Did Labour cause the financial crisis?

The "yes they did, no they didn't" argument rages in letters to our local media and no doubt its being repeated all over the country, so maybe its' worth examination as they may have lost many votes on account of this.

The roots of the crisis can be traced back to 1971 when the US Federal Reserve abandond the gold standard. Most of us including me didn't really know how it worked at the time, but what it did was to abandon any finite anchor for the creation of new money.

In the core argument for the position paper on people-centered economics this can be considered the starting point. It pointed out:

1. The US economy transitioned from hard-asset based (gold, silver) in 1971 to Fed paper notes written solely against the 'good faith and credit' of US citizens.  

2. Gold (or silver) is tangible, observable, finite: whatever is on hand, is on hand.  That provides a firm, tangible, finite, objective economic anchor.  There is no way to create more of it at will.  One ton of gold is one ton of gold.  Its quantity and value are represented in numbers.  Since that time, the US national debt went from near zero to nine trillion dollars in 2008 (~5 trillion in 1996 when these points were first compiled.)  That debt is backed by nothing more than paper based on numbers which may or may not even exist.

See Manifesto for People Centered Economics

The Chairman of the Federal Reserve at the time was horrified, insisting on a return to the gold standard

The age of neoliberalism and trickle-down economics was to follow. New financial instruments evolved including what are known as "Over the Counter" derivatives for which there were apparently no regulation

The PBS Frontline series relates how in the late 1990s, one woman took a stand 

"We didn't truly know the dangers of the market, because it was a dark market," says Brooksley Born, the head of an obscure federal regulatory agency -- the Commodity Futures Trading Commission [CFTC] -- who not only warned of the potential for economic meltdown in the late 1990s, but also tried to convince the country's key economic powerbrokers to take actions that could have helped avert the crisis. "They were totally opposed to it," Born says. "That puzzled me. What was it that was in this market that had to be hidden?"

"I walk into Brooksley's office one day; the blood has drained from her face," says Michael Greenberger, a former top official at the CFTC who worked closely with Born. "She's hanging up the telephone; she says to me: 'That was [former Assistant Treasury Secretary] Larry Summers. He says, "You're going to cause the worst financial crisis since the end of World War II."... [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.'"

Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives.

The PBS vidieo describes the influence on Alan Greenspan of philospher Ayn Rand 

One of the consequences of this market liberalisation was the boom in what are known as sub- prime mortagages. The abundance of debt meant that it became available to high risk borrowers with poor credit history 

The creation of money as debt is not unique to the US:

IMPACT IN THE UK

As those who held mortgages with building societies will know there was a shift toward demutalisation of building societies in the 1990. We were told that this was to remain competitive and gain access to new money markets.  It was in 1997 under a Labour government that Northern Rock made this move.  They invested in the same vehicles Brooksley Born had warned about|.

As reported by Any Mellineux in Cooperative News

"Northern Rock and others were using off balance sheet special purpose vehicles (‘special investment vehicles’, or ‘SIVs’ and ‘conduits’) to facilitate securitisation and the construction of derivative financial instruments, such as ‘collateralised debt obligations’. These ‘sliced and diced’ the MBSs to form products of varying credit standing, from top ranking ‘Triple A’ assets to ‘toxic waste’, the most risky assets which earned the highest returns."

These were the instruments which had allowed the subprime market to boom and when a sharp rise in default began to take place in 2006, it would trigger a market collapse.

In the 2002 financial report for Berkshire Hathaway, Warren Buffet wrote:

"I view derivatives as time bombs, both for the parties that deal in them and the economic system"

In March 2009 P-CEDs founder delivered a presentation to an international conference on Economics for Ecology. The US government had responded to the crisis using Quantititive Easing to inject another 3 trillion dollars into the banking system: he concluded: 

 "At this point, the simple fact is that regarding economic theory, no one knows what to do next.  Possibly this has escaped immediate attention in Ukraine, but, economists in the US as of the end of 2008 openly confessed that they do not know what to do.  So, we invented three trillion dollars, lent it to ourselves, and are trying to salvage a broken system so far by reestablishing the broken system with imaginary money.

Now there are, honestly, no answers.  It is all just guesswork, and not more than that.  What is not guesswork is that the broken – again – capitalist system, be it traditional economics theories in the West or hybrid communism/capitalism in China, is sitting in a world where the existence of human beings is at grave risk, and it's no longer alarmist to say so.

The question at hand is what to do next, and how to do it.  We all get to invent whatever new economics system that comes next, because we must."

Almost as he spoke, the UK followed suit raising $375 billion through QE to recapitalise the banks.

COULD WE HAVE DONE THINGS DIFFERENTLY?

