The first truth to grasp about the crash is our overdependence on financial capital as a motor of growth in our economy. This generated significant volatility in the growth model that eventually failed and required an enormous transfer of money from poor to rich, from public to private sector. We were naive in our attitude to finance capitalism.
The second truth, which was obscured by the low-grade Blair-Brown feud over the role of the market in public sector reform, is that there was very weak private sector growth outside property and finance. The problem was not private sector partnership in state reform, but its lack of vitality in the actual economy. This in turn led to a debt-generated growth strategy, in terms of mortgages and loans. Public sector renewal was predicated on spending the tax returns generated by the speculative bubble that exploded so spectacularly in our faces.
There is no way back to nationalisation and state planning. There is no way forward, however, unless we reacquaint ourselves with the problems of finance capital, and develop a new private sector-led growth strategy that can address our economic failures in office.
A good place to start is the lack of availability of capital for small- and medium-sized business growth in the regions. The reasons for this are rooted in the abandonment of any distinction between the formal and the substantive economy, or between finance and ‘real’ business. This gets to the heart of the matter as regard the changes we need to make.
Capitalism is built around maximum return on investment. Financial investment always offers higher rates of return than real economies, which are slower, more embedded things, because the value added is nominal and unconnected to real improvements in productivity. The demand for ‘best value’ only made things worse as our pensions, assets and inheritance were sucked into the City of London where the returns were indeed best.
It turned out the offer was fantastical, that there is no endless high-returns economy that involves neither productivity improvements nor real work. The money managers were building castles in the air, which they were then selling on. Sand would have been an improvement.
The endowment of regional banks could change all this. In the wake of the collapse London Citizens suggested that these be endowed with one per cent of the bailout money – around a trillion pounds. These banks would be barred from lending outside their region thus making capital available locally to businesses and households. They would counter the City effect of sucking all surplus to speculation, and engage in the necessary task of generating real private sector growth in the areas that need it.
This should be tied to a renewal of vocational training and corporate governance reform that would promote real skills and the balance of interests. But, for the moment, if we are serious about private sector growth we need to be more serious about keeping finance capital within institutional constraints. Regional banks would be a good place to start.
Probably duped by “banking” charlatans like Goodwin and Hornby, our own banking novices Balls and Brown seemingly knee-jerked into rescuing the rogue banks lock-stock-and-barrel in order to (rightly) save jobs! Instead, they could have rescued (at a much cheaper cost to the tax-payers) only those parts of banking that directly help money function as the medium of exchange (ie not as a vehicle for speculation) and reorganised it — for quickest positive impact – into regional banks (as Maurice rightly says) for industrial and housing developments. That rather short-term (Keynesian) measure could have nonetheless have Osborne’s “fiscally neutral” (ie balanced) budget and still generate jobs (vide Haavelmo Theorem). For the long-run growth, however, we should plan towards not just a more innovative economy (because capitalism/socialism will stagnate sans innovation), but we should seize 21st Century’s green technology innovations by both hands!