Michael Meacher - Labour's Future

One of Labour's major achievements has been to remove nearly a million children from poverty. What a tragedy if goodwill from this highly significant gain were lost through the 10p tax debacle. The problem for Labour, facing an imminent rebellion, is how to turn this round, in a manner that not only restores respect, but solves the big problem of how to recoup lost potential revenue. It can be done.

The cost of restoring the 10p tax rate would be £6.6bn. To concentrate the gain on those in need, and particularly the 5.3 million losers, one obvious mechanism would be to limit the res toration to poorer taxpayers and those who pay the standard rate. Since about 12 per cent of taxpayers pay at the higher rate, this would recoup some £2.4bn. The problem then is to raise the further £4.2bn. There are ways to do it that would make the tax system a lot fairer.

It is little known that although UK-based individuals hold some £284bn in shares or UK-based unit and investment trusts, the total declared disposal value of quoted shares in 2004-2005, the last year for which data is available, was only £5.8bn - just 2 per cent of their shareholdings. That 2 per cent figure implies that on average their portfolios are changed once in every 50 years. However, it is known that the average market holding at the time was in fact only 14 months. So we should end what is clearly substantial undeclared share trading taking place on the London Stock Exchange. Even if individuals traded their portfolio only half as frequently as 14 months, it would still, if collected, raise the revenue take by some £4bn a year. And collection could be secured by requiring automatic declaration by the stockbroker of all such deals.

Another remarkable fact is that nearly half (45 per cent) of all commercial property in the UK is now owned by foreign nationals. Yet they are unlikely to pay UK tax on their UK property sales, in contrast to the practice in many other countries. In addition to the revenue loss, this distorts the market. Closing this gap by charging capital gains tax (CGT) on the sales of foreign holdings could well form the second strand of the strategy. Property disposal in 2004-2005 accounted for nearly a third of all reported capital gains and amounted to £5.3bn. That suggests that gains for foreign property owners totalled some £2.4bn, and with an 18 per cent CGT applied, it would yield about £430m.

It may also not be realised that a fifth of all financial assets sold and subject to CGT have been owned for less than a year. But gains are meant to arise on investments, which by definition should be long-term holdings. Those arising on short-term trades are likely not to have come from investments at all, and it is clearly right that the profit in that case should be subject to income tax. More than £1bn of chargeable gain was declared on these disposals, representing a profit rate of only 13 per cent. This is far lower than the rate for disposals as a whole, where the average is 52 per cent. Closing this anomaly would yield at least a further £500m a year.

These actions alone would be enough to recover the revenue loss resulting from restoring the 10p tax rate. But there are other options.

For example, recent research for the TUC by Richard Murphy, one of Britain's foremost tax experts, found that the 50 largest UK companies almost always pay 5 per cent less tax on average than they declare in their accounts. As such, the actual corporation tax rate paid by these firms in 2006 was 22.5 per cent, when the rate set by parliament was 30 per cent. By the end of 2006, the cumulative tax savings recorded in the accounts of these companies amounted to a staggering £47bn - which seems indefensible when people on £200 a week are required to pay more tax.

Or how about getting tougher on tax avoidance? A recent crackdown has already led to more than 60,000 people admitting substantial undeclared income in offshore bank accounts, with a prospect of a £500m tax recovery.

All this of course raises the spectre of redistribution from rich to poor, a politically taboo subject. But there has never been a time when this was more justified, and it would signify a Labour government that really meant business.

----Originally published in The New Statesman, 24 April 2008

Posted by Michael Meacher at 08:14 PM | Permalink | Comments (0) | TrackBacks (0)

With French and German companies lining up to build new nuclear power stations in Britain, the die now seems cast for nuclear. Or is it?

