$14 trillion was wiped off global share values in 2008, a record yearly decline. The US Dow Jones lost nearly 35%. The main European stockmarkets performed even worse, with falls of more than 40%. London’s FTSE 100 lost 31.3% of its value, the largest annual decline since the index was created in 1985. The British government’s rescue plan for leading UK banks last October made little impression. In 2008 HBOS lost 90.4% of its value, Royal Bank of Scotland (RBS) 78% and Lloyds TSB 73%.
The UK trade deficit of £8.3bn for November 2008 (latest) is the largest deficit since records began in 1697. The pound fell to a 23-year low against the dollar on 23 January 2009. Britain is officially in recession with the economy falling 1.5% in the fourth quarter of 2008 – the largest contraction for nearly 30 years. The IMF predicts the British economy will fall by 2.8% in 2009, the deepest recession of any large capitalist country. Unemployment rose by 132,000 to 1.92m – 6.1% of the workforce – in the three months to November 2008 and thousands of further redundancies are being announced each day. Government borrowing in the first nine months of the financial year reached a record £71.2bn. In early January interest rates were cut to 1.5%, a 315-year low, in a desperate effort to boost lending. DAVID YAFFE reports on the deepening crisis of the British economy.
Saving the banks and the City
For some time now we have been arguing that British capitalism with its bloated and usurious banking sector is the imperialist economy most vulnerable to external financial shocks.1 In mid-December Chancellor Alistair Darling went some way to admitting this when he told the House of Commons that Britain will suffer more from the global economic downturn due to a loss of City revenues: ‘London is the major financial services sector of the world. Of course we are likely to be more severely affected as a result of the profitability being reduced’. Saving the banks and the City of London has been the central focus of British government policy during this crisis.
What was the impact of the £400bn rescue plan including the £37bn bail-out of three banks by the government last October?2 As the City Minister Lord Myners revealed recently, on Friday 10 October the banking system was within three hours of collapse. The government intervention, he said, helped to stabilise the immediate situation. ‘Major large depositors were attempting to withdraw – and willing to pay penalties for early withdrawal – from a number of large banks. The steadying influence of what we did should not be underestimated.’ (Timesonline 24 January 2009). After the immediate crisis the banks, however, effectively did not increase lending to private customers, home buyers or businesses following the bail-out but used the money to bolster their balance sheets. They did not lower their interest rates on lending in line with Bank of England cuts in the base rate. They used the difference in the rates to widen profit margins. That is, they did what should have been expected: they privatised the benefits of public funds and guarantees. Thisis what led to calls from left and right of the political spectrum for the nationalisation of the banks, or at least those banks that took taxpayers’ money.
During the first few weeks of January 2009, share prices of the RBS, Barclays and Lloyds Banking Group (formed from the takeover of HBOS by Lloyds TSB) continued their rapid fall. On one day, 16 January, Barclays lost 25% of its value. On 19 January further measures had to be hurriedly brought forward by the government in a last-ditch effort to shore up the banking system and slow down the rapid downturn in the British economy. The government increased its stake in RBS from 58% to 68%. A government insurance scheme would allow banks to insure against bad debts. The state-owned bank Northern Rock would re-enter the mortgage market and be given more time to repay its debt. The Bank of England would be able to buy up to £50bn worth of debts of companies in all sectors of the economy, so increasing their liquidity, with taxpayers taking the risk of businesses failing, not the banks. This package takes government interventions in the economy potentially to a remarkable £617bn since Northern Rock collapsed in September 2007.
The immediate reaction of the markets was brutally clear. On 19 January when the news emerged that RBS was facing the biggest corporate loss ever of £28bn in 2008, its shares plummeted 67% to 11.6p, valuing the banking group at £4.5bn compared to £78bn 18 months previously (Financial Times 20 January 2009). Lloyds Banking Group lost a third of its value and Barclays a further 10%. The government was now carrying paper losses of £17bn on its £37bn investment in the banks last October. The situation continued to deteriorate. There were further falls in bank shares as the pound plunged against the dollar. Foreign financial institutions and capital are leaving the country. Around 30% of lending capacity has already been withdrawn. With foreign financial institutions currently providing directly or indirectly 50% of corporate loans, this could have very serious consequences for the British economy.
