Ten Years After the Northern Rock Crisis: and the Economy is in a Worse Condition

We are now ten years away from the date when a still-under-rated minister, Alastair Darling, took the decisive steps that 'rescued' Northern Rock; and, with it, the economy. I referred yesterday to the fact that some five years after the crash a few students in the University of Manchester dared to challenge the fact that their teachers in Economics classes could not explain [within their own intellectual universe] how the crisis happened, precisely what constituted the crisis, and why they had not adjusted their 'analysis' of the economy in the light of a shattering, cataclysmic event. A second set of questions, soon to be posed and left unanswered, was how and why all these clever professors had not seen the disaster approaching.

Off her own bat, the Queen posed the same question on a visit to the London School of Economics, and received no immediate response. A few weeks later a group of professors sent her a totally unsatisfactory sequence of exculpatory piffle, which satisfied no-one. The Queen later put the same question on a visit to the Bank of England; and because they had no answer to the challenge why they had not anticipated the crisis - and thus been able to avert it, or mininise it - they could not give any sort of satisfactory response.

The Econocracy, the Manchester students' term to describe the wrong-headed devotees of free-market Economics, cannot formulate an answer within their terms of reference: I have frequently damned them in this blog, and set them aside again today as being potentially part of a solution to the mess that their dogma created when it was embraced as deep state policy by the Thatcher gang. To anybody who questions the use of the term 'gang' I respond that the tight group of people who advised Mrs Thatcher and her guru Keith Joseph, several of whom were ex-communists, intended their ideologically-driven policies utterly to destroy the mixed economy no less completely than the Bolsheviks had planned to destroy capitalism.

I have perhaps not stated this point strongly enough in this blog so far. It lies at the root cause of the crisis of 2007-9, and thus it still overshadows the British economy, and damns millions of people to diminishing real incomes as they drag out their days on minimum wages in jobs with barely measurable productivity and negative productiveness. Behind the relatively few specific policies that are still recognised as having been 'Thatcherite' [such as selling council houses] there lay a serious ideology which informed the 'deep policy' that lay behind everything that they did. This dogma is the unconditional belief that 'free markets' release the inventiveness of the brightest and best of the rising entrepreneurial cohort: and that their spontaneous actions would give sufficient positive momentum to the economy that hundreds of thousands of redundancies and billions of poundsworth of plant and equipment that were scrapped [or just left underground] could simply be ignored. If you believed this fervently enough, no specific policy and no government investment would be needed to free self-centred components of the economy to expand at an unprecedented rate.

Of course, this ideology comes up against a mass of real-world inhibitions: laws against defrauding or cheating fellow-citizens, laws controlling dangerous substances, the requirements of national defence, the absolute belief of the public that there must be a national health service, the entrenched tradition that children should attend school, and many more. While telecommunications, gas, water and electricity supply were privatised quickly, many areas of the economy could not directly be attacked in the first wave of Thatcherism. Meanwhile the flow of taxation and government spending had to be maintained to keep the publicly-recognised essentials in being; though plans could be made to privatise hospitals and schools; and other public services were required to cut their real cost to the state. The government made a virtue of shutting down the most heavily-invested material industries [where the state had been the prime investor for decades: in some cases for centuries] such as shipbuilding, iron and steel, shipyards and coal mines, regardless of the damage that was done to the economy.

Much of the material economy went into a state of shock, as protections against competing imports were removed and supply chains from foreign countries had to be accessed because British suppliers had disappeared. When the mines and shipyards and steelworks closed, their suppliers were ruined also, and many supply-chain firms failed; which meant that across much of industry there arose   a need to import components that had previously come from the British firms whose major customers had been taken out in accordance with the prevailing ideology.

The one area where buccaneering entrepreneurs could thrive was in banking and finance, where many controls were removed precisely at the time when the emergence of sophisticated computers became available to firms; while the regulators [most notably the Bank of England] did not develop the means to understand what was happening. That was the fruitful field on which the the crisis, to be recognised by ministers in 2007, was developed over twenty years from 1986.