The Government’s goal is certainly ambitious. Ten countries – primarily the UK, USA, France and Canada, but also including Japan, Korea, Brazil, Argentina, South Africa and Switzerland – have set up a body called the Generation IV International Forum to develop a successor nuclear energy system to the previous Generations I (Magnox) and II (AGRs and the Sizewell B Light Water Reactor) and to follow the Generation III systems now being built. The latter includes the French Areva Evolutionary Pressure Reactor (EPR), the prototype of which is currently being constructed at Olkiluoto in Finland, with another being built in France. It is intended that these Generation III models plus (hopefully) improved versions in future will lead reactor orders through to 2030, after which it is hoped that Generation IV will kick in, the goal of which is nuclear sustainability.

However, the roadmap to get there is beset by profound practical problems which may well prove insurmountable. Generation II and III nuclear power plants operate in a ‘once-through’ mode, which means that only half of the 0.7% fissionable uranium U-235 content of natural uranium goes into the fuel while most of the heavy metal ends up in enrichment tails and in spent fuel as waste. This therefore requires a constant and increasing supply of natural uranium to meet the rising demand for electricity, while at the same time it intensifies the already unresolved problem of what to do with vast accumulations of radioactive waste.

Even the optimistic IAEA-OECD Red Book of world uranium reserves puts the total at 4.7 million tonnes, and that assumes a purchase price of at least $130/kg. In fact prices are currently nearly twice as high, yet primary uranium production is falling. But even if the Red Book figures were roughly correct and not significantly inflated, their total of known uranium resources is expected to be exhausted by 2030.

If fast reactors were to be introduced by then – which is the centrepiece of the strategy – a further 10 million tonnes, twice the known resources, would have to be ready for production, and this could only come from ‘speculative and undiscovered resources’. The nuclear power industry answers this by reference to the universality of uranium in the Earth’s crust and in seawater; but the enormous energy needed to extract it from these low concentration sources would actually exceed the energy output of the fission of the fuel thus provided, so in terms of net energy availability it is irrelevant.

These pressures are already being felt. The US gets half its nuclear fuel from diluted former nuclear weapons’ highly enriched uranium from Russia, and even Russia itself with its insufficient primary production will be forced to rely on ex-weapons material to power its planned expansion. The UK’s aim of security of energy supply will not be aided by 100% import of nuclear fuels on top of increased dependence on imported fossil fuels, notably gas. Japan has closed 7 nuclear power stations built on an earthquake fault line. Olkiluoto is already 2 years behind schedule after just 2 ½ years building and already has a £1bn cost overrun, and there can be no reliable evidence on the economics of nuclear power until the new designs of the Westinghouse AP1000 and European EPR water reactors have been fully tested over many years in service. Contrary to claims by the industry, unresolved questions of cost and the looming shortage of uranium are the biggest challenge to its revival.

To overcome the fragility of this recovery, the industry looks to Generation IV development of the fast reactor by 2030 as the key to ultimate nuclear sustainability. However if for this purpose the fast reactor were adopted in ‘breeder’ mode, an even greater quantity of highly radioactive actinides (plutonium, neptunium, americium and curium) would be generated, exacerbating still further the waste management problem. If on the other hand the fast reactor were adopted in ‘burner’ mode, as currently seems likely to prevail, the waste problem is alleviated, but there is no sustainability.

The Generation IV fuel systems offer at present 6 types, of which two are emerging as likely candidates. One is the very-high-temperature gas-cooled thermal reactor (VHTR) which can be used for coal gasification as well as thermo-chemical hydrogen production. The US Government favours this because a hydrogen economy is seen as the solution to the exhaustion of oil reserves and the petrol (gasoline) derived from it. The main problem with the VHTR, which has a coolant system outlet temperature of about 1,000ºC, is likely to arise from irradiation characterised by the Wigner Effect and from progressive disintegration by neutron bombardment.

Indeed a similar problem with the Wigner energy in pile 1 at Windscale (now Sellafield) caused the fire and melted the fuel elements. Given the very high temperatures needed for this complex and quite likely unstable process, its viability would need rigorous and exhaustive testing before such a problematic reactor were ever adopted.