That is why the voices calling for nationalisation became even louder. John McFall, chairman of the Treasury Select Committee and friend of the Prime Minister, called for the complete nationalisation of Lloyds and RBS. Even Martin Wolf, a staunch supporter of free markets and neo-liberal globalisation, raised concerns of potential losses to taxpayers. He argues that ‘private management of socialised risk is dangerous’ and that ‘temporary nationalisation is logical’ (Financial Times 23 January 2009). Yet this reactionary Labour government, committed as it is to corporate banking capital and the City of London, has so far resisted such calls. ‘We have a clear view that British banks are best managed and owned commercially and not by the government’ Chancellor Darling told the House of Commons on 19 January. The government is desperate to avoid nationalisation, holding to an unfounded belief that eventually it will be possible to return to a modified, slightly more regulated situation in which things carry on much as they did before the credit crunch hit home. This is in line with Britain’s refusal to join a new international crackdown on financial secrecy and tax havens and underlies Britain’s negotiation stance for the G20 summit in April 2009 calling for open, lightly regulated capital markets (The Guardian 22 January 2009). For the Labour government nothing must stand in the way of the City and its parasitic banks sustaining London’s place as ‘the major financial services sector of the world’.
Labour’s privatisation agenda unravelling
The deepening recession and the squeeze on credit are having a dramatic impact on Labour’s privatisation agenda. Five train operators covering more than a quarter of the rail network are already on the critical list with train operators warning that the recession could have a ‘potentially devastating’ impact on their finances. It appears that the ‘gravy train’ of easy profits is over and, faced with significant falls of revenue, the operators now want the government to bail them out. They have asked for renegotiation of their franchises and more government subsidies. Services will be cut and workers made redundant. Similar problems are emerging with the private bus operators.
Hospital and school building and improvement programmes financed through the private finance initiative (PFI) are now at risk because of the credit crunch. A leaked health service memo shows that health managers can ‘expect a capital desert’ and real problems in completing projects because no banks are financing PFI schemes (The Guardian 26 January 2009). Tim Byles head of the public body set up to rebuild secondary schools throughout England said that by Christmas last year no banks had been willing to invest in the school’s programme. The Labour government, ideologically committed as it is to the privatisation agenda, is considering underwriting the deals to prevent public sector building plans grinding to a halt. Byles indicated government thinking when he said: ‘we are looking at ways to share the risk between public and private sectors. The original notion of PFI was to transfer the risk to the private sector – that carries with it a price’ (The Guardian 27 January 2009). Need we comment?
The banks are making it almost impossible for providers of social housing to access credit at a reasonable rate of interest. The seven lenders to the sector, including the government bailed-out RBS and Lloyds, are using every opportunity to raise existing interest rates on loans to housing associations that build and maintain most of Britain’s social housing. Tom Daley, chair of a group of large London-based housing associations, warned: ‘if nothing changes, our sector is going to be devastated and nobody is going to build social housing’ (Financial Times 26 January 2009).
The state pension in this country is at an appallingly low level. Final salary schemes have therefore been an important component of the income of the better-off sections of the working class and middle class on retirement. With the growing recession, private sector final salary schemes could very quickly be withdrawn. The National Association of Pension Funds reports that hundreds of thousands are about to lose their right to a final salary pension. More than 650,000 of the 2.7m people still saving in a final salary scheme could be affected. Ros Altman, an independent pensions expert, has called this development ‘the death knell’ of private sector final salary schemes (Financial Times 24/25 January 2009).
A crisis that will bankrupt the country?
Britain, the oldest imperialist country, sustains the high standard of living of its citizens through the income generated by financial services sector of the economy and the ‘gigantic usury capital’ of its parasitic banks and financial institutions based in the City of London (see FRFI 194). That is why this crisis of the world capitalist system threatens the economic foundations of British capitalism.
Jim Rogers, chairman of Rogers Holdings and co-founder of the Quantum Fund with the financier George Soros, underscored this reality when he announced that the UK economy was ‘finished’. He told Bloomberg, the global distributor of information services: ‘I would urge you to sell any sterling. I hate to say it, but I would not put any money in the UK’. He wrote in the Financial Times (View of the Day FT.com 22 January 2009) that: ‘The two main pillars of support for sterling have been North Sea Oil and the strength of the UK financial services sector, in particular the City of London’s role’. North Sea oil is running out, and London’s standing as a financial centre is set to suffer. He continued: ‘The City of London is finished, the financial centre of the world is moving east’.
The Labour government still holds to the illusion that the City of London can survive the global financial turmoil. The Liberal Democrat leader Nick Clegg believes Britain must join the euro to salvage public finances and prevent the ‘permanent decline of the City’ (Financial Times 21 January 2009). The Tories cannot say anything on this or they would split apart. The ruling class is panicking and divided. A crisis of this order is going to change the political landscape. This is the period when social and economic developments are creating the conditions for building a new socialist movement in this country. We must seize the time.
1 See ‘Britain: parasitic and decaying capitalism’ FRFI 194 Dec 2006/Jan 2007.
2 See ‘Desperate Times Desperate Measures’ in FRFI 206 Dec 2008/Jan 2009 for a discussion of this plan.
FRFI 207 February / March 2009
