No Way to Run an Economy?
I recently read Graham Turner's book, No Way to Run an Economy: Why the System Failed and How to Put it Right. Quite honestly, it is the best book I've read in finance/ economics and politics in years and I highly recommend it to money managers, central bankers, policymakers, and anyone else who wants to understand the financial crisis and its repercussions for our future.
Graham Turner is one of the best economists I ever met. His firm, GFC Economics, is based in London and it provides independent economic research - on US, UK, Japan, and Eurozone – to institutional clients on a subscription basis. If you're an institutional money manager or government agency, this one service worth spending on. There are others but they're way more expensive and do not offer the insight that Graham and his team offer.
Ruth Sutherland, business editor of the Observer recently reviewed Graham's new book for the New Statesman:
The most astute commentators on the credit crunch tend not to be part of the mainstream, Anglo-American, free-market consensus. For example, the economist Nouriel Roubini, widely credited with predicting the crisis, was born in Iran to Jewish parents; the hedge-fund manager and philosopher George Soros was living in Budapest when the Nazis invaded Hungary. Meanwhile, the Financial Times journalist Gillian Tett brings an academic background in social anthropology to bear on her observation of bankers, as well as the experience of living and working in Japan during its long battle to extricate itself from a deflationary slump.
Graham Turner is also one of the outsiders. In his view, the Japanese experience offers a frightening glimpse into our future, with deflation, where the prices of assets such as houses and shares are locked into a downward spiral, becoming entrenched. If that happens, conventional policy measures, such as reducing interest rates and pushing through huge increases in government spending, can fail, as indeed they have in Japan.
We are not quite there yet, but how did we end up in the state we are in? Rather than dwell on the complexities of derivative debt instruments, Turner examines the way in which globalisation has worked to the benefit of capital and the detriment of labour, identifying it as one of the prime causes of the crisis. As companies roamed the globe in search of cheaper workers, policymakers paid far too little heed to stagnant or falling wages. The median wage in the US was no higher in 2008 than it had been eight years previously, and the situation in the UK was little better.
With the failure of governments to recognise the imbalance of capital and labour as being at the heart of the collapse, policymakers were too slow to come to the rescue of homebuyers in the US and the UK with interest-rate cuts and bank bailouts.
Locked in their ivory towers, and lobbied to perdition by the PR machines of Wall Street and the City, they were oblivious to the plight of ordinary people. Turner argues that when capitalists cast around for ways to put excess capital to work, funds are driven into speculative or fictitious ventures. And we saw that pretty clearly in the boom, with its highly leveraged private equity deals and its questionable mergers and takeovers.
Turner's view that the capitalist system, rather than greedy or foolish individuals, is to blame, puts him in improbable agreement with Sir Fred Goodwin, the former chief executive of the Royal Bank of Scotland. Sir Fred told the Treasury select committee of MPs: "If you want to blame it all on me and close the book, that will get the job done very quickly, but it does not go anywhere near close to the cause of all this." Goodwin was talking about the sudden drying up of liquidity, rather than the underlying contradictions within capitalism. But Turner agrees that Goodwin, however reprehensible his conduct, is not the bogeyman and was right to blame the system.
The promise in the subtitle of Turner's book - that he will tell us how to put things right - is hard to fulfil. With interest rates close to zero in the UK and the US, the options available to governments are limited.
In Turner's view, Barack Obama could embark on more quantitative easing and should nationalise the banks wholesale, at least temporarily, so that they can be compelled to get credit flowing back through the economy, instead of trying, in clandestine fashion, to rebuild their own balance sheets.
Many orthodox economists would regard such prescriptions as extreme and dangerous, but Turner is surely right to point to a democratic deficit that leaves us powerless to hold banks and large multinational companies to account.
As employees, and as owners through our pension funds, we should all have a say in how big businesses are run. We do not, because workers are denied representation, and because the large investors to whom we delegate most of our voting power fail to take their responsibility as owners of companies sufficiently seriously. Turner argues that we urgently need a thorough rethink of the shareholder model that blindly chases short-term profit and denies a voice to workers - and, indeed, to small investors. And you don't have to be a Marxist to think he has a point.
Indeed, Graham has repeatedly stated that workers need "a greater voice" in banking:
Graham recently commented on Socialist Worker online, writing on why Britain's recession is a long way from over:
Can governments combat the world recession with a selection of policy tweaks?
Financial forecaster Graham Turner believes real recovery can only be achieved by savagely attacking the system itself, reducing the vice-like grip of shareholders on the steering wheel of global firms.
