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.
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.
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.
So Tony Blair wants to rescue religion from extremism and irrelevance. He certainly is brazen. You really cannot make yourself the obedient servant of Bush, the neo-conservative face of Christian fundamentalism, and then expect to be taken seriously as a voice of moderation. You cannot seduce people into an illegal war in Iraq through a systematic misrepresentation of the facts, and then expect to be accepted as a faith-driven messenger of peace in the cauldron of hatred in the Middle East which he has himself helped to exacerbate. You cannot ruthlessly centralise power and undermine accountability at every point in a decade of rule, and then expect credibility when claiming to be guided by a faith motivation for the last 25 years. As someone once said, ye shall judge them, not by what they say, but by what they do.
He is quite right in my view that religion has a major role to play in world affairs, but not as a convenient adjunct to help solve the political and economic problems of globalisation. He needs to learn that religion is not the servant of politics, even less of particular politicians, but rather an appeal for justice and peace to the world’s people which demands humility, not arrogance, serving others, not dominating them.
We should be very wary of those who claim a close link to God in pursuit of their own ambitious purposes. Bush claims it in pursuit of extending the American empire. Saddam Hussein claimed it in defence of his own tyranny. The Islamic jihadists claim it for the use of terrorist tactics in resisting Western domination. The Jewish settlers’ movement use it in claiming their God-given right to the land of Palestine. Tony Blair is right that there is a fundamentalist face to religion today that has done fearful damage across the world, but he should recognise that it is not confined to Islam or the Middle East.
The consultation document launched on 22 November last year reached an absurd conclusion – that a new airport the size of Gatwick could be bolted on to Heathrow without any adverse environmental effect. It never commanded any credibility and has often been the object of derision. But what is so disturbing about the Sunday Times revelations of 9 March is the exposure, based on documents uncovered by FOI requests, of just how deceptive and manipulative Government Departments can be in pursuit of a pre-determined objective and how far they are prepared to collude with corporate interests in defiance of any objective standards of integrity and honesty.
What these FOI documents reveal (to be found at extra.timesonline.co.uk/heathrow/foi1,2,3,4) is that BAA gave directions to DfT officials on how to strip out data in the consultative documents which showed that the expansion would cause unlawful levels of pollution and extra noise. They show that BAA repeatedly selected alternative data for the consultation devised in order to ensure that the final results showed an insignificant impact on noise and pollution.
They also show that BAA gave unprecedented access to confidential papers and allowed the company to help to rewrite the consultative document. And they show that the final document significantly reduces the third runway emissions by simply excluding incoming international flights. We also know that one official involved in Project Heathrow which researched the environmental impact of the runway said: “It’s a classic case of reverse engineering. They knew exactly what results they wanted and fixed the inputs to get there. It’s appalling”.
Now if all this is true – and none of it has been denied – it indicates that a line has been crossed which is wholly unacceptable. Irrespective of the issue, the people of this country expect the Government, of whichever party, to produce a case, for whatever policy they may choose, which is fair, balanced and to the fullest possible degree accurate and honest. The era of spin and manipulation has done fearful damage to the political culture of this country, and politics will not recover until the public becomes confident that they are being told the truth, however hard the truth may be, and not simply a massaged version to suit the interests of the powers-that-be.
Several implications follow. The consultation document should be withdrawn and replaced by a much more honest and accurate one before it is legally challenged in court and before a judge requires it to be withdrawn. There must be accountability for this episode and – assuming no Ministers were involved in the massaging of the data – the leading civil servants involved, including David Gray who is named as leader in all the FOI documents released, should be disciplined and if necessary removed as would occur in any other sector of employment.
And in addition the Government really must stop going through the formalities of a consultation where it is clear to everyone that they have already made up their mind. It happened over GM foods, nuclear power, Trident, and now it’s happening over the third runway. The Government must listen more to the people’s voice, in this case the long-suffering and much put-upon people of West London, and listen less exclusively to the big industrial and finance barons. What is good for BA and BAA is not necessarily good for the UK. This Government is there to support the people of this country, not a corporate State.
Today the House of Commons debated housing, and in particular the acute lack of social affordable housing almost everywhere in the country. There are three main problems. One is that the demand for such housing far exceeds the Government’s present plans to provide it. Second, it is unrealistic to rely on the private sector to provide the decent, secure homes that people on lower incomes need at prices they can afford, nor is there evidence that the Housing Associations are rising to the challenge to fill the gap. And thirdly, there is nowhere near enough funding for local authorities to maintain and repair their existing stock, let alone build the new houses desperately needed.
