photo credit: hitthatswitch

In yesterday’s Guardian, Simon Jenkins complained that none of the major UK parties are attacking the Chancellor Alistair Darling’s decision to bail out the banks in 2008. After watching Tuesday’s Chancellors debate, Jenkins was left wishing for some “good old Labour blood and guts”, someone who could say to the would-be Chancellors:

“You blew it! When those petrified, knock-kneed smoothies from the City came pleading for help, you caved in and gave them the people’s money. You panicked, you bunch of creeps.”

Now I’m all for a bit of bank-hating, and I agree it’s important to stand up to any ”petrified, knock-kneed smoothies” that come your way (has there ever been a better description of bankers in the credit crunch?) and I definitely agree with Jenkins when he says that the better option would have been to nationalise the banks, not bail them out, but the idea that a better option would also have been to let the banks fail isn’t left wing, it’s just wrong. And it’s particularly wrong to say this:

Of course we shall never know what the world would be like today had Darling reacted differently in 2008. It could hardly have been worse. Some scenarios, such as just letting the banks fail, are undeniably hairy, though the global market in finance is astonishingly resilient and would, by now, probably be picking up the pieces and getting back to normal. America still eats and breathes, despite the failure of Lehman Brothers.

Wow. Saying that America still eats and breathes despite the failure of Lehman Brothers is like saying that Dick Cheney still lives and breathes after his heart attack. Technically true, but avoiding the minor detail of the triple-heart bypass in between. The crash of investment bank Lehman Brothers started the credit crunch proper and almost brought the world’s financial markets to their knees. Its collapse sent waves of panic through the markets, causing investors to try and dump all their dodgy financial products, which simply made the crisis worse. The mistake of the US government was to assume that the financial markets could cope with the failure of Lehman Brothers, and it learnt its lesson by bailing out all the other massive banks that needed help, and in doing so (narrowly) averted the complete collapse of America’s banking system

If Darling had let banks like RBS fail instead of bailing them out, then Britain might have had its own mini Lehman Brothers crisis. Jenkins says “it could have hardly have been worse”, but it really could have. At least we still have a functioning banking system. Obviously this doesn’t mean we shouldn’t still be angry about the respective parties’ current approach to the banks - no-one seems to be willing to make the banks pay for the mess they created, and no-one is taking the steps necessary to stop it happening again - but venting this anger by wishing that we’d just told the bankers to, uh, go collapse themselves instead of bailing them out is not admirably Old Labour, it’s just silly.

photo credit: Today is a good day

“The world should consider adopting the Nordic approach to capitalism and learn from the region’s response to its financial and economic crisis in the 1990s in the attempt to stave off recession, according to the chairman of two of Europe’s biggest companies.

Jorma Ollila, chairman of Nokia, the mobile phone maker, and oil major Royal Dutch Shell, said the Nordic style of capitalism was characterised by openness to globalisation balanced by strong government programmes to protect people from its excesses and an egalitarian education system.”

I’m a huge fan of the nordic model for Government, economics and to some extent even society.  The Scandinavian economies and even their welfare system have proved remakrably resilient in recent years, despite being targets for right-wing attacks (particulalrly in the US) and bizarrely O’Reilly feels Sweden is a nightmare communist state.

They’ve shown that globalisation need not be a negative as long as the state acts as a levelling tool, of course such engineering would be far harder in more economically diverse countries such as the UK and France, but in principles the direction is a positive one.

photo credit: srqpix

Last month Britain was swept up in a maelstrom of rage after it was revealed that Fred Goodwin, the chief executive of the Royal Bank of Scotland, was due to receive a generous pension to the tune of a staggering £703,000 a year. The problem? The Royal Bank of Scotland is now 70% owned by the British taxpayer. Cue outrage from all sides: while the tabloids and broadsheets alike foamed at the mouth, government ministers went a bit mental and promised to suspend the rule of law. The controversy over Goodwin’s pension wasn’t just a matter of one man’s greed, however; it was a focal point for the public feeling of  helplessness, disbelief and disgust brought on by the realisation that the mighty, all-knowing financial powers we entrusted with our money are actually just a load of out-of-their-depth greedy idiots who’ve gone and squandered the lot.

Well, now the United States is having their “Goodwin” moment – and who knows where the chips will fall?

