The Government is not Solving the Financial Crisis, It is Causing It

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The Financial Crisis of 2007/8 was a crisis of private debt.  It only became a crisis of public debt when states around the world made the taxpayer guarantor for this debt and bailed out banks.  However, since then conversation and policy has focussed almost exclusively on public debt, as if this were the source of the crisis.  This has seen devastating impacts on public services, and public perceptions on the welfare state.  In doing so, the government is not solving the financial crisis, but causing it.

Public Debt before and after the Financial Crisis

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In the last year before the Financial Crisis, public spending in the UK stood at 41% of GDP and national debt was just 44.1% of GDP. This was consistent with the level of debt and public spending as a proportion of GDP for around the last fifty years.

Running budget deficits has also been a pretty regular feature of UK economics.  The Conservative government ran deficits between 3.9% and 50.9% between 1990 and 1997.  The incoming Labour party returned the budget to surplus into 2002.

Labour argue that these deficits were cyclical rather than structural.  This means that they created a deficit to invest in programmes that would release an economic benefit later.  So, a cyclical deficit would look like a mortgage – the average mortgage holder’s account would look in deficit if their mortgage were taken into account, but also counts as an asset.  A structural deficit would look more like an overdraft, it’s simply there to cover the fact that what is being spent is more than what is being earned.

Whatever the reality, the deficit was not increasing the national debt, and public spending as a percentage of GDP was no higher than it had been under previous governments. Therefore if there were criticisms of Labour’s spending programme, it cannot be laid at the door of domestic public spending.

This is no defence of Labour’s fiscal approach however, but we do need to make sure we criticize the proper things, and the welfare state was not the issue.

According to the National Audit Office, the Bank Bailout increased the National Debt by £1.5trn. That means in one month in 2008, the (non-fiscally adjusted) national debt jumped to 138.7%.   Since then this figure has risen and fallen by 10% in either direction.  More worrying is as austerity policies kill off investment, consumer spending and economic growth, the net national debt figure has actually risen 30% since 2008, and 22% of that has occurred under the Coalition government.

Public spending has remained fairly constant throughout this time, rising 3% as a proportion of GDP under the Coalition.

The deficit hit 156.3% after the bailout, and still at 90% by 2012 (higher than Cyprus, at 85.8%)

This level of national debt and deficit have not been seen in the UK since World War II. But the entire welfare state was built and rolled out while reducing the national debt and the deficit.  The UK can more than afford its public spending as less than half of GDP.  What it cannot afford is the Corporate Welfare State on top of it.

Private Debt before and after the Financial Crisis

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While public debt rose after the crisis, private debt rose exponentially prior to the crisis and was its ultimate cause.  Economist Steve Keen rails against mainstream neoclassical economists’ insistence on ignoring private debt as a factor in a future crisis.

We need to distinguish two kinds of private debt.  The first is consumer debt: that debt carried by individuals in the form of loans, credit cards and so on.  The second is corporate debt: that debt carried by private entities (businesses, corporations, etc.).

Consumer debt rose by 158% in the ten years between 1999 and 2009.  Did the UK consumer go on a self-indulgent spending spree for this decade? Not quite.  You see, during the same period, house prices went up 130%, a loaf of bread went up 147%, and a litre of petrol went up 42%.  Wages rose just 13.6%.  Consumer debt was used to conceal the fact the wages were failing to keep pace with a fast rising cost of living.

This issue contributed to the Financial Crisis when overburdened debtors in the US failed to meet their mortgage payments, effectively kicking over the first domino.  So how does Austerity deal with this problem?  It makes it worse.

Austerity policy is only driving down wages further, in fact workers are being asked to accept further wage cuts to hold on to their jobs, which is only exacerbating consumer debt.  The level of family debt rose by another 50% just last year, hitting £1.4trn by February this year.  This is significantly faster than its already dizzying rise in the previous decade.

Corporate Debt is a whole other matter.  Financial Services corporations have effectively begun printing their own money by inventing financial instruments which turn debt into assets.  The problem is, the assets are used to create paper profits for corporations and individuals, while the debt is simply ignored until it explodes, as it did in 2008, and then passed over to the taxpayer.

By 2004, UK Banks were creating £500bn a year this way, they created £567bn in 2007 as the crisis was at their door.  To put this figure in perspective, the entire national debt in 2007 was £501bn.  Corporations created the same amount of debt based money in a year, as the UK’s entire national debt.  This has totally screwed up the money supply, with the Bank of England creating only a tiny fraction of the money in circulation.

The Derivatives market that capitalises on this debt based money, by turning consumer debt into investment vehicles, caused the Financial Crisis.  This market encourages fraudulent, reckless and predatory lending to consumers who cannot repay, as by creating the debt the organisation can print money.

The Government is Fixing Problems Which Don’t Exist

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The UK Government is fixing problems which don’t exist, and by doing so is worsening the problems that do.

The Financial Services industry as a whole and the Derivatives market in particular remain unregulated and derivative debt has now grown to $700trn (ten times the GDP of the entire planet).  There is no way any state or combination of states could ever pay this down in a future crisis.

The bankers personally responsible for the crisis have not been held accountable in a court of law.  Indeed, many of them now hold senior responsible positions in economics, academics and government.

Wages continue to be pushed down and consumer debt is rising to meet the gap creating an unfolding crisis in personal finances.

The National Debt continues to rise as rising unemployment and cost of living increase the bill for the welfare state, and stalled GDP fails to create new jobs or growth to cover the deficit.

What Solving the Crisis Might Look Like

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To tackle the causes of the Financial Crisis and restore the UK economy to a sustainable footing, we would need to do almost the exact opposite of what the government is doing today.

Banking

Break up the big banks into many smaller ones which could fail in future and not devastate the wider economy.