Mr Turner, who worked for several Japanese banks in the '90s before founding Mile End-based GFC Economics in 1999, believes that "more effective participation of workers" is key to restoring balance in the world economy.
He believes governments should have taken advantage of the nationalisation of the banks by breaking up the shareholder-oriented model and imposing a "worker veto".
He said: "It was an opportunity missed really to change the perception that people can't have a say in the way that the economy is run.
"It's about exerting sufficient oversight, not just through government but by giving the people a greater voice. Increased regulation just gives the banking lobby something to aim at.
"What you need is an effective counterweight within the workforce so decisions, such as where to place a factory, are not based exclusively on how they benefit the shareholders.
"I don't believe increased regulation deals with that. It can be bent, distorted and undermined by corporate power. We need more effective participation of the workers within the decision-making structure of companies to create a more effective balance."
Mr Turner recommended aggressive measures such as quantitative easing to combat the financial slide in his 2008 book, The Credit Crunch.
Talking to The Wharf following the release of his second book, entitled No Way To Run An Economy, he re-states this as one of the two main pillars of his strategy to haul the world out of the downturn.
He said: "I would have taken a twin approach. I would have introduced more aggressive quantitative easing from a much earlier stage, and I would have made a more direct intervention into the private sector.
"The one thing that could mitigate this current bubble is aggressive quantitative easing because that's what was used in the '30s.
"By 1932 they started aggressive quantitative easing and they put a floor in the economy. By comparison to what we have now it was a swifter recovery.
"Governments haven't really been committed to quantitative easing in the manner that we saw in the '30s."
Mr Turner is convinced that the US remains the "epicentre" of the crisis, and criticises the Obama administration for its slow reaction.
He said: "[Obama is] trying to do too much and he's out of his depth. He's trying to fix healthcare, climate change, the wars in Iraq and Afghanistan and the housing problem.
"The world economy will rise or fall based on how the US fares in the next 12 months. I believe the US gave Obama a mandate with his landslide election victory and he hasn't used that mandate to be radical.
"The GDP numbers don't do justice to the problems in the States. All the data says repossessions are accelerating, despite the money that's being thrown at banks and the incentives that are in place. It's the mortgage problems that caused the crisis, and they're spreading to commercial property as well.
"One in four mortgages is behind in Florida and the foreclosure crisis is spreading away form the traditional sub-prime areas into states such as New Jersey, Utah, Idaho and Rhode Island. Banks are either unwilling or unable to put the people who are in arrears on a more sustainable mortgage scheme.
"Banks are not charities and they're throwing people out of their homes in record numbers. Every time someone forecloses it depresses prices in that entire neighbourhood significantly.
"The banking lobby have been very strong. It's a perfectly legitimate point to make that the Obama administration is too close to Wall Street.
"The Bush administration were very close as well, but the new administration has not distanced itself anywhere near as far as it should have done. Too much money has gone in without getting the result that was promised.
"There's a systematic breakdown that can't be addressed by monetary and fiscal policy anymore."
Mr Turner also highlights climate change as a sign of how globalisation has damaged the environment and communities, but believes it has been unfairly "marginalised and radicalised" as an economic issue.
He said: "It goes to the heart of the way we structure the economy.
"Burberry shut down its factories in Wales and Rotherham and now make their goods in Turkey and China and bring them back into this country with a mark up.
"It's destructive for the environment and communities in this country. But capitalism can't deal with climate change because of competition pressures. If your rival ships to China so it can undercut you, you don't have a choice but to do the same under the shareholder model. If companies had a worker veto, they could break this vicious cycle."
While many commentators see the recession as the result of greed, Mr Turner believes that much of the debt was created through need rather than luxury.
He said: "We had a boom and it was still a struggle for people. Debt was a substitute for decent income gains. For many people the cost of buying a home and doing basic things in life was an uphill battle and debt became the way to achieve things.
"There's an critique of debt now, in which everyone got greedy and we all need to pay. It's rubbish. The Bank of England showed the people with the biggest debt problem were the poorest people and they're the ones getting most shafted by the credit crunch.
"The squeeze in public spending being discussed is going to exacerbate the current divide. That's what globalisation has done. It's failed the west, and probably the emerging markets too.
"Corporate power is hollowing out industry and has been doing so since the 1980s. We now work in bubble jobs sustained by taking on increasing amounts of debt. There's a ridiculous logic to capitalism and it's been exposed by all this, not that anyone would admit it."
I happen to agree with much of Graham's criticism. The financial oligarchs control our economies and they're sowing the seeds of their destruction by impoverishing millions of hard working people that are accumulating more and more debt to make ends meet.
