Ending the obsession with deficit reduction

Most politicians are economically illiterate, preferring homespun wisdom to intelligent macroeconomic analysis.

Thanks to Liberator Collective member Gareth Epps, who (via Mark Pack) spotted an article by Professor Simon Wren-Lewis on his blog mainly macro. Wren-Lewis explains why Nick Clegg’s economics motion at this September’s Liberal Democrat conference is wrong-headed. He summarises the motion as asserting that:

...the best thing that has happened to the UK economy recently has been that the deficit has come down. The message seems clear: reduction of the budget deficit is the number one priority and all else has to be subsumed to that.

Now you might in Clegg’s defense say that he has to put it this way, as he has been part of a government which has made deficit reduction the overriding priority. I think that is simply wrong. He could say instead that the focus on deficit reduction was appropriate given all the uncertainty as the Eurozone crisis broke. However now it is clear that this was a crisis specific to the Eurozone, and with interest rates on UK borrowing really low and likely to stay there, the UK can make reducing unemployment the priority, while still of course operating a prudent fiscal policy in the longer term. In other words, he could begin to de-prioritise deficit reduction. The fact that he chooses to do the complete opposite suggests he is content to see fiscal policy as an extension of household financial management. We will see in September whether the Party as a whole is happy to follow its leader in ignoring 80 years of macroeconomic analysis.

So the conference will be faced with a choice between Clegg’s Tory-lite folk wisdom or intelligent macroeconomic analysis. If ever there were a case for delivering a humiliating defeat to the leader, this is it.

The mess we’re in

The banking scandals of recent years have been so big and so complex that it is difficult for most people to grasp the extent of the problem. In the London Review of Books, John Lanchester surveys numerous major scandals, in ascending order of seriousness:

• Two traditional trading floor disasters – The huge losses caused by Kweku Adoboli, the UBS wunderkind who lost £1.4 billion in 2011, and Bruno Iksil, the ‘London Whale’ at JPMorgan Chase, who in 2012 lost an amount described by his boss Jamie Dimon as ‘a tempest in a teacup’, until it turned out to be $6.2 billion.
• The downfall of HBOS – The FSA said: “Whatever may explain the problems of other banks, the downfall of HBOS was not the result of cultural contamination by investment banking. This was a traditional bank failure pure and simple. It was a case of a bank pursuing traditional banking activities and pursuing them badly.” Lanchester adds: “In other words, the single biggest factor in the collapse of HBOS was simple incompetence.”
• The manipulation of Libor – Lanchester observes: “It seems bizarre that something so central to the global markets – $360 trillion of deals are pinned to Libor – should have such a strong element of invention or guesswork. The potential for abuse is immediately apparent.” And abuse is precisely what happened.
• Criminal acts – Sanctions-busting by Standard Chartered; sanctions-busting and also money-laundering for drugs cartels by HSBC.
• RBS’s back-end implosion – The bank introduced a software update into its payment system that caused it to stop working. It was impossible to make either payments into or withdrawals from the bank’s accounts.
• The payment protection insurance (PPI) scandal – Lanchester says this is the biggest scandal of them all – “an industry-wide, systematic cheating of the banks’ own customers”. The cost will be enormous; the latest estimates of the final cost to the banks vary between £16 billion and £25 billion.

Lanchester concludes that the PPI scandal is the worst, not just because of its size but also because it has destroyed banking’s most important asset:

Trust is the banks’ most important intangible asset: if it were lacking, none of us would ever use them for anything, ever. In a sense, trust is what banks do...

PPI was about banks breaking trust by exploiting their customers, not accidentally, but as a matter of deliberate and sustained policy. They sold policies which they knew did not serve the ends they were supposed to serve and in doing so treated their customers purely as an extractive resource. That is why, uncharismatic as it sounds and dreary in many of its specifics as it is, PPI is the worst scandal in the history of British banking: the one that shows just how badly wrong the industry had gone, and just how fundamentally it violated what should have been its basic values. No wonder that there’s been what the Parliamentary Commission on Banking Standards, in the very first sentence of its 571-page report, calls ‘a profound loss of trust born of profound lapses in banking standards’. PPI is the final proof that our banks became rotten.

