During the end of the 1970s into the
1980s, British Conservative prime minister
Margaret Thatcher and the City of London financial
interests who backed her introduced wholesale
measures of privatization, state budget cuts,
moves against labor and deregulation of the
financial markets.
They did so in parallel
with similar moves in the US initiated by advisers
around Reagan. The claim was that hard medicine
was needed to curb inflation and that the bloated
state bureaucracy was a central problem.
For almost three decades, Anglo-American
university economic faculties have turned to
Thatcherite deregulation of financial markets as
"the efficient way", in the process, undoing many
of the hard-fought gains secured for personal
social security, public
health care and pension
security of the population. Now the poster-child
economy of the Thatcher revolution, Great Britain,
is sinking like the proverbial Titanic, a
testimony to the incompetence of what is generally
called neo-liberalism or free-market ideology.
As the neo-liberal revolution began in the
economies of the US and the UK, it should not be
not surprising that the epi-center of catastrophe
in the global crisis now unfolding also lies with
the economies of the US and the UK, as well as a
handful of economies, including Ireland, Canada,
Australia, New Zealand and Iceland, all of which
embraced the free market Thatcherite agenda most
strongly in recent years.
Notably, the man
who personally implemented Thatcherite financial
market reforms and deregulation during the era of
Tony Blair in Britain was Gordon Brown, then
Treasury secretary.
A sample of most
recent British developments is instructive.
Britain's economy is about to suffer its most
vicious slump since 1946, shrinking by a drastic
2.8% this year, according to the European Union's
latest estimates. The UK is predicted to suffer
the worst recession of any large European economy.
The consequences for the UK will include
soaring unemployment, while the economy also
teeters on the brink of full-blown deflation.
Unemployment will rise by more than 900,000 people
over the next 12 months, driving the jobless total
to 2.55 million by the end of the year, or 8.2% of
the workforce, from 5.3% at present.
In
parallel, the currency, the pound, which is not
part of the eurozone currencies, has fallen
dramatically against the euro and even the US
dollar in recent weeks over growing fears of the
collapsing UK economy and banking system. Sterling
has fallen below US$1.40 to its lowest point in
seven-and-a-half years because of concerns about
the depth of Britain's banking crisis and the
government's rising debt levels. This coming year
the UK government's borrowing levels may exceed
ฃ118 billion, equal to 8% of GDP.
Britain
will not be able to reap much benefit from a lower
pound for exports because, as part of the Thatcher
revolution, the national economy has out-sourced,
de-industrialized and turned into a service
economy where, as in the US, finance and banking
became the motor of economic growth the past two
decades. That motor has now broken.
Public debt soaring Fueled by
the cost of state bank bailouts, the UK's national
debt is set to rise to ฃ1.06 trillion, or 72% of
GDP, by 2010, a sharp rise of more than 70% from
present levels.
Last week, the Brown
government, only three months ago hailed as the
institution that was taking effective action to
control the global financial meltdown, was forced
to introduce yet another new bank bailout package
of measures designed to rescue the country's
banking sector.
Brown refused to put any
ceiling on the amount that he might ultimately
need, creating great distrust in the Brussels and
across the EU.
Combined, British banks
have some US$4.4 trillion of foreign liabilities.
That is twice the size of the British economy. UK
foreign reserves are virtually nothing at $60.6
billion. Little wonder that savvy currency traders
and hedge funds have decided the British pound can
go only one way - down. Swap markets for CDS now
price in an alarming 10% probability of Britain
having to default on state debt obligations in the
next few years as public debt explodes.
The last time England had a default on
state debt was in the early 14th century, when
King Edward III decided to declare default on his
then huge debts to the large Italian banking house
of Bardi & Peruzzi, taking the large bank down
with it and spreading ruin across Europe.
Kiss of life to a corpse Brown
admits he does not know whether the second bank
rescue package the government just launched will
work, senior ministers admit. One minister is
quoted anonymously in the British press, "The
truth is that we can't be sure whether it will be
effective. We have to look calm to try to instill
some confidence in the system. But we don't know
what will happen next. No one can be sure that
this is the end of it. We are in completely
uncharted waters. The position is changing all the
time."
In brief, the authorities have lost
control in the UK.
Brown and Treasury
Secretary Alistair Darling claim the second
bailout did not mean the first package they
unveiled last October had failed. That deal, they
insist, was about preventing banks from going
bust; this one was about ensuring they had the
confidence to lend to businesses and the public.
The government refuses to reveal how much
it will cost taxpayers. Officials dismissed talk
of a ฃ200 billion bailout, saying some measures
had a low risk and figures were still being
calculated. Labour Party backbenchers conceded it
would be difficult to "sell" the rescue plan to an
increasingly hostile public. Not surprisingly,
polls have turned dramatically against Labour and
Brown, now showing that were elections held today
the Conservative Party would secure a win over
Labour of 9% to 13%. An astonishing 49% of all
Britons fear losing their job this year.
A
major impediment to swift and consequent
government action to contain the impact of the
banking crisis has been the dominance of
Thatcherite ideology as an almost religious dogma
that permeates even Labour, where Brown's
predecessor as prime minister, Blair, was
portrayed as a Labour version of Thatcher. The
ideological absurdity of the situation was
underscored recently when the Conservative
opposition offered broad support for measures,
even though their concern over soaring borrowing
led them to oppose the government's ฃ20 billion
fiscal stimulus designed to keep the economy
moving.
