Thursday, 23 October 2008

Keynes Resurgens!

Hang on to your hats: ideologies are back, and they’re crashing up against one another like not-so-ignorant armies in the night! It’s all the fault of the Global Financial Crisis, of course, and in terms of the chorus of conflicting op-ed commentary perhaps the most interesting development has been a vigorous revisiting of the legacy of Keynes.
When I was a boy Britain was stalked by 'stagflation': 26% inflation, the country near bankrupt, the IMF called in and demanding monetary targets and cuts in public spending. In 1976 Prime Minister Callaghan (how odd that sounds now!) read out Peter Jay's speech to Labour conference declaring that no-one, least of all him, was going to spend their way out of a recession again.
Come 1979 a zealous new Tory government was confirmed in the view that the rate of inflation, not the level of unemployment, was our chief enemy and obstacle to economical wellbeing, to be fought by sado-monetarism. (Actually the monetarist experiment didn’t last long: the Tories were soon in real trouble c. 1981-2, and they would need fortuitous events in the shape of General Galtieri and North Sea Oil coming on-stream to get them out of a hole.)
Anyhow, back to the present: Brown and Darling are going to spend their way out of a recession! The plan is to increase spending on public sector capital projects to compensate for the ‘shrinkage’ in the banking system. Seasoned observers had seized on this Keynesian dimension of Labour intentions well before Alistair Darling pronounced that the resemblance was intentional.
Now Keynes’ biographer Lord Skidelsky weighs mildly into the fray in today’s Times. He does a nice tour of the fragile peace we enjoyed until late 2007, what Mervyn King apparently termed a ‘nice’ environment (strong growth in big economies, downward pressure on prices thanks to globalization), the main item of policy thus being an occasional mild tweak of interest rates. No surprise, then, how long most people agreed that the market should be given its head, its inherently sound judgment respected. But as of September 2008 no-one in the world believes that markets are 'inherently stable.’ Thus Skidelsky's summary of our plight and what he rates the rightness of the British government's response:
‘When panic sets in there is a flight into cash. But while this may be rational for the individual, it is disastrous for the economy. If everyone wants cash, no one will lend. As Keynes tellingly reminded us “there is no such thing as liquidity... for the community as a whole”. And that means that there may be no automatic barrier to the slide into depression, unless a government intervenes to offset extreme reluctance to lend by huge injections of cash into the economy.'
Over at the Spectator, though, Tim Congdon wants us to know 'there is nothing magic about this Keynesian fad.' Congdon, I gather from the FT, is 'an economist and businessman, who served on the UK’s Treasury Panel (the so-called ‘wise men’) between 1992 and 1997.' And he's fuming like David Cameron at yesterday's PMQ: Don’t let this gloomy, chippy, hammer-and-sickle Scot off the ropes where I had him just a few weeks ago!. (Congdon refers to Brown and Darling as "notorious left-wingers" in an earlier life, which is an amusing designation of 'notoriety'.)
Brown’s bank recapitalisation exercise, Congdon argues, “is not intellectually original, it will not be fully implemented in practice and, to the extent that it is implemented, it will be a disaster. Further, no other country is copying Brown’s plan or behaving as vindictively as Britain towards its financial system.” Rather, it is "a policy of economic and financial sado-masochism in one country." (So what's the difference between what we're doing and what the US is doing? "The interest rate charged by the US government will be 5 per cent, much less than the 12 per cent imposed by Mr Brown." Does that sound sadistic to you? Depends on how you feel about banks right now, whether you're a 'wise man', etc etc)
It really irks Congdon that the government pressured the banks into the new money-raising arrangements by the THREAT that otherwise "the Bank of England would stop lending to that bank and so force its nationalisation." This 'THREAT', he believes, will not be forgotten: he sees a time when "internationally mobile parts of British banking will relocate to other jurisdictions and possible foreign entrants into British banking will hesitate to invest here.’
(This is only to speak of another form of THREAT that we have always lived with in my lifetime, i.e. let capital and big wealth creators do exactly as they wish, whatever the situation, or else they will run off and seek their safest bolthole in another far pleasanter country. Thus the thrusting City of London of which Britain is supposed to be so proud.)
It irks Congdon further that the mainstream media and people like you and me don't understand preference capital, and thus he revisits its role in the US after the Great Crash of 29 (if only to affirm its usefulness.) But he also wants us to be aware that what we've got isn't ‘nationalisation’ - so don't celebrate yet, you Lefties!:
"What the Brown plan proposes is that if the banks’ current shareholders do not wish to take up the shares offered in the rights issue, the government will take their place. However, if the banks’ current shareholders do subscribe in full to the rights issue, the government has no equity stake and the banks are not nationalised."
(If our ignorance is so much Congdon's concern he should have a word with his Spectator labelmate Richard Northedge who's fulminating in the very same issue about 'socialism seizing the city', how “suddenly the state has its hands on the economy’s real levers of power.")
When Congdon calms down, he basically says that his dream role for government is that it offer lender-of-last-resort loans and impose nothing on solvent and profitable banks. If he's so vexed then by what just actually happened, he presumably knows better about the fitness of the banks than Mervyn King, who said only this week that they were all looking like dead meat before the bailout. Lenders of last resort? I think everyone agrees the government should have moved quicker on this score. Even so, could they have averted the panic and pain we've all been having? The ever-vigilant enemies of socialism, Keynesianism and every other form of 'ism' other than neoliberalism say 'Yes'. So ideologies are back, comrades, and they're fit and tanned and ready for service...

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