Even PPI, though, is not the most serious issue. There is a problem so large that Lanchester leaves it out of his account:

Just to keep things simple, I’m going to leave out the biggest of them all, the grotesque toxic-asset and derivative spree which took the global financial system to the edge of the abyss. That was the precursor and proximate cause of the difficulties which are affecting the entire Western world at the moment, but the causal mechanisms connecting the initial crisis and our current predicament are a separate subject. The crisis and its consequences are too big to count as a scandal: they’re more like a climate.

Amongst other things, the “grotesque toxic-asset and derivative spree” dwarfs any sin committed by the last Labour government. That government shares some of the blame for the financial crisis and subsequent recession, but to reduce our present economic problems to “the mess left by Labour” is facile. Anyone who thinks that slogan is a satisfactory analysis is an idiot.

What political genius thought of this?

Yes, let’s pick at some old scabs, shall we?

The New Statesman reports that Danny Alexander has confirmed the student loan book will be privatised. The report explains why this makes no economic sense.

What the New Statesman doesn’t say is that reopening the issue of student loans makes no political sense either. That issue has become a byword for mistrust of the Liberal Democrats. So why revive the controversy?

Oh yes, I forgot. Everybody who used to vote Liberal Democrat is a ‘protest voter’ who can be safely jettisoned in favour of hard-working-centre-ground-alarm-clock-Britain. I hope these imaginary voters will be impressed.

Why America’s economy is recovering and Europe’s isn’t

The reason Europe’s economy isn’t recovering is a dogged insistence on austerity. That is the conclusion of John Cassidy, writing in the New Yorker:

The big mystery isn’t why austerity has failed to work as advertised: anybody familiar with the concept of “aggregate demand” could explain that one. It is why an area with a population of more than three hundred million has stuck with a policy prescription that was discredited in the nineteen-twenties and thirties. The stock answer, which is that austerity is necessary to preserve the euro, doesn’t hold up. At this stage, austerity is the biggest threat to the euro. If the recession lasts for very much longer, political unrest is sure to mount, and the currency zone could well break up.

So why is this woebegone approach proving so sticky? Some of the answers can be found in a timely and suitably irreverent new book by Mark Blyth, a professor of political economy at Brown: “Austerity: The History of a Dangerous Idea.” Adopting a tone that is by turns bemused and outraged, Blyth traces the intellectual and political roots of austerity back to the Enlightenment, and the works of John Locke, David Hume, and Adam Smith. But he also provides a sharp analysis of Europe’s current predicament, explaining how an unholy alliance of financiers, central bankers, and German politicians foisted a draconian and unworkable policy on an unsuspecting populace.

The central fact about Europe’s “debt crisis” is that it largely originated in the private sector rather than the public sector. In 2007, Blyth reminds us, the ratio of net public debt to G.D.P. was just twelve per cent in Ireland and twenty-six per cent in Spain. In some places, such as Greece and Italy, the ratios were considerably higher. Over all, though, the euro zone was modestly indebted. Then came the financial crisis and the fateful decision to rescue many of the continent’s creaking banks, which had lent heavily into property bubbles and other speculative schemes. In Ireland, Spain, and other countries, bad bank debts were shifted onto the public sector’s balance sheet, which suddenly looked a lot less robust. But rather than recognizing the looming sovereign-debt crisis for what it was—an artifact of the speculative boom and bust in the financial sector—policymakers and commentators put the blame on public-sector profligacy.

“The result of all this opportunistic rebranding was the greatest bait-and-switch operation in modern history,” Blyth writes. “What were essentially private-sector debt problems were rechristened as ‘the Debt’ generated by ‘out-of-control’ public spending.”

In other words, austerians are playing a game of ‘blame the victims’ and the consequences for real people’s lives are disastrous.

How the case for austerity has crumbled

Make a pot of tea because you are about to read a long essay. It is a very good essay by Paul Krugman, explaining why the orthodoxy of austerity, adopted throughout Europe and North America in 2010, is profoundly wrong:

Three years after the turn to austerity, then, both the hopes and the fears of the austerians appear to have been misplaced. Austerity did not lead to a surge in confidence; deficits did not lead to crisis. But wasn’t the austerity movement grounded in serious economic research? Actually, it turned out that it wasn’t—the research the austerians cited was deeply flawed.

Krugman also takes apart the motivation of austerians and finds emotions rather than rationality; a flawed impulse to treat macroeconomics as if it were a morality play instead of a technical malfunction.