[Next installment tomorrow]

Why Bannon Had to Go: The Importance of China

On leaving the White House, Steve Bannon promised to wage war on the enemies of the President of the United States. Of course, he means  that he is ready to fight anyone who challenges his idea of the 'mission' of the United States: which may now come to include Donald Trump, if Trump can retain the presidency.

The idea of waging a trade war against China, even at the price of ignoring the buildup of North Korea's nuclear arsenal and Kim's development of rockets capable of reaching the continental USA, is far too crude to be practicable.

The rustbelt that provided a huge cohort of dedicated followers of the Trump line was not created by the Chinese. Factory sites became derelict, and lives were 'ruined', in consequence of thousands of decisions that were taken by US Corporations; with the encouragement and support of the Econocracy. Many of those decisions were based on the fact that components for advanced manufacturing could more cheaply be bought from emergent countries - including China - than by building and equipping new factories in the US and training the appropriate workforce. This enabled major corporations to concentrate their investment on the 'top end' of manufacturing, and on research and development for innovative products.

Simultaneously, American retailers found new cheaper sources of consumer products, which could thus be sold [largely under the retailers' 'own-brands'] at prices that could maintain some shreds of a consumerist lifestyle even for the ex-industrial workers and their children who survived on government benefits in the rustbelt. Hence imports from emergent countries, not just China, enabled their mass-producers of such products to expand their capacity and reduce their costs. Hence they improved their competitiveness with surviving US manufacturers of similar goods; many of whom were ruined. This all suited the model of 'free markets' that forms the basis of recent econocratic theory. The fact that it left individuals who were sunk in mortgaged houses without the means [economic or intellectual] unable to move on from where they were, rather than to seek new economic opportunities for themselves, is beneath the radar of the Econocracy. Equally invisible to most Econocrats is the fact that as the proportion of the population who are sunk in misery expands, so the communities in which they live progressively lack the will and the means to renew or replace collapsing infrastructure. Until an urban area falls so far into dereliction that it becomes a source of potential danger to the rest of the country - as happened with Detroit a few years ago - national government ignores the problem, while the bankrupt local government is incapable of tackling it. Even after a major assault on poverty and its causes, large areas of greater Detroit remain deeply depressed; and eyesores have not been removed.

While the rustbelt was consolidating, the lead by which the USA is ahead of the rest of the world in advanced technologies has become greater than ever. America remains the predominant and military power in the world, and even despite Chinese efforts to develop and promote competitors like Alibaba their corporations remain far behind the US in developing intellectual property. And here is the pressure point. Bannon's reason for wanting a trade war with China rests precisely on the point that China is determined to catch up with the USA in all areas, and that China will use fair means or foul: just as the US did in the nineteenth century when piracy of European intellectual property was fostered by state and federal governments, principally by deferring the development of laws to protect alien intellectual property until there was an equal danger of American inventors loosing out in global competition.

Bannon has picked on an aspect of trade policy that is used heavily by China now, and was used in Europe and America over a couple of centuries. This is the requirement that the technology used in imported devices and products should be understood, so that the items can be allowed into the country on health and safety grounds. It involves requiring the intending importer [or the company hoping to open a subsidiary plant in China] to disclose the technical matters that - whether reasonably or not - the Chinese regulators say is necessary for the product to be sold as safe and healthy in China. Once those technological data are disclosed to Chinese authorities, there is a danger that they will be leaked to Chinese competitors for their commercial benefit; as has happened in Europe and North America in the past.

To treat this as an act of war is absurd: it is a matter for patient negotiation, case by case; always remembering that in such issues it is best to speak gently, and carry a big stick. America needs better to coordinate the ambitions of US companies to develop trade with China with the need to protect American intellectual property. Steve Bannon will have done his country a huge service by highlighting the issue; but his use of bellicose rhetoric meant that his role in government had to be brought to an end.