The second favoured Generation IV candidate is the sodium-cooled fast reactor system (SFR). The idea here is that as supplies of natural uranium decline, it is replaced by a plutonium-based fuel which is incrementally augmented by fresh plutonium in a repetitive cycle, providing claims of sustainability. It is envisaged that there is a gain in the plutonium in a surrounding ‘blanket’ of uranium 238 over and above the plutoniun consumed in the reaction, with a doubling time of 15-20 years. But again there are two key problems. It is a burner reactor, not a breeder, so that whilst reducing waste management problems it does not provide for sustainability.

Secondly, even if fast reactors of this kind could be successfully deployed – a big if – the doubling time of 15-20 years would require supplies of natural uranium to be maintained for decades, if not centuries, until the fleet of ‘once-through’ reactors can be progressively replaced. And the uranium simply isn’t available for that timespan. So, a nuclear renaissance? Forget it.

Posted by Michael Meacher at 09:46 AM | Permalink | Comments (0) | TrackBacks (0)

Is this Government really serious about climate change? We’ve just learnt that it is now lining up behind BP to get a decent-sized chunk of the oil-drilling licences soon to be issued in Iraq. That’s in line with the discovery that Britain is also planning to lay claim to over 1/3 rd million square miles of the seabed off Antarctica because of its oil potential. And the UK is also already developing sub-sea claims on Atlantic oilfields around the Falklands, off Ascension Island, and in the Rockall basin, as well as large tracts in the Bay of Biscay.

Tony Blair’s visit to Gadaffi in 2004 was prompted less by concern about Libyan WMD than by the goal of prising open the huge Libyan oil market. Blair’s red-carpet welcome in Downing Street in 1998 for Haydar Aliyev, the ex-KGB President of Azerbaijan, was designed to secure a £5 billion oil deal for BP, which it duly did. The Government also strongly backed the construction of BP’s $4bn Baku-Tbilisi-Ceyhan 1,000 mile oil pipeline which is now transporting a million barrels of oil a day of Caspian oil to the UK and the West. Again, Government support lay behind Shell’s massive $20bn Sakhalin Energy gas and oil project in Eastern Siberia (till Russia muscled its way into taking it over in 2006) and Shell’s equally costly Athabascan tar sands project in Alberta, Canada, to extract synthetic oil from oil shales even though extracting it generates twice as much C0² as conventional oil. And of course UK participation in the American invasion of Iraq was at least partly motivated by the goal of securing for BP some significant share in Iraq’s huge still-unexplored oilfields.

This policy of relentless – and extraordinarily expensive – pursuit of the remaining hydrocarbon supplies wherever they may be found across the world is both shortsighted and wholly contrary to any pretensions to be tackling climate change as being the greatest threat facing the planet. It is shortsighted because peak oil – the point at which oil production reaches its global peak before it then steadily declines – is widely expected to be reached some time between 2010-2015. At the same time the global demand for oil, driven mainly by the frenetic growth rate of the Chinese and Indian economies over the last decade and into the future, will continue to rise inexorably and the 1-1.5 trillion barrels of conventional oil that remain will be consumed in some 40 years and perhaps less. Even if the UK could secure a significant slice of the remaining hydrocarbon deposits across the world which, given that the intense competition between the US and China for the same supplies is the biggest struggle driving geopolitics today, must at best be highly optimistic, it is a policy which is absurdly short-term. Oil has no long-term future, and it is madness that so close to its demise we are not at this stage planning much more systematically for a post-oil world.

The policy also ruthlessly exposes the proud boasts that the UK is leading the world in the fight against climate change. While Government is telling people (rightly) to turn off their electronic stand-by buttons and to recycle more, which will have a useful but small effect, it is still cranking up the last enormous reserves of the fossil fuel mania
which will have a vastly greater and negative effect. While 10-25% of electricity generation in Europe is derived from renewable sources of energy, and 35-50% in Scandinavia, in Britain – which as an offshore island has more windpower capacity than most of the rest of Europe put together – it is a pitiful 4%.