It is not as if we did not have the knowledge to prevent such misjudgements. But as Krugman concludes:

To the extent that policymakers and elite opinion in general have made use of economic analysis at all, they have, as the saying goes, done so the way a drunkard uses a lamppost: for support, not illumination.

Private good, public bad?

For more than thirty years, we have been taught to believe that the private sector is automatically superior to the public sector. Another mythbuster by nef (the new economics foundation) demonstrates the falsehood of this dogma.

For Liberals, the point is the distribution of power and the human element. The private and public sectors can both be well or badly run. They are equally capable of remoteness, alienation, bad service, waste and incompetence.

As Britain’s experience with the railways demonstrates, privatisation is no guarantee that things will improve. Furthermore, when politicians repeatedly tell public sector workers such as teachers or nurses that they are rubbish, it hardly works wonders for the quality of public service.

Few push the dogma of nationalisation anymore. No one should push the dogma of privatisation either. The guiding principle should be to put people first, which is why social liberals prefer voluntary, mutual, cooperative and social enterprise models to private or state monoliths. As David Boyle points out on his blog today, we should be exploring ways to enable local communities to develop and run their local economies and local services, instead of pushing them into dependence on large organisations.

Transferring bus services from the National Bus Company to Stagecoach, or care homes from the council to a big private operator, fails to address that need. So there is no reason to believe that a private monopoly is somehow morally superior to a public one.

George Osborne believes in fairies

The coalition government’s harsh austerity policy isn’t working, for the reasons the Liberal Democrats predicted in their 2010 manifesto. Even the IMF has advised the government to rethink its strategy and spend more. So why is the government refusing to change course?

As Paul Krugman explains, it is because George Osborne still believes in the confidence fairy. And the arguments for the existence of this fairy are utterly implausible.

What is the reason for Osborne’s stubborn persistence with this nonsense? Superstition, muddle or callousness? You decide.

Yet another myth busted: “A competitive tax system is a better tax system”

You’ve heard the arguments: Having a ‘competitive’ tax system is a good thing for the UK. Trying to tax the wealthy and corporations just stifles economic performance and puts off investors. If business and wealthy people are taxed too much, they will desert Britain for countries with a more ‘competitive’ tax system.

Does this belief in a ‘competitive’ tax system have any evidential basis?

nef (the new economics foundation) has produced another of its useful mythbusters. The evidence shows what happens when you pursue a competitive’ tax policy:

• Only big, multinational companies can afford to shift operations to take advantage of different tax regimes, so that when governments lower business taxes, local businesses face unfair competition.

• A race to the bottom means that, as countries respond to one another’s policies, everyone ends up where they started, except more impoverished and with greater inequalities of wealth.

• There is no evidence that differences in the tax take have any impact on GDP growth.

• Genuine investors are not deterred by tax regimes. They are attracted by a good infrastructure, a healthy and educated workforce, and the rule of law – all of which rely on tax.

 Oh dear. Another of those tired old right-wing tropes bites the dust.

Britain isn’t ‘broke’

“Britain has maxed out its credit card. The level of debt is too high, and the cost of servicing that debt risks bankrupting the UK. We’re in real danger of heading the same way as Greece.”

Really?

The ‘maxed-out credit card’ metaphor is actually complete bollocks, and nef (the new economics foundation) has just published a handy mythbuster to expose this metaphor as both false and damaging.

Next up: the minimum wage

Unlike our report on electoral reform yesterday, this is no joke. The government’s Department of Business, Innovation and Skills (which I seem to recall has two Liberal Democrat ministers in it) is worried the minimum wage may be too high.

Well, let’s have a look at the minimum wage. The rate for people aged 21 or over is currently £6.19 per hour. Does that sound too high to you? How would you know? You are probably middle class and think in terms of an annual salary, so let’s convert it into terms you will understand. Assuming a 40-hour week and paid holidays, £6.19 X 40 X 52 = £12,875. For people aged 18 to 20, the minimum wage is £4.98 per hour. £4.98 X 40 X 52 = £10,358. But these annual amounts are a best-case scenario since, for many low-paid people, work is often casual and holidays not always paid.

There is an argument that the minimum wage harms the economy and here is Jo Swinson (who ought to know better) making it:

Employment minister Jo Swinson said in February: “The level of employment is now above its pre-recession peak, but the employment rate is below the pre-recession peak.