“Unbelievable, literally”. That was the response of one economist at US investment bank Goldman Sachs to the news last month that Britain was still in recession.
The Office for National Statistics (ONS) had just announced a 0.4 percent decline in real GDP – the sixth quarter in a row that the economy has shrunk.
According to the ONS, the economy had declined 6 percent from its peak. But economists at Goldman Sachs were unconvinced. Business surveys pointed to a much stronger economy, they claimed. The official data were “hardly worth the paper they were printed on”.
Yet a month later Britain is still in recession. Last week’s figures show a decline of 0.3 percent. This recession is proving all too stubborn – and a closer inspection of the data shows why.
There was a record decline in output for “restaurants/hotels”, which fell 7.7 percent year on year. This category encompasses a range of recreational services, many of them provided by smaller companies.
These are not reflected in the business surveys that drive sentiment in the City, and which led economists to conclude that the UK had escaped recession.
The widely-followed purchasing manager indices (PMIs), provided by private firm Markit Economics, only cover 600 companies. The ONS surveys 30,000.
Not surprisingly, its official statistics are proving a better judge of the squeeze on smaller businesses. Many of these have suffered from the clampdown in lending by banks as they continue to shrink their balance sheets. According to the Bank of England, lending to companies shrank by a record 3.5 percent in the year to October.
But it is not just small businesses that continue to suffer from a credit squeeze. Banks are also cutting credit lines to individuals. Consumer credit has shrunk for four months in a row, another record. Last year’s collapse of Lehman Brothers continues to cast a long shadow.
And wages are being squeezed as well. In real terms, wages have now fallen for five straight quarters.
All of this is taking its toll on public finances. Last month saw a record increase in government borrowing, a rise of £11.3 billion compared to the same month in 2008. (This is the most useful comparison to make, because of the strong seasonal swings in tax receipts and spending.)
Some continue to cite runaway public spending as the culprit. But the facts suggest otherwise.
So far during the current financial year, spending has risen 6 percent year-on-year in pound terms. That is less than the budget set by the Treasury in April.
By contrast, tax revenues have shrunk by 10 percent. That is well beyond the 6.5 percent decline projected in April.
This year, tax revenues as a proportion of GDP will fall to lower than any level under Margaret Thatcher or John Major. The Tories trumpet a low-tax economy as the way to recovery – but New Labour has already done that, and Britain is still in recession.
Any upswing will be slow, as companies continue to cut costs and banks retrench. The Bank of England could cut interest rates from the current level of 0.5 percent all the way down to zero, but at this late stage the impact would be limited.
The programme of quantitative easing – buying gilts (government IOUs) – is more aggressive than in any other major industrialised economy. The Bank of England is unlikely to sanction much more of it when the budget deficit is spiralling upwards.
If the world economy takes a turn for the worse, Britain will be in trouble. The next government will be cutting spending and hiking taxes in the eye of the storm.
The risks are numerous. What’s happening in Dubai is a reminder of the credit problems that still litter the world. In Germany, the central bank announced last week that banks would have to find a further 90 billion euros to cover expected losses on toxic loans.
Lending is shrinking across the Eurozone. Banks are weighed down by bad debts. Consumer spending continues to slide in the majority of member states. Ireland and Greece remain in deep financial trouble.
And in the US, Obama has failed to tackle the foreclosure crisis. By the end of September, one in seven with a mortgage was either in arrears or in the process of being repossessed.
Early indications from Freddie Mac, one of the biggest US lenders (now nationalised), suggest these delinquencies rose again last month – and the increase is accelerating. Long-term unemployment has hit a post-war record and is driving more borrowers to default.
Despite repeated bailouts, capital injections and tax-subsidised incentives for banks, the homelessness crisis is intensifying. The US faces economic and political turmoil in 2010 if Obama does not act. And the US remains a major risk to any possible recovery in the UK.
Graham's book is a must read. I literally enjoyed every chapter, but my favorite one was "Learning from the Great Depression" where he looked at the policy mistakes that were made back then. His historical account of how quantitative easing was used to combat the depression was a real eye opener for me. He also went over the mistakes central bankers made by removing liquidity too quickly (this is what really worries me nowadays).
The book's final chapter, "Breaking from the Past" is also worth carefully reading because it offers hope but ends with a stark warning:
The challenges posed by many of these issues, from democratic accountability, worker representation, rebalancing of corporate power and climate change, cannot be ignored. But the danger remains that the radical changes needed to our policitcal economy will be derailed by the policy failings articulated in this book.If you only read one book this holiday season, make sure it's this one. I have an eerie feeling that Graham Turner's warning will fall on deaf ears, much to the detriment of the global economy.