Still today almost every aspect of energy policy in Britain is driven by the dominating influence of the old fossil fuel industries. The Government is proposing to triple airport capacity by 2030 even though on current trends air travel emissions may well by 2050 equal emissions from all other sectors combined so that even if all the latter were reduced to zero (which is fanciful), there would still be no reduction at all in the hugely excess level of total emissions that already exists today. And since the abolition of the fuel duty escalator in 2000, there has been no policy to discourage use of gas-guzzling and emissions-inflating SUVs except the mild differential in annual car tax between small and large cars which a recent budget increased for SUVs by 80p a week – which is a joke.

Nor has industry, or at least the largest firms, been required to report annually on their greenhouse gas emissions so that the public can see whether they, and particularly the most polluting industries, are making their due and proper contribution to cutting emissions by at least 60% by 2050, as the scientists say is necessary. There was indeed a Government legislative measure to do just that in 2002, but it was dropped at the last moment in order to burnish the Chancellor’s deregulatory credentials with the CBI. Nor, to cut food air miles when produce can be grown locally, are food products required to be labelled with the country of origin and the distance they have travelled to be sold.

There are however two areas where the Government is certainly headed in the right direction. One is the proposal that all new house-building by 2016 should be emissions zero-rated. This is a bold initiative, though it needs to be supplemented with measures to reduce the carbon-rating of existing buildings progressively towards zero. The second is the proposal to introduce a carbon allowance for each family, depending on its size, which will then gradually be reduced year by year, though its date of introduction should be brought forward from 2012.

The ongoing love affair with oil has got to be broken. In 1990, taken as the baseline date for climate change purposes, Britain generated about 160 million net tons of carbon a year. If we are to cut emissions by at least 60% by 2050 (though the scientists are now saying 80% will be necessary), we will have to reduce that to no more than 60 million tons – a reduction of around 2 million tons of carbon every year right through to 2050. On that basis the total should by now have reduced by some 35 million tonnes compared with 1990. In fact it has reduced by only about 5 million tons. There could be no starker reminder that if we are really serious about stopping catastrophic climate change – in reality, not just in words – then we need as a top priority a blueprint for a zero-carbon post-oil Britain, and we then need to enforce it.

---Originally published in Compassonline.com, first week of April 2008

Posted by Michael Meacher at 05:09 PM | Permalink | Comments (0) | TrackBacks (0)

Nigel Lawson, the former Tory Chancellor of the Exchequer under Thatcher, never known for modesty, has taken it upon himself to write what he sees as the definitive tract in denial of climate change. Despite the polemics, it is well enough documented to be worth taking him on.

He rightly rejects the easy assumption that every major catastrophe, like Hurricane Katrina, is simply due to climate change. It is more complex than that, and whilst global warming may make such events more likely, other factors may well play a significant role. He is right that the science of the immense inter-connectedness of climatic phenomena, both within the Earth’s atmosphere as well as solar activity and cosmic rays, still has many uncertainties, and that disentangling the natural variability of the climate which has always existed from that which is new and man-made is fraught with difficulty.

He is right too to mock at some of the solutions that have been all too readily peddled. The EU Emissions Trading Scheme, so favoured by the marketers, has, as he admits, turned out to be a gigantic scam allowing businesses to invent a host of devices to cream off billions of pounds from making imaginary carbon reductions. He is right that the current stampede into biofuels is hugely counter-productive both in leading to the destruction of rain-forests and in competing for land with food crops, thus forcing up world food prices. And he is right too that carbon offsets, so beloved of today’s political and business jet-setting classes, are no better than the sale of indulgences by the mediaeval church which allowed the sinner to go on sinning so long as he paid the going price for it.

But Lawson wants to go further than tilting his lance at the sillier eccentricities of what he sees as the climate change establishment. He wants to demolish the entire infrastructure of climate change theory. But here his arguments are badly flawed.