“This means that we believe that caution is required – particularly as the minimum wage rate is now at its highest ever level relative to average earnings for adults, and remains high for young people.”

She is motivated by a fear that the minimum wage acts as a disincentive to job creation, but that is only the case if your job creation strategy is a race to the bottom on wages. Taken to its logical extreme, the government could eliminate unemployment tomorrow if it eliminated pay altogether.

Meanwhile, depressing pay levels can only harm the economy. First, low-paid people must spend what they have – they don’t have a surplus to save – so their income goes straight into the local economy to buy goods and services, which helps the economy. Second, the lower pay levels are, the more the government has to subsidise stingy employers in the form of Income Support. Leaving aside the arguments about unemployment benefits, surely anyone in full-time work should be paid enough to live on?

But then these arguments will cut little ice with those for whom austerity is more of a religion than a rational policy.

Postscript: The Living Wage Foundation has calculated the living wage for both London and the rest of the UK. For London, it is £8.55 per hour and for the rest of the UK £7.45. Converted to annual salary equivalents, that is (£8.55 X 40 X 52 =) £17,784 and (£7.45 X 40 X 52 =) £15,496 respectively, in both cases more than the statutory minimum wage. So, Jo Swinson, still worried that the minimum wage is “high”?

Budget: Gareth Epps in the Independent

On the Independent’s Independent Voices blog, Liberator’s Gareth Epps, assessing this week’s budget, says that George Osborne has got the little things right but the big things wrong.

From Iraq to the deficit

Q: What do the Iraq war in 2003 and economic policy in 2013 have in common?

A: An illusion of consensus.

As Paul Krugman observes in the New York Times:

The really striking thing, during the run-up to the war, was the illusion of consensus. To this day, pundits who got it wrong excuse themselves on the grounds that “everyone” thought that there was a solid case for war. Of course, they acknowledge, there were war opponents — but they were out of the mainstream.

The trouble with this argument is that it was and is circular: support for the war became part of the definition of what it meant to hold a mainstream opinion. Anyone who dissented, no matter how qualified, was ipso facto labeled as unworthy of consideration. This was true in political circles; it was equally true of much of the press, which effectively took sides and joined the war party.

A similar process is happening today with the policy of fiscal austerity:

...now as then we have the illusion of consensus, an illusion based on a process in which anyone questioning the preferred narrative is immediately marginalized, no matter how strong his or her credentials. And now as then the press often seems to have taken sides. It has been especially striking how often questionable assertions are reported as fact. How many times, for example, have you seen news articles simply asserting that the United States has a “debt crisis,” even though many economists would argue that it faces no such thing?

Krugman concludes:

What we should have learned from the Iraq debacle was that you should always be skeptical and that you should never rely on supposed authority. If you hear that “everyone” supports a policy, whether it’s a war of choice or fiscal austerity, you should ask whether “everyone” has been defined to exclude anyone expressing a different opinion. And policy arguments should be evaluated on the merits, not by who expresses them; remember when Colin Powell assured us about those Iraqi W.M.D.’s?

Whatever the political issue, war or economics, never trust people who begin with “everybody thinks that...” or end with “there is no alternative”.

Cameron was talking bollocks – official

Remember David Cameron’s big speech yesterday on the economy? It turns out he was being economical with the truth.

The Office for Budget Responsibility (OBR) has contradicted Cameron’s claim that spending cuts and tax rises were not responsible for the weak economy. Cameron quoted the OBR in his speech, in which he rejected calls for increased borrowing:

[Cameron] said the OBR had made it clear that growth had been depressed by the legacy of the 2008 financial crisis, instability in the eurozone and a sharp rise in oil prices between 2010 and 2011.

The watchdog, he added, was “absolutely clear that the deficit reduction plan is not responsible, in fact, quite the opposite”.

But the OBR’s chairman, Robert Chote, has written to the prime minister to take issue with his comments.

“For the avoidance of doubt, I think it is important to point out that every forecast published by the OBR since the June 2010 Budget has incorporated the widely held assumption that tax increases and spending cuts reduce economic growth in the short term,” he wrote. “To summarise, we believe that fiscal consolidation measures have reduced economic growth over the past couple of years.”

A triple-dip recession (the British economy contracted in the final three months of 2012), then last month the UK lost of its triple-A credit rating, and now Cameron delivers a triple load of bollocks. How much worse do things have to get before Cameron and Clegg admit that ‘Plan A’ isn’t working?