As well, it is clear, following
the nationalization last year of the Northern Rock
home-loan firm and the forced state share of 70%
in the Royal Bank of Scotland, that a type of
approach is being adopted similar to that used in
the early 1990s' Swedish banking crisis, in which
the state nationalized banks that were insolvent
and unable to raise private capital.
Sweden then split the banks into "good
banks" and "bad banks". In the good bank, the
business of lending to the real economy continued
unabated. The assets in the bad bank, largely
illiquid Swedish real estate holdings, were held
by the state until economic growth again allowed
the government to sell the assets in a healthy
market. The ultimate taxpayer cost of the
"Securum" model were estimated to have been zero
or even a tiny profit when all costs were
factored.
The ideological Labour
government is stubbornly refusing to admit the
logic of the situation, and ends up cutting the
dog's tail off by inches. As certain Labour MPs
call for the full nationalization of the banks,
the government says that is not its goal. Darling
stated, "We have a clear view that British banks
are best managed and owned commercially and not by
the government. That remains our policy."
John McFall, Labour chairman of the
Treasury Select Committee, who believes full
nationalization of the banks is inevitable, asked
Darling in a recent House of Commons debate if the
government would take a 100% stake in the banks if
the new package did not restart lending.
Vince Cable, who watches the Treasury for
the Liberal Democrats, said, "The government
increasingly resembles somebody who is trying to
give the kiss of life to a corpse. The government
now effectively controls one of the largest banks
in the world. It will almost certainly have to put
more money in; it may well acquire other banks."
Cable had predicted the bursting of the house
price and personal debt bubbles - and the
nationalization of Northern Rock.
Royal
Bank of Scotland next The same day Brown's
government announced the second bank bailout
attempt, the Royal Bank of Scotland issued a
statement revealing it expected losses of ฃ28
billion for 2008, far greater than anyone was
expecting and triggering a further selloff in
shares of all major British banks.
The
huge losses announced at RBS were mainly the
result of its acquisition of ABN Amro in 2007. RBS
paid a high price for ABN and admitted last week
that the business was worth around ฃ20 billion
less than it had previously thought. This
unexpected announcement resulted in a 67% fall in
its shares.
Brown, in a pathetic attempt
to deflect blame, has said that he was
particularly "angry" at the record losses racked
up by the Royal Bank of Scotland, and the large
write-offs of foreign debt. Lloyds Bank is rumored
to be the next bank in need of emergency help as
the economy of Britain goes into free-fall, the
tragic eulogy to Thatcherism.
Origins
of the neo-liberal model The so-called
neo-liberal finance model espoused by the Thatcher
government after 1979 had its origins in a
decision by leading Anglo-American financial
powers and their circle that it was time to begin
a wholesale clawing back of the concessions they
had granted under, as they saw it, duress, during
the Great Depression of the 1930s and in the case
of Britain the post-war economic difficulties.
The origins of the effort in the United
States go back to a seminal little-known book by a
scion of the vastly wealthy Rockefeller family,
the late John D Rockefeller III, titled The
Second American Revolution. There, amid
soporific rhetoric about creation of a "humanistic
capitalism", he called for a drastic reduction in
the role and size of government in the economy.
That theme was then propagated through the
efficient propaganda apparatus of the Rockefeller
imperium, aided by the economist guru of the
Rockefellers' University of Chicago, Milton
Friedman.
Amid the misnamed "stagflation"
- sluggish growth, high inflation - era of the
late 1970s into the 1980s, that propaganda machine
blamed all ills on "big government", conveniently
ignoring the pivotal role of the manipulated oil
shocks, shocks manipulated and brought about by
the same Rockefeller family, as I detail in A
Century of War: Anglo-American Oil Politics.
Rockefeller protege Paul Volcker of Chase
Manhattan Bank was sent to president Jimmy Carter
on orders of David Rockefeller to "wring inflation
out of the system" in October 1979, the same
general time Thatcher's Bank of England imposed
its own form of economic "shock therapy".
The true economic causality was obscured
and reams of press copy from the Friedmanite
free-market camp during the Reagan and Thatcher
era claimed that the "defeat of inflation" had
been due to the ruthless discipline of Volcker and
Thatcher. That was, we were told, again and again,
the reason why the market should be unfettered
from government regulation, freed to the devices
of its own unbounded innovative genius.
The results of that unfettered "humanistic
capitalism", or what now former Federal Reserve
chairman Alan Greenspan approvingly called the
"revolution in finance", is bringing both Meccas
of neo-liberalism, the United States and Great
Britain, to economic ruin. Somewhere between this
and Joseph Stalin's Soviet central planning there
lies a better way.
F William
Engdahl is author of A Century of War:
Anglo-American Oil Politics and the New World
Order (Pluto Press) and Seeds of
Destruction: The Hidden Agenda of Genetic
Manipulation (www.globalresearch.ca). The
present article is adapted from his forthcoming
book, due in summer 2009, Power of Money: The
Rise and Decline of the American Century. He
may be contacted through his website,
www.engdahl.oilgeopolitics.net.
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