The controversy centres around American International Group, the behemoth insurance giant who has so far been bailed out to the tune of $170 billion – $30 billion of that under Obama’s watch. It turns out that AIG intends to pay its employees $165 million in bonuses. Yes, you heard that right: AIG, one of the companies directly responsible for the financial meltdown, wants to reward its employees to the tune of one hundred and sixty five million dollars. Cue outrage across America: congressmen foaming at the mouths, TV pundits having aneurysms before our eyes, etc.

AIG Chief Executive Edward M Liddy (who is testifying before Congress today which should be, uh, interesting…), defended the bonuses by claiming they were necessary so that AIG could keep their “best and brightest talent”, though quite what the talent were doing while the economy went to hell in a handcart he neglected to explain. An arguably better defense of the bonuses has been made in the New York Times: essentially, they are necessary to stop the departures from AIG of the only people who know how to defuse the complex financial instruments that they helped put together. This is all very well, but perhaps we should first remind ourselves how AIG got into this mess, and then judge for ourselves whether we give a damn if there’s anyone left in their offices by the end of the month…

Basically, AIG dragged themselves into this hole – taking part of the economy with it – by engorging themselves on the devastatingly stupid credit default swap market. Say what now? Allow me to explain. A credit default swap is essentially an insurance contract, in that an insurance company – like AIG – says to a bank: I bet you that your subprime mortgages won’t fail. You pay me an annual premium, and, in the event of the subprimes being defaulted upon, I’ll pay you their value! Sounds alright, except for two things: the subprime mortgages turned out to be pretty rubbish. And by pretty rubbish I mean economy-ruining awful. Even more damning, AIG took on so many contracts that they didn’t have enough money to pay out in the event of all the subprimes defaulting. Which is obviously what happened – which in turn is partly the reason why you don’t have a job, the bailiff is taking your sofa and there’s an angry mob off to burn down the banks.

AIG, however, are not the only ones facing tough questions. Treasury secretary Tim Geithner, and his accomplice National Economic Council head Larry Summers, are under close scrutiny over their roles in this clusterf***. Specifically, why were strict rules on bonuses not ironed out when AIG was given a further $30 billion last month? Were Geithner and Sumners aware of the bonuses at that point? If not, why not? If so, then can we have your resignations, please? There is a growing feeling, as there has been ever since Geithner and Summers were appointed to their respective roles, that Obama’s economic gurus are, to repeat a cliche, more interested in protecting Wall Street than they are Main Street. Their original reaction to the news of the bonuses didn’t  exactly squash this suspicion: Larry Summers basically said “they have ironclad contracts… there’s nothing we can do!” Nothing we can do, eh? I suppose that’s why Congress is right now planning to impose a 100% surtax charge on the bonuses, right?

If anything, this mess is another reminder that the Treasury seems to be trapped in what Paul Krugman has called the “Big Dither” when it comes to fixing the banks. Geithner is obviously reluctant to go down the path of bank nationalisation, even though – as increasing numbers of economists are pointing out – it’s the most efficient, tax-payer friendly way out of this mess.  Indeed, as I pointed out a few weeks ago in my post “Nationalising Banks – In America?” a path to nationalisation was slipped into last month’s still-not-enacted Treasury plan. But Obama’s team seem unwilling to bite the bullet and take over the troubled banks. Instead, Geithner gets the worst of both worlds: no concrete action on the banks and a lack of confidence caused by the Treasury’s unwillingness to do anything. In this way, the AIG scandal only serves to highlight the perils of the current strategy: on the one hand using taxpayer money to bail out the banks but on the other hand not having any control over what happens to our cash. Given all this, it’s hard not to agree with Ex-Labour secretary Robert Reich’s conclusion:

Oh, and by the way, Mr. President. You may not want to hear this, but your Treasury Secretary is making things worse. His dithering on what to do about Wall Street, and his incapacity to speak clearly to the Street and to the public about what needs to be done, is spooking everyone. Why doesn’t he just put the irrevocably insolvent banks into receivership under the FDIC, sell off their assets, protect depositors, and reimburse taxpayers with whatever remains? Let the rest of the banks fend for themselves — working out their bad loans with their creditors. As to AIG, well, that’s a complete basketcase. Put it out of its suffering. Take it over, sell its assets, protect policy holders (you’ll need to create a big co-insurance plan with every other major insurer in the world), then get out.