Gareth Epps on Left Foot Forward

Liberator’s Gareth Epps has just published a post on Left Foot Forward, which praises Vince Cable’s New Statesman article (discussed on this blog yesterday).

Gareth mentions that the Social Liberal Forum is proposing an emergency motion (‘Kickstarting economic growth’) at this weekend’s Liberal Democrat spring conference in Brighton, and we would urge representatives to support it.

That Vince Cable article in full

Vince Cable has been in the news this morning for an article he has written in the New Statesman.

The article is important because it advocates the financing of more capital investment by borrowing, although it does so in measured tones, weighing up a “balance of risks”. It is also a lengthy and somewhat technical article on economic policy, making it too difficult for anyone with a short attention span. For this reason, it has been subject to dramatic interpretations by the media.

BBC News is an honourable exception (see also Stephanie Flanders’s blog). But the Guardian described the article as, first, “Vince Cable makes direct challenge to Cameron” then later as “Vince Cable contradicts Osborne”, while the Independent’s headline declares “David Cameron and Vince Cable at war over route to recovery”. The Spectator’s Coffee House blog attempts to up the ante with “Vince Cable’s borrowing bombshell”, compared with which the Daily Mirror’s “Vince Cable breaks Coalition ranks” seems restrained.

Is any of this hyperbole justified? One interpretation of events says that it isn’t. The budget is less than two weeks away and it seems doubtful that any cabinet minister – even Vince Cable – would be allowed to rock the boat at this stage. There will have been robust arguments within the government but these have probably been resolved by now. So what is going on?

Has Cable won the argument (as Bill le Breton suggests on Liberal Democrat Voice today)? Is the New Statesman article a curtain-raiser for a budget that will signal a change in direction? Of course, the government will want to save face and deny any failure, so any change in policy would be presented as a seamless continuation of a long-term plan. But are we about to see ‘Plan A+’?

Or is Cable out on a limb? Does David Cameron’s speech today represent a genuine determination to stick with Plan A? Cameron’s warning that changing course would “plunge us back into the abyss” suggests that it does. And what of Nick Clegg’s statement on his weekly LBC phone-in programme this morning? It was hardly a ringing endorsement of Cable’s position, although Clegg revealed that he, Cameron and George Osborne had all seen the New Statesman article before it was published.

If one had to say which is more likely, Cable’s muted optimism or Cameron’s resort to ‘TINA’ (There Is No Alternative), echoed by Clegg, the government will almost certainly opt for the latter.

Later...

I’ve been reflecting on the politics of the situation. Why did the ‘Quad’ (Cameron, Osborne, Clegg, Alexander) allow Cable to publish his article, even though it disagrees? After all, if the Quad or the Treasury had wanted to enforce cabinet discipline, they could easily have blocked publication.

This is all about positioning before the budget on 20th March. The Quad clearly plans to stick to ‘Plan A’ (even though it isn’t working) and, in the absence of effective opposition from Labour, needs Cable as a ‘defining other’. Cameron and Clegg could not have made their unrepentant statements today without being able to contrast with a prominent critic. And if Cable hadn’t said what he had said, who else could they have knocked down?

Bankers’ bonuses: Liberals 1 Tories 0

The EU proposal to cap bankers’ bonuses has received predictable opposition from David Cameron and Boris Johnson.

The willingness of the Tories to continue to defend the selfish interests of the bankers who caused the global financial crisis seems to know no bounds.

So it is good to hear Sharon Bowles, Liberal Democrat MEP and chair of the European Parliament’s most powerful committee, the Economic and Monetary Affairs Committee, strike the right note:

“Overall, this is a major achievement for [the European] Parliament, in curbing the culture of quick profit and irresponsible lending that has played such a pernicious role in fuelling Europe's banking crisis.”

Meanwhile, if the Tories are right, and a few irresponsible and overpaid arseholes flee to Singapore or Zurich, good riddance.

Austerity = drop in GDP = rubbish policy

The policy of fiscal austerity has failed throughout Europe. Which radical, left-wing publication has reached this conclusion? The Financial Times (£) [to get round the FT’s paywall, go to Google News and enter the phrase “The sad record of fiscal austerity” in the search box].