Almost certainly. In 2004, we'd warned of the risk of another time bomb as a consequence of wealth accumulating in the hands of a shrinking minority. Essentially the same warning delivered to Bill Clinton 8 years earlier.

"While the vast majority of people in poverty suffer quietly and with little protest, it is not safe to assume that everyone will react the same way. When in defence of family and friends, it is completely predictable that it should be only a matter of time until uprisings become sufficient to imperil an entire nation or region of the world. People with nothing have nothing to lose. Poverty was therefore deemed not only a moral catastrophe but also a time bomb waiting to explode."

Capitalism wasn't delivering:

"Dealing with poverty is nothing new. The question became ‘how does poverty still exist in a world with sufficient resources for a decent quality of life for everyone?’ The answer was that we have yet to develop any economic system capable redistributing finite resources in a way that everyone has at minimum enough for a decent life: food, decent housing, transportation, clothing, health care, and education. The problem has not been lack of resources, but adequate distribution of resources. Capitalism is the most powerful economic engine ever devised, yet it came up short with its classical, inherent profit-motive as being presumed to be the driving force. Under that presumption, all is good in the name of profit became the prevailing winds of international economies — thereby giving carte blanche to the notion that greed is good because it is what has driven capitalism. The 1996 paper merely took exception with the assumption that personal profit, greed, and the desire to amass as much money and property on a personal level as possible are inherent and therefore necessary aspects of any capitalist endeavour. While it is in fact very normal for that to be the case, it simply does not follow that it must be the case."

As demonstrated from our work in Russia developing local economies from the bottom up had delivered a successful strategy after attempts to implenent a trickle-down economy collapsed, resulting their 1998 financial crisis in whch the ruble devalued 1000 fold.    

What we put forward for the UK was a plan to replicate this approach an a national level through a network of Community Benefit Societies and a living wage policy.

By the end of 2004 however, we'd returned to Ukraine where one of the first uprisings began as the Orange Revolution.

Ironically we'd find the Labour party leadership in Ukraine several years later when Lord Mandelson and Tony Blair began cultivating relationships with Ukraine's oligarchs.  Mandelson had been the instigator of the ill fated EU association agreement that finally triggered the war in Ukraine.    

In 2007 a cross sector collaboration proposal had been delivered to Ukraine's government with a very different strategy for Ukraine's development  Mandleson as EU trade minister and UK business secretary was in the position to help. He didn't and we now know why. 

'This is a long-term permanently sustainable program, the basis for “people-centered” economic development. Core focus is always on people and their needs, with neediest people having first priority – as contrasted with the eternal chase for financial profit and numbers where people, social benefit, and human well-being are often and routinely overlooked or ignored altogether. This is in keeping with the fundamental objectives of Marshall Plan: policy aimed at hunger, poverty, desperation and chaos. This is a bottom-up approach, starting with Ukraine’s poorest and most desperate citizens, rather than a “top-down” approach that might not ever benefit them. They cannot wait, particularly children. Impedance by anyone or any group of people constitutes precisely what the original Marshall Plan was dedicated to opposing. Those who suffer most, and those in greatest need, must be helped first — not secondarily, along the way or by the way.'

it's not suprising to find Lord Mandelson in the middle of a new 'Marshall Plan'  intiiative which was founder in Ausria where oligarch Dmitri Firtash had been held pending extradition on allegations of bribery.     

Labour may not have been the root cause of the financial crisis, but the focus of the cabinet on the interests of the obscenely wealthy on an international basis , illustrates that they cannot perceive the need to put people before profit.

A WAY FORWARD?

Another criticism of Labour has been that in abandoning its left wing orgins marginalised traditional supporters who found more in common with the Green Party. Notably it was the Greens who included a policy on living wages in their people first manifesto.. To vote for Labour might well have relieved us of a Tory government but would also have been seen as a vote of confidence in their policies.  

In Europe the cooperative movement has enbraced the inclusion of people-centred business in supply chains.      

In the US, where the impact on the poor had been much greater, the rise of localised economic solutions is the focus of Gar Alperovitz call for the "Next System". He asks - What then Must We Do ?   

The question had been asked more than a century ago by Leo Tolstoy contemplating poverty in Moscow at the time of a census

Rather than a return to the Gold Standard, we'd argued for an economy that could be measured and calibrated in terms of human beings, seeing it delivered by means of local action:

"It need not be a risk to cultural heritage and integrity to benefit economically; the means by which such benefit will occur, how local citizens can have food, shelter, health care, and a basic sustaining human standard of existence can be determined at the local village level and then communicated at the regional, national, and global level simultaneously at virtually no cost via the Internet and a web site. It is this basic level of human sustenance, coupled with self-sustaining enterprise to provide this basic level of support, that I refer to as sustainable development -- which is just another way of saying "people-centered" economic development."