Make it illegal for a bank to be both a retail bank and an investment bank.

Hold individuals responsible for the Financial Crisis accountable in a court of law, sending a clear signal that people will not be allowed to profit by destroying their companies and the wider economy.

This was what the government publicly committed to ahead of the Vickers Report but watered down proposals to such an extent that they will not reduce the banking sector as a proportion of GDP, they will not separate casino banking from retail banking, they will not outlaw derivatives trading or the commercial money supply.

Wages

Introduce legislation increasing the minimum wage to the living wage.  This would support the reduction of consumer debt, an increase in consumer spending, and decrease the income equality gap.

Cost of Living

Introduce price control measures on items on the UK Essentials Index.  By reducing the cost of the essentials, the consumer budget has more room to accommodate saving and pension contributions that will take the pressure off public finances as they age, and to avoid debt.  There would be losers in this plan, but that GDP is already gobbled up by the impacts of what is being sold.  GDP at the cost of personal and corporate debt is short termist and creates unsustainable and unstable economic circumstances.

Economic Policy

Abandon neoclassical economics.  The dominance of this model is dangerous.  When ‘economists’ are produced on panel shows, news interviews and government working groups they are always neoclassical economists.  Keynesians or Friedmanites, they are of the same school.  This school of economics uses models to forecast economic performance which do not even include debt, money or time as factors.  These economists contributed to the Financial Crisis by endorsing the behaviour or the Financial Services industry and governments who deregulated them.  They also not only failed to foresee the Financial Crisis, but actually said it was impossible.  To continue to seek answers from this community when they have so clearly been proven wrong, is utter folly.

Why Doing Nothing is Not an Option

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It is not that our government are not aware of the alternatives to Austerity, it is that they are actively opposing those alternatives.  The public debt crisis in the UK is as a direct result of the private debt crisis, and our government has no answer for that.  Therefore we can only predict years of crushing austerity, rising unemployment, rising consumer debt, rising corporate debt and a continuing and deepening crisis.  It is not enough for us to wring our hands and wait for the good times to roll again.  Without significant public intervention to stop this process, the good times will never roll again for those outside the 1%.

Take Action

Positive Money – a great way to learn more about how money is created and how you can change your own behaviour to make a difference.

Steve Keen at LSE – this is 30mins which will change your life.  Steve Keen explains why our current economics simply does not work.

Move Your Money – take your money out of the big banks which are causing the crisis.

The People’s Assembly – join the campaign to end the democratic deficit caused by all our main political parties adopting the same flawed economic policy.

The 99% Rise Against Austerity – protest Austerity on May 4th and make your opposition visible.

12 thoughts on “The Government is not Solving the Financial Crisis, It is Causing It

  1. “Introduce legislation increasing the minimum wage to the living wage”

    which results in all wages going up again, which results in inflation and more debt. Minimum wage is a very tricky subject. It really isn’t a case of just increase or decrease it.

    I wonder do people accept that there will always be poor and rich in our society with most of us somewhere between the two? If you don’t I would suggest that you will always be fighting a battle that you cannot win.

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  3. I have no issue with the above explanation, but even this expos’e fails to reveal the scourge that lies underneath our system. We are currently subject to the fractional banking system, and if you are not aware of this odious phenomenon I suggest that you take a look at it on youtube……Basically its a system that allows (Private) banks like The bank of England to print money that they then attach interest to, and this is how the bank investors control our economy ( “and on the news today, the Bank of england raised the interest rate” ) Yes thats the innocuous way it is presented on the news. When our economy is heating up they raise the interest on their own FIAT paper money and grab it all from us. It has been ostensibly postulated that this perpetual debt foisted onto us actually takes away most of the tax money we pay to Government, hence the Gov has to find a 100 ways of stealth taxing us to generate income to run the country. Fuel duty, road tax, Vat, and all the other stealth taxes are actually needed. This is why our roads are falling apart, and fuel is expensive. This is why both tobacco and alcohol is cheaper abroad. An integral part of this process is reliant upon debt increasing year upon year. Therefore this years debt must outstrip last years or their system will POP. Its the same in America, Canada, Australia etc….Therefore when Gov says we have to get public debt down, they are lying because it has to rise in order to maintain the fractional system. No doubt this explanation is way too simple for some, and many would challenge this, but only two men have ever publicly declared it was their intention to be rid of this blight upon people, and they were Lincoln and Kennedy. Both were shot for it, and Kennedy was shot within one week of making his intention public. I am in no way capable of explaining this properly thus i suggest that you take a look at some of the Vids on this topic on youtube…….Oh and for your edification i would further suggest that you delve into the concept of legalese language via John Harris (Its an Illusion) and also the second version (Its an Illusion II) he will explain the real manipulation of the masses. Let me finish by saying this….If you drive a car, go check the V5 from the DVLA that you got when you REGIS/tered it. Down at the bottom is says “Keeper of the car” NOT owner. Now look at the word Register, the first 5 letters are regis= queen…They actually consider your car registration to be a declaration of abandonment, and the queen accepts ownership of your car when you REGISter it. if you think thats a scary, then think about a child being REGIStered at birth…Watch John Harris…..

    • The Queen is NOT the owner of your car. The words “keeper of the car” is a warning to intending buyers that the name on the document may not be the legal owner (though it almost invariably is). Queen is REGINA.

      I have seen the things in your first paragraph before and suspect that they are equally in error.

  4. In one article you have, putatively, solved everything. I appreciate your efforts, as I used to feel the same impulse when I was a younger person. Although I am not going to I would dispute your calculations and figures, I am less confident about the facts and the variables, but what you say is very good as an essay, and gives out lots of opportunities for discussion. I personally am a Labour supporter although I am against total control by government since this would be like handing over to “mob rule” in a democratic state.

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