the RESPECT party

We are facing a meltdown in the financial system in two to three weeks’ time. So says the chief economic advisor to the IMF. We are facing a “perfect storm” in the financial system, says the man who bailed out the banks in 2008, Lord Myners. We are facing a crisis which could be at least as bad as the 1930s, says the Governor of the Bank of England.

The most frightening thing about recent forecasts of doom and gloom is how widespread they are across those who are paid handsomely to try to read the tea leaves and find out where we are headed.

The problems we face today are entirely the product of the deregulation and globalisation of the financial sector combined with the recklessness of the bankers in the pursuit of greed. They extended loans and bet vast sums on financial “products” which were never likely to have an income stream to justify their prices but where the assumption was that the price would just carry on rising, thereby making the speculator big profits.

This was a classic financial bubble that was bound to burst sooner or later. When it did bank lending froze, real interest rates to the borrower went up and the economies of the indebted countries where the banking crisis was worst slowed down and stagnated. This, in turn, caused government debts to rise significantly as tax revenues fell and obligations to bail out the banks to stop an even more catastrophic collapse rose.

This is why we now have a so-called sovereign debt crisis in the most vulnerable economies. In Europe this is Ireland and Greece, followed by Portugal, Italy and Spain. Vast amounts of money have been found running to hundreds of billions of Euros in order to stave off default, when the government itself runs out of money, can’t pay its wages or its debts.

But that money, raised from Germany above all, comes at a steep price. Greece has had to cut its state spending dramatically and try to raise taxes. At the same time the vulnerability of the Greek economy means it is having to pay exorbitant interest rates on its debts to factor in the “risk” of lending to a hopelessly indebted economy.

The consequence of these “austerity” measures has been to make matters worse not better. Spending has been taken out of the economy so growth has declined further and with it tax revenues. There is no chance Greece can pay its debts and the market is now waiting for it to default. The European bail out fund is there to try and ensure that banks are properly capitalised to take the losses when the default occurs, otherwise it really will be Armageddon as the banking system stops functioning again and on a far worse scale than in 2008.

However, the European Union is a dysfunctional body when it comes to dealing with this kind of crisis. The Slovakian government has just collapsed after a minor party in the coalition refused to ratify a bail out fund which, in the words of former CBI chief Howard Davies was yesterday’s news anyway. So an completely inadequate bail out fund is still not operational despite that fact the bail out fund it is estimated is now required is more than twice the size at more than a trillion Euros.

The bail out is not cost free. It means taxpayers will take a severe hit in the lending countries, ie again above all Germany. But German leader Angela Merkl faces elections shortly, as does Sarkozy in France, constraining their room for manoeuvre. In the United States, the economy there is grinding to a halt too.

In Britain, we now have the highest unemployment for 17 years at over 2.5 million and the highest number of unemployed between the ages of 16 and 24 since records began at almost a million. A recent authoritative report has stated that due to a combination of government policy and economic decline, 25%, one quarter, of all children will be living in poverty in just a few short years.

The government’s response to this has been that we are to get more of the same, and even worse. Public spending is being slashed whilst taxes through VAT in particular remain high on ordinary working people, who are also facing big rises in their basic living costs, whilst wages stagnate. There is every prospect of years of stagnation and worse on the current economic outlook.

And yet, there is a huge shortage of affordable homes either to buy or rent and 200,000 construction workers on the dole. Interest rates are at very low levels in Britain and the government’s debt b burden is less than in 1950 when the government embarked on an ambitious housing programme to try to eliminate slum dwellings in Britain.

Here in Tower Hamlets we now learn that the government is cutting £100 million from the council budget, an increase of 40% on the figure announced just a few months ago. This means cuts to staff, help to the most vulnerable and much else, in an area of exceptionally high youth unemployment, poverty and poor health.

This is the madness of the Condem government’s policies, ideologically and dogmatically driven and driving the economy into meltdown. Labour has voiced its opposition to these policies, saying it is too much too early, but they too are committed to cuts and a desire to satisfy the financial markets whose madness brought us to this collapse in the first place.

There is an alternative. And it does not involve being a “deficit denier”. Of course the deficit cannot go on rising forever at a faster rate than that of economic growth. That would mean default, bankruptcy, potential rampant inflation and disaster. But the deficit can be reduced without cutting employment and essential government services.

Money needs to be injected into the economy not by the so-called Quantitative Easing. This simply gives banks money to speculate on asset prices rather than productive lending and stores up inflation for the future. We need public investment to make up for the lack of private investment, above all in building decent and affordable homes for sale and rent.

Taxes do need to rise but on the rich and tax loopholes need to be closed. The Royal Bank of Scotlansd was bailed out by the taxpayer as a result of which we now own the bank. And yet it has 30 subsidiary companies registered in Jersey and over 200 in other tax havens around the world so it can avoid paying its share of UK taxes.

All but two of the biggest 100 companies in Britain operate similar tax scams. Most extraordinary of all is that six of the top ten tax havens around the world are in British territories like Jersey and the Cayman Islands. If another country threatened these British territories, the government would dispatch gunboats to protect them. Well, I’ve got another idea. We could close the tax loopholes in these territories and send the gunboats to collect the hundreds of billions of tax revenues that would close the budget deficit in an instant.

By all accounts, we are going to be very lucky to avoid another financial crash with unknown but no doubt dire consequences. The Condem government’s policies are making things worse and Labour is offering no credible alternative. It is time for a radical rethink and for radical action to put our people back to work and rebuild a society in which the needs of the most vulnerable are properly looked after.