In three weeks time, mass demonstrations are being planned in the UK against public sector cuts. The organisers of the 26th March protests have called themselves the Coalition of Resistance, with the aim of consolidating a variety of unions and groups most at risk.
What they are resisting are the cuts and austerity measures which the Government says are essential. The government’s message is, “We must all share the pain of austerity to put right what we all got wrong.” What the Government is failing to admit is that the cuts will likely affect a vast majority of people who had little involvement in creating the dire fiscal conditions in the first place or actively benefited from the boom times either. And more profoundly, leave those who did create the mess both unnacountable and benefiting further.
It is vital therefore that these demonstrations are focussed on how the current policy prescriptions are unjustly misdirected and ignore the underlying causes of the crisis.
A further critical consideration is that the audience for the March 26th demonstrations is not the Government; we must make it crystal clear that we are not there to petition or plead for clemency. Far more will be achieved if we remember that the real audience watching the demonstrations will be the vast majority of the country who hasn’t yet felt the pinch of deteriorating financial circumstances, but soon will. It’s to them that we must reach out and make common cause. Private sector must not get pitted against public sector; both are in this together.
People watching news of the protests from the comfort of their homes need to empathise with the participants and their concerns, perhaps even prompted to ask questions because of it. We all need to understand the real causes of our economic woes and how we are all suffering together. We need to shout out that our Government is rewarding speculation, corruption and malfeasance by the banks, whereas real workers, savers, the law abiding and the prudent are getting bashed, not in a verbal sense, but a very real “standards of living” sense.
We need to understand how we are actually witnessing a scandalous outbreak of “Crime and Collective Punishment”.
The evidence of Crime:
The recently released Oscar winning documentary “Inside Job” gives a thorough overview of how the current crisis was not only inevitable, but more importantly nothing short of criminal. Although primarily a tale of the US situation, the criticisms made in the film are just as applicable in the UK:
1) The active pursuit of de-regulation of the financial industry.
The rising levels of debt were not just the consequence of irresponsible borrowing by the public and governments alike. Any debt contract involves two parties, and so it is critical to understand not only the demand for debt but the relentless supply of it. What we often forget is that in any lending situation it takes two to tango. The recent growth in debt pushing has been actively facilitated by de-regulation of the finance sector, such as the increase of bank leverage and the removal of “firewalls” within the industry (such as Glass-Steagal regulation). The key point is that from the late 1990s onwards we have seen a shift (most notably in the US and UK) from regulating banks and financial systems by clearly stating what limited activities they can do, to the highly questionable situation of banks pretty much able to whatever they want to do, unless a regulator expressly says they cannot do it. They have completely contorted the concept of banking regulation, and well and truly let the “venal but legal” genie out of the bottle.
2) The growing corruption and co-opting of politicians to act in the interests of the finance sector.
The de-regulation of the finance sector did not emerge spontaneously. Indeed, the extent to which the finance sector exerts undue pressure on policy makers to act in their sole interests could be nothing short of a complete contortion of democracy. Simon Johnson’s article “The Quiet Coup” in the June 2009 edition of the Atlantic (and his subsequent book “13 Bankers”) charts the revolving door policy between regulatory bodies, treasury politicians, and the private banking institutions. There is a worrying trend that regulations, laws and the priorities of Government itself are at the mercy of powerful lobbying efforts. Eisenhower feared the might of the military-industrial complex. In the 21st Century the real weapons of mass destruction are financial. But unlike the brutish prowess of the military, the financial sector tends to enjoy a more benign public perception. Far from being wary of our new captors we are instead lured in to a semi-conscious embrace of their mounting supremacy. Could it be that we’ve slowly developed Stockholm syndrome? How else can we explain the idolatry the public and Government still bestow upon a sector which is both holding us hostage and repeatedly subjects us to blackmail and extortion?
3) Ripe conditions for widespread fraudulent conduct:
A bank isn’t like an ordinary company. Strictly speaking it doesn’t actually make anything itself. Instead it greases the wheels of genuine productive enterprises. In that respect then, a bank should only really prosper when the rest of the economy prospers. But a very obvious de-coupling of this relationship has happened recently. How exactly can the banks be doing well when the rest of the economy is limping? The only answer can be covert fraud and looting.
George Akerlof (a Nobel economist) first outlined the conditions for financial looting after studying various corporate fraud cases in the 1980s and 1990s. He concluded that looting is ripe when businesses have extremely high salaries, over inflated firm values, and are safe in the knowledge that the Government will underwrite any mistakes and not pursue malevolent conduct. Given the prevalence of all these pre-conditions, there is more than just a suspicion of this looting syndrome. It’s like leaving ones door on the latch, and then acting surprised when the house contents have disappeared.
4) Absence of any criminal prosecutions:
One could be forgiven for assuming that because there have been almost no charges of fraud, then none exists. In the face of allegations of serious misconduct regulators seem to settle cases with what amounts to little more than a slap on the wrist and non-culpability agreements. It’s what Joseph Stiglitz calls the equivalent of a “parking fine” to these firms. The banks regard fraud not as a crime, but as an acceptable business practice where the benefits are more than outweighed by the occassional cost of getting caught. And worse our regulators seem to have accepted this as well. In modern parlance it is known as Regulatory Capture. In the eyes of the law we should all be equal. But now it seems that the extent of legal air cover one gets is actually proportional to the amount of money one has access to. And the banks have no shortage of it.