I should add that had the government allowed AIG to go bankrupt then the problem would be solved: in bankruptcy proceedings bonuses would be right at the back of the queue behind dozens of more important creditors. This makes AIG protests all the more ridiculous. Of course, if the government owned them, then this wouldn’t be a problem:  you don’t have to honour a contract if the other party doesn’t exist anymore.  Given this, I think the argument for nationalisation of companies like AIG goes from “pretty rock solid” to “more unbreakable than diamond”.

Right now, Obama’s worst enemy is his Treasury department. The AIG mess and the unprecedented public rage that has followed it is not just another example that capitalism as we know it has failed – though it is that -  but also an urgent warning to the President: If he doesn’t do something about the banks soon, then he can kiss the rest of his agenda goodbye. It really is that simple.

Update: Chris Bowers identifies the four main questions that need answering about Geithner and Summers’ involvement in the mess.

First and foremost, it’s impossible to attribute blame correctly. Even if we identify some of the targets, it’s impossible to accurately calculate how influential their specific role was. This is logical, we haven’t even hit the bottom yet, and, even after we hit the bottom, the length of recovery will be different from country to country, with some roaring forwards and others limping out. The length of recession and recovery is necessary to gauge the true strength of the overall economy.

The housing boom masked the true strength of the global economy, creating a cheap credit speculative boom that glossed over the true growth of property based economies (particularly the US and the UK) but given the interconnection of the global market it actually added gloss across the global – hence Europe’s initial smugness at Anglo-Saxon recession was muted somewhat as the credit crunch subsequently caught up with the eurozone economies.

Even after the recession has ended and each country’s economic strength gauged more time will be needed; time for academics to pore over financial records of key players in the finance industries, to exam policy decisions and processes from Washington to the White House. Then and only then will we start to have a clearer idea of the causes of the recession.

That isn’t to say some figures are unworthy or inaccurate targets. There was a dangerous extension of the culture of risk taking, with Investment banks willing to invest heavily in derivatives despite warnings from prominent investors such Warren Buffet’s as early as 2003. Figures such as Madoff epitomised the dogmatic culture in banking circles, that a speculative boom was real growth a self-perpetuated deception emerged everyone was convinced because everyone else was. A confident mood replaced thorough empirical analysis of the true strength of markets.

Undoubtedly, blame should also be attributed to policy makers, de-regulation under Clinton and Bush (and Blair in the UK) in finance and pushing for home-ownership loans to those unable to afford them was an unsound practice. Even more culpable perhaps were the “wise men of finance”; the Federal Reserve and the Bank of England. These institutions stated goal of sound fiscal policy should have prevented such a dangerous over-extension of public debt from cheap credit and a booming property market. Yet both failed to take action, both lulled into the comfort zone of economic growth they as with the others, failed to rigorously examine the basis for this growth.

Even with targets such as these, the long lens of history could still present a far less individualist blame list, and this to my mind may be the heart of why the blame game of individuals is misleading. Historians, tend to look at complex phenomena, involving different groups from different walks of life and conclude that such a complex phenomena required a structure, and can’t simply be explained by individuals simultaneously choosing to participate. One possible explanation could be a value system that has encompassed economics, the so-called Anglo-Saxon culture of economics could be seen as a determining structure, encouraging excessive de-regulation and risk-taking and the kow-towing of politicians to the wisdom of Wall Street and the Square mile, without questioning their fallibility. Another could be the inherent weakness of politicians to whistle blow on false economic growth – they’re blamed if they’re correct and end the dream and ridiculed if they’re wrong.

Simply put, we won’t know for quite some time. Some figures could be latterly exonerated, unwilling actors in a wider plot, some whose crimes have yet to be uncovered will later be villified.

The US could roar out of recession and Europe could crawl out, in which case many might question the more cumbersome capitalism espoused by Merkel, but on the other hand, the US and particularly the UK may take some time to recover. . The blame for the recession may be all too easily placed at their feet and some might begin to question the unfettered capitalism that has characterised the post- Reagan/Thatcher era and wonder whether a more balanced capitalism, shorn of the inflation inducing booms and the credit crunching recessions, while less glamorous might not be more sensible.