His attack centres on three main contentions. First he argues that greenhouse gas concentrations in the atmosphere do not automatically translate into rising average global temperatures, since there was a pause in the latter between 1940-1975 and again between 2001-2007, and therefore the basic theory fails. However, what he neglects is the much bigger picture provided by the Antarctica Vostok Station’s deep drilling which has found that carbon dioxide and methane, the two main greenhouse gases, rose and fell in near-lockstep with average global temperatures over the last half-million years. Thus the basic theory holds, even if the factors that cause short intermittent fluctuations are not yet fully understood.

Second, he contends that even on the most pessimistic economic scenario – that global warming will cut world GDP by 5% by 2100 – people will still be greatly better off by then and global warming will reduce that only very slightly per person, so we shouldn’t be too bothered about it. But averaging it out across the planet gives a very false impression. Whilst most people may be not greatly affected, hundreds of millions of others may die. It’s like saying that the Asian flu pandemic of 1918 may have killed 40 millions and the Second World War 60 millions, but when the global population was 2 billion, we can live with that because world economic growth per capita was only slightly interrupted. Not an argument that will I think appeal to most people, especially when we cannot tell in advance who will get through in a much more dangerous world and who will die.

His third contention is that the authoritative Stern Review, published last year, understates the economic costs of taking early action now to head off a potential future global catastrophe and overstates the benefits for future generations. He may well be right that Stern has taken too low a discount rate for his calculations, but in one important sense Stern may actually be underestimating future climatic and economic costs. This is because global climate change is not a linear process where warming grows smoothly and proportionately, but rather is beset by feedback mechanisms which abruptly, and maybe uncontrollably, magnify the climatic change with unpredictable consequences. Scientists are still uncertain whether some of the known mass extinctions in the Earth’s history of the last half-billion years may have happened for these reasons. Such mechanisms might include the melting of the Antarctic and Greenland ice-sheets, the die-back of the world’s rainforests, and the mass release of methane hydrates from the ocean seabed.

When we may still be only in the early stages of climate change with very much worse to come and when the delay in the dissipation of greenhouse gases in the atmosphere may take centuries, a precautionary policy is the only sensible course. That should include switching out of fossil fuels into renewable sources of energy at the fastest practicable pace, a high carbon price to incentivise decarbonisation, and carbon capture and storage when developing countries insist on large-scale coal-burning.

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THE biggest question about Northern Rock is still not being asked. It’s not just about billions in loans and in guarantees from British taxpayers and how they can be redeemed. It’s not even about whether temporary public ownership at the outset would have been a better solution. It’s about what caused this systemic failure in international financial markets and how it cam now be put right.

The breakdown of financial market operations has become systematic. First, the new exotic securities in bonds and derivatives were generated because they offered the prospect of turning property lending, previously seen as a long-term business, into a short-term one with instant profits. Instead of waiting up to 25 years to recoup the loans, “structured investment vehicles” enabled banks to regain their funds straightaway so that they could lend them out again and make even more money. This process was repeated endlessly, with hedge funds, pension funds and insurance companies joining in frenzied rounds of buying and selling re-bundled mortgages and thus widening the repercussions of the crisis when it finally broke. SIVs and the labyrinthine “collateralised debt obligations” – the pooling structures which contained them – were not understood even by those who dealt in them. Repeated repackagings left what were always complex instruments bearing little or no value comparable with the original asset taken as collateral.

Moreover, many SIVs have been set in offshore financial havens with a reputation for secrecy and light controls. In fact, no regulatory agency demanded transparency and no auditor condemned the securitisation process on the grounds that it confounded the valuation of risk.

The crisis has also exposed the financial industry’s relentless drive for quick profits, irrespective of long-term security, in an environment woefully lacking in public accountability. The present dominant enterprise culture locks remuneration for chief executives, directors, markets and investors to short-term gains and creates perverse incentives for reckless behaviour. The rewards of Northern Rock’s directors over the past five years are a case in point: the £30 million they made in salaries, share incentives and bonuses were profit-driven, although the losses are now accruing to the taxpayer. This crisis is not a temporary glitch which can be got over as soon as a satisfactory buyer for Northern Rock can be found. The monumental scale of the losses – present and future – belies that.

