Sunday, October 11, 2009

Will Hutton: critic and writer on neoliberalism and the corporate economic system

I have been a big fan of British journalist Will Hutton since I read his 1995 book The State We're in: Why Britain Is in Crisis and How to Overcome It and his weekly columns in the Guardian and the Observer. Hutton is one of Britain's leading economic thinkers. He is a former editor in chief for The Observer and is currently executive vice-chair of The Work Foundation (formerly the Industrial Society), having been Chief Executive from 2000 to 2008.

For 15 years in his weekly column in the Guardian and the Observer Hutton has been a consistent critic and skeptic of the two decades long obsession with free markets and neo-liberalism.

In his most recent piece in The Guardian Hutton has written about the contradictions at the heart of the British conservatives attempt to seize power in Britain and their unwillingness to publicly detach themselves from an obsession with markets, capitalism and free enterprise. Whilst trying to reposition themselves as an alternative, compassionate conservative government Hutton argues they remain locked into old ideas about the state, capitalism and the market. Here's Hutton on David Cameron's recent speech to the Tories National Conference"

David Cameron declared in his closing speech at the Conservative party conference: "Here is the big argument in British politics today. Labour say that to solve the country's problems we need more government. Don't they see? It is more government that got us into this mess." Not only his audience, but much of the media applauded this apparently killer point.

Except it is wrong. It wasn't the government that got us into this mess – if what you mean by mess is an ugly recession, an unbalanced economy, profound uncertainty over recovery, grossly indebted consumers, disadvantaged communities hit hard again and a budget deficit of £175bn. What got us into this mess above all was the 30-year rise of Big Finance before which governments unfurled the white flag. Bankers used their power to bend the rules at home and abroad, to lend ever more riskily and supported by less capital, until, finally, a vastly overextended banking system backed by very little capital collapsed. The result is today's economic calamity.

There were many culprits in this story, but the damage stemmed from an obsession to keep government small and markets big. Thus, mergers that created banks that were too big to fail went ahead and their daffy mathematical models went unchallenged. We need to reform our financial system from top to bottom, but neither shadow chancellor George Osborne nor shadow business secretary Ken Clarke began to address this question. Their twin attack was on the state – Osborne's because it was borrowing too much, Clarke's because it was regulating too much.

On the global financial crises Hutton is always an intelligent commentator. In a recent piece on the G2o meeting Hutton argues that despite all the rhetoric emanating from the G20 meeting in Pittsburgh it delivered little to address the causes of the global economic and financial crises – the stranglehold of a new financial oligarchy upon public policy. Hutton argues that this failure is not only grossly unfair, but unless there is change, a second and more serious crisis potentially awaits. Hutton argues that there has been no action on the banking system and its bonuses, the excesses that created the credit crunch and division among the great nations? Action taken by the G20 was minimalist. Hutton writes:
"Banks are exploiting this vacuum to return to business as usual. It is hard to believe that only 12 months ago their recklessly overstretched balance sheets threatened an implosion of the western banking system.

This was an event that rivals and arguably even exceeds 1929 as a traumatic event in western economic history. The Wall Street crash radiated out from the US. The autumn 2008 banking collapse was global. Credit crunches at national level provoke declines in GDP of between 7 to 9%; when they happen simultaneously, the decline could potentially feed on itself to deliver a slump.

......Governments have got to reform the entire structure of western finance –bonuses, credit rating agencies, capital adequacy requirements, banks that are too big to fail, the use of offshore tax havens, the role of derivatives – from top to bottom.

.....The bonus culture works on a London/New York axis, with financiers having a sense of entitlement to astonishing earnings that have no economic justification in terms of value creation or relation to profitability. In the US, for example, Merrill Lynch lost $27bn in 2008: 700 employees received bonuses in excess of $1m. AIG, the world's biggest insurance company, paid 377 members of the financial products division that lost $40.5bn (provoking AIG's bail-out by the US government) $220m in bonuses.

When this is what happens in a crisis, there should be no surprise that in 2009, as investment banks profits soar thanks to fewer competitors, cheap money and widened margins, so do bonuses. Witness the £30m guaranteed bonus Barclays has offered to a team of investment bankers it is poaching. Even in 2008, London paid £7.6bn of bonuses, only 40% down in a year when the system imploded. And 90% of investment bank profits is not directed to strengthen balance sheets or to shareholders in dividends, nor to customers in lower fees, nor to taxpayers – it goes as bankers' bonuses. Our role is to bail them out when things go wrong.

We know it is a scam. The Financial Times's Gillian Tett observes that far fewer financiers have been arrested in this crisis compared with the much smaller Savings and Loan debacle in the 1980s. She is right. We are far from that. Instead, Whitehall and Washington oppose more action just on bonuses as "impractical". Wrong. If G20 governments demanded limits and made continued liquidity provision dependent upon compliance, no bank could refuse. The threat of an exodus of bankers is nonsense. No bank trading outside the G20 in financial centres such as Dubai, Hong Kong or Dublin could muster the capital or scale to pay mega bonuses. The issue would be dead".

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