more of the financial 'instruments' that had been traded through the wholesale finance sector came under suspicion as having no substance behind them. Eventually the Bank of England [backed by the government] promised to buy enough 'securities' [using newly-created credit] to keep the financial sector funded with : and they created billions of pounds of 'cash' every month for several years to keep the system rolling on.

In saving that fantasy world, that had been created by a tiny fragment of the population, the real world in which most people lived had to bear the cost of the exercise. At first, it all seemed to be a technical matter; but later a conflict opened up between the demands of the financial sector and the real economy: and by then the government was so committed to saving the financial world that real people in the real world had to forced to accept lower living standards and lesser public amenities. This began slowly under the Gordon Brown government, and consequently the government rapidly expanded its borrowing to continue funding social commitments.

Then came the coalition government, in 2010. To the incoming ministers, the amount of debt that the former Labour government had been incurring was unsustainable. Month after month, as the taxation that people had paid stagnated, the government had borrowed what was necessary to keep public and social services going. Large areas of the economy - especially of the real economy - imploded and ceased to pay taxes to the state or wages to former employees [who also ceased to pay taxes when their incomes failed]. Thus the temptation to borrow yet more to compensate for the failure of the material economy was pressed upon the new government: which boldly decided that the deficit must be eradicated. So austerity became the essence of the coalition's economic policy; and mass misery was ensured. Since most of the misery was well away from Westminster politicians and civil servants could ignore the consequences of their actions. And because there was no place for humanity or reality in their model markets, the Econocracy could ignore the situation entirely.

Lame Ducks and Kamikaze in Cloud-Cuckoo Land

Mrs May's new ploy might be quite clever; and if it is, one wonders who dreamed it up for her. To issue a draft speech two days early is a new trick, as far as I know. It is designed to set the media into a frenzy and to challenge the opposition parties to make a considered response to the apparently-arid actual content of the discourse.

Mrs May appears to be a lame duck premier, but her party dare not precipitate an election if it can be avoided. She may indeed survive long enough for the arch-Brexiteers to be shown up as lame ducks, instead.

A so-called Kamikaze wing of the Conservative party is - against all reason - demanding a 'hard' Brexit, which seems to mean complete withdrawal from the European Economic Area and the destruction of what the Thatcherites [and the neo-Thatcherite New Labour crew] left of the British economy. With various degrees of enthusiasm about self-immolation, there are reckoned to be up to sixty people of that persuasion: enough the prevent any more moderate consensus in the Tory party. Before her spectacularly unsuccessful election campaign, Mrs May hoped to get a big enough majority, including a large number of Remainers among the new MPs, to be able to face down the loonies and come to a solution of the Brexit dilemma [which she did not solicit personally] that could probably attract massive support in parliament and in the so-called parliament of the EU.

She is now launching an attempt to build a Commons consensus anyway. It will take a long time, but it may have the effect of moderating the success of the Momentum movement in the Labour Party.
Corbyn was spectacularly equivocal in all the recent election grandstanding about the Brexit issue. His personal antagonism towards anything that might protect or strengthen capitalism is beyond doubt, and as is evidenced in Germany the EU is good for business. M Macron's euro-enthusiasm is largely driven by his recognition that it will be less difficult finally to smash the French trade unions in a context of a stronger European Union than in has proven to be in a still-sovereign France. The Corbynistas will have noticed that: Macron is a product of the French system for producing technocrats who serve the secret state that lies behind the constitution, and the hard left recognises the enemy. This is the context in which Corbyn's twists and turns in the coming months should be observed. He has command of the party - increasingly - thanks to the crazy constitutional changes that his predecessor pushed through the party: but he has no empathy with the mainstream tradition of the Labour party which most of his MPs [including the new cohort] represent.

Thus Mrs May's scenario planning could set the Corbynista minority of Labour and the Kamikaze minority of the Tories on the outside of a developing consensus. As that political experiment fails at the first hurdle, but might eventually be made to run, economic reality will turn the enthusiastic Brexiteer ministers into lame ducks. Putting both Fox and Davis alongside Johnson in key roles at the sharp edge of the Brexit negotiations seemed crazy at first: and perhaps it was simply that: crazy. But now the real evidence is coming to the top, the wedges between the three musketeers will become apparent. David Davis is learning the limits of practicality, and will soon have to make a decision about whether he sides with Philip Hammond [who has already, in effect, said that the UK must remain within the European Economic Area] or go out on a limb. Johnson will follow where the wind blows: he was late in deciding to opt for the Brexit camp, astonished when they won, and confused now that they are faced with increasingly harsh realities.

Liam Fox has appeared to be the most dangerous Brexiteer minister. He seems really to have believed what he said about the gains that post-Brexit agreements with the USA and India and China can bring to the country. But today the main manufacturing employers' body has emphasised that point protectionism is increasingly transcending overall trade agreements specifically in China, India and the USA. To protect their own firms, trade associations and governments in those countries are simply setting up ad hoc barriers against imports, especially of the high-tech and IP-strong exports that Britain needs to build up in the future. Fox will be proven to be a very lame duck before he can be really dangerous; and that public exposure will greatly strengthen the argument that the UK must remain within the European Free Trade Area: on almost-any terms.