Ben Bernanke, the chairman of the United States Federal Reserve, has already estimated the losses from bad mortgage loans at $150 billion. And that may grow, given that a staggering $1.3 trillion of sub-prime loans were set up in the two years to 2006 – of which nearly half may be unrecoverable.

In Britain, HSBC has already announced losses from its sub-prime business of nearly £1 billion, while other British banks have yet to make clear their write-downs, which must foretell a tightening of credit. When the British economy has long been kept afloat by easy credit – mortgage and credit card debt now amounting to some £1.35 trillion, which is greater than the country’s entire gross national product – the knock-on effects of this crisis will stretch far beyond the perpetrators in the financial sector.

As the enumeration of actual and potential losses reveals, the deregulatory, light-touch markets regime underpinning the neo-liberal ideology that has dominated the international economy since the 1980s has sustained a severe reverse from which it will take a very long time to recover – if it ever does. This may be seen as a repetition of the secondary banking crisis of 1974. The lessons of that time have clearly not been learned and an economic crisis has now returned with a vengeance: lack of prudential controls, regulatory capture, obscure accounting, absence of auditor independence and an economic elite driven by reckless short-term profit-making at the expense of the taxpayers who have to bail them out.

The risks of unregulated markets have now been shown to be far too great and it is clear the market on its own cannot establish the necessary supervision. Investors in loan-backed securities have not sought tougher monitoring because they were captured by the allure of the yields on offer, which Alan Greenspan, the former chairman of the US Federal Reserve, has compared to cocaine abuse. Auditors have been only too happy to offer a clean bill of health to companies in which they may have an interest. The Financial Services Authority, it has emerged, does not have inspectors dedicated to the regulation of banks or to monitor potentially worrying investments or to test financial products against risk of public detriment.

In view of this systemic failure in the financial sector and its kickback across the whole economy, what is now needed is a committee of inquiry into the governance, accounting and auditing of the banks. This should investigate offshore structures, complex derivatives, the lack of accounting transparency and the overriding need to align commercial incentives with public accountability. Otherwise the same problems will recur again – only worse.

Posted by Michael Meacher at 12:08 PM | Permalink | Comments (1) | TrackBacks (0)

With the latest action on Bear Stearns the most serious financial news yet, it is not too soon to envisage a new era.

The quarter century dominance of Keynesianism was overturned by the oil price-induced hyper-inflation of the 1970s, which paved the way initially for the rise of monetarism and thence the quarter century ascendancy of the Washington neo-liberal consensus. The sub-prime housing fiasco and the subsequent banking credit crunch, the results of which are still being felt across the international economy, are now bringing this period of hegemony to a close, not only because of western banks having to be bailed out by sovereign funds from China, Asia and the Middle East, but mainly because of systemic failure which is at risk of precipitating collapse.

The problems go far deeper than the demise of Northern Rock or the activities of a single rogue trader at Societe Generale. These were dealt with by the authorities as though they were isolated aberrations of a basically sound financial system, by trying in the former case to manipulate an alternative private takeover and in the latter to tighten the internal trader rules. This is like taping the fences to hold back the tsunami. The Treasury's recent proposals to allow the Bank of England to carry out secret rescue operations or the Financial Services Authority to seize the deposits of savers if a bank is in trouble, are scarcely any more useful. All these measures simply do not recognise the scale of the challenge that now confronts financial markets.

The whole nature of the global financial system has altered drastically in ways that the International Monetary Fund (IMF) can no longer control. The investment managers of private equity funds and major banks have displaced national banks and international bodies and extended their power far outside existing regulatory structures by "reintermediating" themselves between national and individual traditional borrowers on the one hand and the markets on the other. They have deregulated the world financial structure, making it far more unpredictable and liable to crises. Their business is to generate out-of-the-ordinary investment returns, which governs their reward, and it drives them to take ever-mounting risks.