It is good that the Government is proposing to raise the number of houses built per year from 200,000 to 240,000, to reach a total of 3 million new houses built by 2020. But the current baseline is only around 170,000 a year, and that number is anyway likely to fall for some years ahead because of the sub-prime market crisis and the credit crunch. Moreover, the numbers of specifically social and affordable houses needed is estimated to be an extra 50-70,000 a year, rather more than the 30,000 proposed by the Government, if the large backlog of homelessness and poor or unsatisfactory housing for low-income households is to be cleared within a reasonable period.
In the current economic climate there is no way that the private sector can remotely fill the gap. Nor indeed would it be wise for them to try to do so anyway. A Parliamentary Answer I received in November revealed that there are already more than 200,000 households who have taken out mortgages with a house price-to-income ratio in excess of 6:1, including 38,000 in excess of 10:1. We are already in danger of generating our own sub-prime market disaster in this country too, not just in the US, and we should certainly not risk making the present downturn any worse. Besides, there is probably a fifth of the population who have such low incomes and such uncertain employment prospects that they will never be able under present circumstances reliably to afford to buy and maintain a home.
For them what is clearly needed is good-quality secure public housing at rents which they can genuinely afford. And that is the message which the current levels of unmet housing demand are crying out to be heard. There were 1.6 million households on Council waiting lists in 2006, and the number is probably nearer 2 million today. In Oldham the number on the Council waiting list is now 12,000; yet the total Council housing stock in Oldham is now only about 12,500 – down from some 27,000 homes twenty years ago. In addition, across the country there are nearly 100,000 households who are homeless in temporary accommodation, including several hundred in Oldham.
Yet despite the pressure cooker conditions now prevailing in public rented housing, the demand to stay in Council housing, and to have more Council housing, could not be clearer. No less than 2 ½ million existing Council tenants in nearly 200 areas across the country have still opted in transfer ballots to remain as Council tenants even though they have been told that if they don’t vote for either stock transfer to a private landlord or to a housing association or to an arm’s length management organisation (First Choice Homes in Oldham), they will be denied funding for proper repairs and maintenance. Tenants know they will not get from private landlords or even housing associations the same security, socially affordable rents (at least till now) and a publicly accountable Council to complain to if things go wrong.
That’s why it’s now so vital that the Management and Maintenance Allowances and the Major Repairs Allowances which Councils get from the Government should be paid to all Councils (even where the tenants in a ballot have declined to shift) and that they are pitched at an adequate level. At present they are fixed far below this level. A report from the Government itself, issued this month, says that current allowances “undercut basic investment needs by 43% over 30 years”. That is a staggering admission – that the funding provided for Council housing is little more than half of what is basically needed.
It is this huge shortfall in allowances which is driving Councils to privatise their homes, even against the wishes of their tenants. It means also of course that many local authorities can’t meet the Government’s Decent Homes Standard and that many others who may be meeting it now will be unable to sustain this standard in the longer term.
At present, the net funding trail is, perversely, going in the opposite direction. Council rents are actually rising faster in order to close the gap with private rents in the locality, though ideologically that seems to be turning the whole purpose of Council housing on its head. And Council rents are even rising higher than expenditure so that tenants will actually be paying a tax to the Treasury this year of some £180 millions, and a Parliamentary Answer of 18 December even suggested that this would rise to nearly £1 billion by 2022. This is on top of the £1.5 billions already being taken each year from Council Housing Revenue Accounts, ostensibly to repay historic debt, though since tenants don’t own the asset, it is difficult to see why they should be burdened with servicing the debt.
The amendment to the Housing Bill I moved tonight in the Commons is about justice for tenants which is long overdue. I moved it because at every surgery I hold in Oldham I am distressed, hurt and angry that usually half the constituents attending have come because their housing situation has become intolerable, and yet I know that in current circumstances I can do nothing. What is desperately needed is that a major Council house-building programme should now urgently be re-started, and if the Government cannot afford that in the present financial climate, then local authorities should be permitted to borrow the necessary funds on the open market against the collateral of their existing housing stock. It is because I believe this so passionately that I voted against the Government tonight along with 27 other Labour colleagues.