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A House of Cards

An umbrella in a hurricane

The union leaders at the TUC this week built up quite a head of theatrical steam over their demand – swiftly rejected – that New Labour politely asks the energy companies to pay a one-off, windfall tax to be used to hold down prices. It was a waste of everybody’s time – and energy.

Instead, the power companies are being invited to fund an insulation programme, the cost of which can be knocked off their tax bill or recouped through higher prices!

All in all, the government remains 100% in thrall to the corporations and especially the financial markets. You can learn much about the strength of their commitment by opening the rushed report Chancellor Alistair Darling commissioned from Sir James Crosby on how to improve the functioning of the mortgage market. Crosby is deputy chairman of the Financial Services Authority – the government’s “regulator” (do I hear cynical sniggers?), and former chief executive of the seriously ailing HBOS banking group.

As it happens Crosby left HBOS in 2006, having received a knighthood for services to the financial services industry. It’s what you get from New Labour for leading an organisation that now has an extremely high loan-to-deposit ratio. At 177 per cent, it is higher than any other British bank. In other words, the UK’s biggest mortgage lender lent out an awful lot more than they’ve got on deposit, and they’re not going to get much, if any of it, back. Ever. Does that make Crosby the man to sort out the mortgage mess? Apparently so.

And the report? It’s not as if Darling set Crosby an open-ended “what is to be done” kind of question. In his letter to Darling which fronts up the report Crosby writes: “In April of this year, you asked me to review what market-led initiatives might be necessary to improve the functioning of secondary and primary markets in UK mortgage-backed securities... in the context of the recent and ongoing disruption in global financial markets.” (emphasis added in case any TUC leaders who may be reading, missed it)

Crosby and the government are wasting their time because their beloved markets have taken on a life of their own. A year ago this week, Northern Rock’s crisis became public. Taking the failed bank into temporary public ownership and pumping billions of our money down the plughole was a desperate, hopeless attempt to prevent the global market meltdown. A bit like an umbrella in a hurricane.

Which brings us to Fannie Mae and Freddie Mac, the US mortgage companies taken over by the American government earlier this week. Keyboards are rattling all over the world about the scale and significance of this, the biggest bail-out of a financial institution in history. Some say that it amounts to nationalisation – or the socialisation of debt, passing the risk of failure and the costs to the taxpayer. Some are arguing that the global crisis has got so bad that it has made the neo-liberals stand on their heads, cancelling shareholders’ rights, wiping them out.

Certainly it is bad. Very bad. Most of the big economies are either already in recession or will be by the end of the year. The collapse overnight of UK holiday firm XL is a sign of the times. Some analysts are beginning to say that there can’t be a recovery for eight to ten years. The giant global financial services company, Lehman Brothers, which borrowed billions of dollars from the US Federal Reserve earlier this year, is on the skids with no rescuer in sight.

But the US government hasn’t begun to adopt socialist measures, and the rescue won’t achieve US Treasury Secretary Henry Paulson’s aim “to protect the stability of the financial market, and to protect the taxpayer to the maximum extent possible”. Unless you understand “protection” as wiping out thousands of regional banks that are among the shareholders in Freddie and Fannie. In reality it is an unimaginably huge gamble, as jobs and incomes are blown away, to keep people with mortgages tied into repaying the debt they’ve been seduced into by the fantasy spun by global financiers and their friends in London and Washington. Some stability.

Gerry Gold
Economics editor
12 September 2008

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