Avoiding Scapegoats

by Stephen Beer

Talk for more than a couple of minutes with anyone who works in the City and you will sense a dark cloud of gloom descend upon the conversation. The scale of the financial crisis that has hit the world remains hard to describe.

You can get an idea of the seriousness of the situation by looking at the faces of City workers. They really do feel they have looked into the financial abyss. For a time this year, the entire financial system was under threat of implosion. Now, the wider economy is feeling the effects. While the terms of the political debate are being refashioned we need a Christian Socialist voice in the midst of the turmoil. We also need to be wise in the way we read the times in which we live.

Banks have been saved by governments because they would not even lend to each other. The UK government has injected capital by buying bank shares and it now owns most of Royal Bank of Scotland, in addition to Northern Rock. This was a bold first step and it was necessary. Banks have significantly cut back lending to both house-buyers and companies. Even perfectly solvent companies need bank finance to conduct their normal business operations. That is now not forthcoming in many cases. If companies want to borrow money, to invest in new products for example, they will have to pay interest rates in excess of 11% and indeed even if they want to pay up, banks are often just not lending. The expected economic slowdown has not helped because it has called business plans into question, making lending riskier.

The sub prime mortgage collapse sparked a wave of deleveraging. In the past, the possible return from some deals was geared up by borrowing. Now that gearing is working in reverse and investors are struggling to reduce their exposure. Hedge fund managers are frantically trading, surfing a tidal wave of deleveraging as they try to unwind positions.

The economics of Keynes are back. However, it is the analysis by Keynesian economist Hyman Minsky that is being read by those who want to understand what is happening. He showed that capitalism, while having many advantages (you might call it the ‘least worse system’) is inherently unstable. When things seem to be calm, people feel able to take more risks, and take on more debt. Low income households suddenly find they are being offered mortgages for example. The period of stability sows the seeds for the next period of instability. When the bubbles finally burst, the financial system is threatened. The system is saved by government acting as lender of last resort and if necessary recapitalising banks. In essence, household and business sector debt is transferred to the government balance sheet. When this process is complete, growth resumes in those sectors and over time the debt is eroded.

In the 1930s the US government actually attempted to balance its budget at first, so compounding the problem. This is not happening today. The government’s Pre Budget Report, presented at the end of November, showed that Labour is stepping up to the challenge. The PBR injects over £20bn into the economy through various measures such as a cut in VAT. The government is trying to mitigate the effects of the recession which has now begun, by encouraging consumer spending and through government spending encouraging business activity. He will have to do more in 2009.

There are various ways Christian Socialists can explain the crisis. CSM Chair Alun Michael has highlighted the parallels between the banks’ surly response to bail-outs and the parable of the Unmerciful Servant in Matthew chapter 18. From a wider perspective, we might agree that the dislocation people are experiencing is partly a loss of faith in the banking system and the way they thought the economy worked, on which so much depends. Houses have been built on sand.
Christian Socialists might also hesitate before assigning blame, even if the financial sector bears most responsibility. We should get no satisfaction from watching people lose their jobs and many City workers (including caterers, personal assistants, security personnel, shop workers) will have had little to do with the markets that caused the problems. We all share some responsibility, especially if we have taken on debt. Prophets such as Amos have warned us, the rich, against a focus on consumerism over the rights of the poor and oppressed.

We may indeed be living in a ‘progressive moment’ when, with banks being nationalised anything seems up for grabs. Yet we must prepare for hard choices about political priorities. The challenge for Christian Socialists now is to avoid dusting off policy ideas from the 1970s and before (we can all think of a few), and instead focus on solutions to today’s problems. We will need to build on our values. We may need to apply the Jubilee principles as debts are written off, for example, and promote cooperative solutions.

The main political challenge in recessions is unemployment. The Conservatives approach in the last two downturns saw unemployment as a necessary evil. A progressive, radical, and indeed Keynesian, alternative would be for the government to become an ‘employer of last resort’. This might be better than a gamble that throwing money at consumers and businesses will give them the confidence to start spending and employing again. It would also put into practice our belief that all should have the opportunity to fulfil their God-given potential. Such a scheme might benefit workers, businesses and the Third Sector.

Whatever solutions we propose, amidst the economic gloom Christian Socialists need to speak words of hope, that the future can be better.

Stephen Beer is chair of Vauxhall Constituency Labour Party. He is also an investment manager with the Central Finance Board of the Methodist Church. He blogs at www.stephenbeer.com. This article represents his personal opinion.

Stephen Beer, 05/02/2009