The current situation is a heady cocktail of perverse incentives, lax supervision and bewildering complexity; ripe conditions for fraudulent conduct and ambiguous larceny. Excessive levels of private banking debt have been created under at best dubious assumptions of genuine economic growth, or at worst malicious conditions of fraudulent lending activities. There is too much debt in the system, and the financial sector was culpable in creating it. Currently, the public, the mainstream media and the Government seem oblivious to the crime taking place under their noses. If that in itself weren’t bad enough, then guess who has to pay for the damage created by this crime…..
The evidence of Collective Punishment:
Since 2008 our country has been left with a pretty hefty clean up bill. So who has to pay the cost for this excessive debt build-up? When things go wrong, who should pay the price for an ill judged loan; the borrower alone, the lender alone, or should there be a shared responsibility? Certainly, if an ordinary commercial business or start-up fails then the process of liquidation commences. Shareholders could likely see their whole stake eliminated, as it is an accepted price that one pays for holding equity. Other creditors are recompensed to a certain degree, but there is the very real prospect of a sizeable proportion of any monies owed actually being written off.
A broadly similar process of bankruptcy can also be administered upon individuals when they are no longer able to service commitments to creditors. In both cases, a proportion of debt is destroyed, with creditors compensated to some extent, but not necessarily in full. In becoming a creditor to a company or individual, they have forfeited the right to seek complete re-imbursement in the event of failure. There is a line beyond which they cannot cross, as they may have to share responsibility in meeting the cost of these failures. Unpleastant though these events are, they serve a valuable purpose in resetting unprofitable or insolvent operations. The business is dismantled with assets removed from the control and ownership of those who failed and instead finding a more viable new function; it’s the Schumpterian mantra of creative destruction. It’s Capitalism’s way of dealing with change and renewing itself for the better.
But when the UK banks suffered major liquidity problems in 2008, no mention of their potential insolvency was made. We were told that it would be inconceivable to allow the banks to fail (i.e. become bankrupt), or their creditors (bond holders) to suffer losses. Instead the taxpayer became the guarantor of last resort, with the Government pledging the public finances in support of private misdemeanours.
The two main outcomes of the Government’s bailout policy have been the worsening public finances and rising inflation. It is nothing less than an absolute prevention of debts being reneged on. It is in fact an act of anti-Capitalist behaviour. The implementation of Austerity measures is not one jot of recognition of fault on the part of the lender, but instead the enforcement of debt maintenance by any means necessary. The lender is being provided with complete protection, but at the expense not only of the borrower, but also wider members of society who are innocent bystanders. If education is cut, then why should my children suffer from a poorer education? If policing is cut, then why should victims of crime have to suffer from lower crime fighting resources? If the health service is cut, why should those who are ill or sick have to pay the price of potentially worse levels of care?
Why should society as a whole have to pay the price of private debts gone bad?
Wikipedia defines Collective punishment as “the punishment of a group of people as a result of the behavior of one or more other individuals or groups. The punished group may often have no direct association with the other individuals or groups, or direct control over their actions.” This is precisely the point. That the punishment is being inflicted on society at large, and indeed it could be argued, hits those who are most vulnerable in society.
The UK seems to be following the path taken by Ireland who bailed-out insolvent banks (i.e. they protected the bond holders) by using the might of the public purse. The consequences for Ireland were dire. But there was an alternative. When faced with extraordinary private debts having to be borne by the public, Iceland took a very different approach. They placed the major banks in receivership, defaulted on many obligations and made debt holders share the pain:
“With the economy projected to grow 3 percent this year, Iceland’s decision to let the banks fail is looking smart – and may prove to be a model for others.”
Far from being reckless or short sighted, burning the bond holders was in fact the ultimate Capitalist prescription of privatised profits and privatised losses. However, our Government is hot on the heels of Ireland down the path of privatised profits and socialised losses. A perverse contortion of economic dogma that is grossly assymetric. Bank bailouts assure that the lender bears no responsibility whatsoever for their faulty judgement in lending out in the first place, and instead disseminates it through Austerity and Inflation. So, without making debt holders share the pain, we’re not quite “all in this together” are we?
Who exactly is getting “bashed” here?
We often hear complaints by banks that they are the victims of “banker bashing” as if the criticisms are indiscriminate and unfounded. This argument is spin-doctoring par excellence. There are specific, substantial and legitimate concerns raised about the conduct of the banks. If we look beyond the veil of rhetoric we can clearly see that far from being bashed, the bankers are constantly appeased, reassured and encouraged by Government policy, whilst the rest of society is covertly shafted. Back in the real world we actually have savers being squeezed, real workers getting bashed, and those who act prudently being penalised through rising costs of food, fuel and energy. The bankers cry foul as if they are the victims, but the detrimental consequences of their actions on society are undeniable. The upcoming protests in March must not become diluted or distracted by chaff and obfuscation. This is our grievance, plain and simple:
We are all victims of a great crime, and are collectively being punished. It is state sponsored racketeering. The immoral and unlawful conduct of a select few must not go unnoticed by the people of this country.
Published with thanks to David Malone. Visit David Malone’s blog here.