1st December 2008

Watching our British politicians squabble and spin this last week over the Pre Budget Report – while Rome burns –  was depressing. Why are our politicians so off-beam? Why does their response to this crisis seem so petty and botched?

The answer may lie in their ties to the finance sector. The fact is we are experiencing what will be a prolonged Bankers’ Depression – born in the City of London, not in the US sub-prime market. Neither of our major political parties is willing to admit that; to analyse the crisis in those terms and therefore to lay the blame on the finance sector and to rein it in. They are too compromised.

If Britain were facing the threat of a foreign invasion, would the Conservatives hesitate to spend on defence? Have any balanced budget Tories suggested dropping Trident to bring down public spending?  No of course not.

And if this crisis is likely to be prolonged and grave, why is Labour’s Alastair Darling so optimistic, airily assuring us that the economy will be so improved in thirteen months time, that he will raise taxes? Does he not appreciate the scale of this crisis, which thanks to globalisation is now borderless?

One need only think back to events on an oligarch’s yacht in Corfu in which both political parties were implicated. Or to JP Morgan’s recruitment at just £2 million a year of a man until recently Labour’s Prime Minister. Or to Gordon Brown’s decision to bestow a knighthood on the man that carries a great responsibility for this crisis – Alan Greenspan. On 4th August this year Greenspan, writing in the Financial Times, celebrated the role that “Adam Smith’s invisible hand” has played in “quietly displacing government control of economic affairs. Since early this decade” he wrote “central banks have had to cede control of long-term interest rates to global market forces”.

In this last week, just three months after this was written, governments on both sides of the Atlantic used taxpayer resources to take government control of two of the biggest banks in the world – Citigroup and the Royal Bank of Scotland (RBS) – to protect them from the savage discipline of global market forces.

Politicians (and we Green New Dealers) will not be able to deal with this, or the climate change crisis effectively until the finance sector and its ideology is subordinated to society’s interests - and we regain control over movements of capital, the regulation of credit and interest rates.

Politicians have in turn, to abandon the certainties of orthodox monetary theory. Namely that money is a commodity, and that its “price” - the rate of interest - must be set by the private sector alone – through supply and demand for money in private markets for capital - just as the price of oil is set by supply and demand for oil.

This is a nonsense. We do not dig capital out of the ground, nor does it grow on trees. Money is man-made. Interest rates are a social construct. And as such, unlike oil or soya beans “there are no intrinsic reasons for the scarcity of capital” as Keynes argued in the General Theory. Because there is no reason for the scarcity of capital, there is no reason for the price of capital to be high.

If we are to emerge from this grave financial  crisis; if we are to finance a Green New Deal, we need to get a grip on the finance sector, on the creation of credit, on the movement of capital, and on the setting of interest rates. Until we, as a society acknowledge that, and begin to disarm the financiers, there will be little hope of the recovery Alastair Darling boasted of this week – or indeed of a Green New Deal.