It is ironic that the deregulation and liberalisation, which the IMF and the Washington consensus advocates championed so aggressively through the last three decades, have now spiralled out of control. That is the result of a conjunction of factors which has created hugely greater risk than they ever conceived. One is the entwining with the US fiscal and trade deficit which is still rising fast. The Bush administration has added over $4tn to the federal borrowing limit, which now stands at $9.8tn. The continuing devaluation of the US dollar has then driven banks and funds to see increasing financial risktaking as worthwhile.

Second is the rise of hedge funds, which now control assets worth $1.5tn worldwide, with the top 10 alone controlling $250bn. They are often highly profitable, but at the same time increasingly dangerous. Their reward structure encourages recklessness: the 26 leading hedge fund managers in 2005 earned on average $363m each. Altogether, hedge fund managers in the City and Wall Street took home $50bn last year. They depend on a constantly rising stock market, and current conditions expose their fragility. Even the Long-Term Capital Management hedge fund meltdown in 1998 showed that banks simply do not understand the chain of exposure, yet today the financial network is much larger and more complex.

Third, hedge funds now deal in credit derivatives and a variety of other arcane financial instruments. The credit derivative market barely existed in 2001, and grew quite slowly until 2004, when it really took off, exceeding $17tn by the end of 2005. Their sheer complexity was designed partly to prevent their being copied, but mainly to package a seemingly attractive product which could generate enormous short-term gains. The downside, ignored while profits remained high, was the potential for unleashing a chain reaction of losses that could engulf the hedge funds that had jumped on the bandwagon. In the event the sub-prime market debacle provided the trigger. However, other devices, even more opaque, such as split capital trusts, collateralised debt obligations and market credit default swaps, have caused the IMF and senior financial regulators even more worry.

As these risks and problems have mounted inexorably, the IMF has undergone a structural and ideological crisis. Its outstanding credit and loans diminished sharply from $70bn in 2003 to less than $20bn now, drastically cutting its leverage over economic policy across the world. It is now actually in deficit. This trend has become even more pronounced as developing countries, mainly China provide even more foreign direct investment in other developing nations. That has now been extended further by the partial takeover of the western banking system - Citigroup, Barclays, UBS to name but a few - by Arab and Asian governments.

There are at least two other sides to this financial maelstrom. Both are again structural. One is the greatly increasing ratio of corporate debt loads to core earnings. Whilst interest rates remained low, leveraged loans provided a solution for firms that should have gone bankrupt, and now too often incompetent, debt-ridden firms find a market with hedge funds and other financial instruments. Another issue is that the speed and complexity of the deregulated market has generated widespread errors on a disturbing scale. The International Swaps and Derivatives Association recently found that 20% of deals, many involving billions of dollars, were subject to major errors.

The dangers that all these factors are exposing are slowly accumulating. The ticking time-bomb in the US banking system is not resetting sub-prime mortgage rates; it is the contractual ability of investors in mortgagee bonds to require banks to buy back the loans at face value - at present almost 10 times their market worth. In the UK the contagion affecting the banks is beginning to seep into other areas, notably the monoline insurers (who provide the insurance for bonds), and could well threaten the market for credit default swaps which, given its size - $45tn - could prove catastrophic.

The central banking and governmental response to the crisis - showering unlimited liquidity and huge tax cuts onto the markets - is no solution if, quite apart from exacerbating moral hazard, it leads to higher inflation, a falling dollar and higher long-term interest rates. On the other hand, for the authorities to be blackmailed into saving the current international financial structure at any price is simply to invite the next crisis, only sooner and worse. If we are to escape this situation being repeated again and again, what is needed is a frank recognition, however painful, that self-regulation has failed spectacularly and that a new system of international financial governance is now urgently needed in which the re-regulation of banking must be the least requirement if government and taxpayers are to be expected to guarantee deposits.

Posted by Michael Meacher at 02:03 PM | Permalink | Comments (1) | TrackBacks (0)