The FT’s Martin Wolf is scathing about the European Central Bank’s policies before turning on the UK government:

...the panic that justified the UK coalition government’s turn to a long-term programme of austerity was a mistake. Had its members never heard of the paradox of thrift? If the domestic private and external sectors are retrenching, the public sector cannot expect to succeed in doing so, however hard it tries, unless it is willing to drive the economy into a far bigger slump. While short-term factors have played a real part, it is not surprising that the UK’s recovery has stalled and the deficit is so persistent. It is consequently also not surprising that downgrades are on the way, not that these tell one anything very useful in the case of an issuer with access to its own money-printing machine.

Wolf concludes:

In the long run, the fiscal deficit must close. In the short run, the UK has the chance to push growth. It should take it. So should the US.

The Land! The Land!

This will come as no news to older Liberals, but the main factor hobbling Britain’s economic prosperity is land. That is the argument of Simon Tilford, chief economist at the Centre for European Reform think tank:

The UK’s essentially rigged market for land and its restrictive planning system are as big an obstacle to economic growth as restrictive labour markets and protected professions are in Southern Europe.

The number of new homes built each year in Britain has lagged far behind demand from a growing population for 30 years. Despite faster population growth, house construction is currently running at half the level of the 1960s. At the same time the average size of homes built in Britain is now the smallest in the EU. The result of these two trends has been a steady fall in the amount of living space per head. Property prices relative to average household incomes have come down a bit since 2007, but remain very high. Moreover, the problem is not just restricted to the residential sector: Britain has the highest office rents in the EU. Firms in cities such as Manchester pay more than in Frankfurt or Milan. And transport infrastructure is very expensive to build in Britain, which is one reason why there is too little of it.

Most of us might baulk at one of Tilford’s proposed remedies, which is to build on the green belt. Also, he fails to acknowledge the profligate use of land in British cities (where people prefer to live in a detached or semi-detached house with a garden rather than a flat or town house as in continental cities).

Nevertheless, his basic analysis is sound and the proposed move to a land tax is the single best policy that could be adopted.

Just when you thought bankers couldn’t get any worse...

Never mind the banks that are “too big to fail”; what about the bankers who are “too big to jail”?

Rolling Stone reports that British-based bank HSBC has just been prosecuted in the USA for the largest drug-and-terrorism money-laundering case ever. But none of the bankers responsible were jailed. Instead, the bank was fined $1.9 billion, equivalent to about five weeks’ profit:

For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico’s Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that “they make the guys on Wall Street look good.” The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.

So why no jail sentences?

That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist slap for HSBC might undermine the world economy. “Had the U.S. authorities decided to press criminal charges,” said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, “HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized.”

Is Lanny Breuer’s dismal assessment correct?

Breuer is saying the banks have us by the balls, that the social cost of putting their executives in jail might end up being larger than the cost of letting them get away with, well, anything.

This is bullshit, and exactly the opposite of the truth, but it’s what our current government believes. From JonBenet to O.J. to Robert Blake, Americans have long understood that the rich get good lawyers and get off, while the poor suck eggs and do time. But this is something different. This is the government admitting to being afraid to prosecute the very powerful – something it never did even in the heydays of Al Capone or Pablo Escobar, something it didn’t do even with Richard Nixon. And when you admit that some people are too important to prosecute, it’s just a few short steps to the obvious corollary – that everybody else is unimportant enough to jail.

If further proof were needed that the present financial system is beyond minor repair, this is it. Politicians who continue to argue timidly for regulatory tinkering as a remedy for the banking crisis either have no clue or no balls.

Who rates the credit rating agencies?

One of the main justifications offered by the coalition government for sticking to its austerity policies is a fear that the UK would otherwise lose its ‘triple A’ rating from the credit rating agencies.

But why should we trust the judgement of the credit rating agencies? Ever since they gave the thumbs up to subprime mortgages and helped trigger the banking crisis of 2007/8, more and more of their misjudgements have come to light.

The USA is currently being entertained by the Justice Department’s five-billion-dollar lawsuit against one of these agencies, Standard & Poor’s, which is accused of defrauding investors by issuing ratings on subprime mortgage securities that it knew to be misleading.

There is no doubt that the credit rating agencies bear a lot of responsibility for the current crisis, since they certified that very risky financial products were safe investments. The question is whether this was stupidity or fraud.

Either way, clowns or crooks, there is no longer any good reason why these agencies should remain the final arbiters of economic policy.