The bullies, bullied

News International is today the victim of events, not the master.

Yesterday was rather frantic for News International: Rebekah Brooks's email, Glenn Mulcaire's apology, and Ford pulling its advertising from the News of the World for the time being. Who knows what was happening away from the public view.

Today may well see further significant developments, perhaps even sackings or resignations. But in all this extraordinary activity it is useful to pause and think about how the current scandal came into being, and what it may indicate.

First, there is the question of timing. The news about Milly Dowler's phone being hacked came almost from nowhere. There was no objective event, such as an arrest or a charge, to explain why this story was published at this time.

As it has turned out, the Dowler revelation is just one of a number of alleged examples where the phones of those simply caught up in a news story have been hacked: victims, friends, and families. These were not members of the Royal Household, as were those in the first phase of revelations; nor were they the celebrities and media people who constituted the second phase of revelations.

These are ordinary people without any public profile other than the unfortunate events which were inflicted upon them.

And out of all these many cases, someone, somewhere chose the Milly Dowler story as the first one to now get into the public domain. The person that made that decision is a practical genius. That Milly Dowler's phone was hacked when she was missing was simply disgusting, and its disclosure was inevitably going to be newsworthy.

But why was that hacking disclosed now?

It may well be that it was sensible to wait to the end of the recent murder trial. It may be that this was the optimal week for disrupting the proposed full acquisition by News Corporation of BSkyB.

Whatever explains the timing, the choice of the Milly Dowler case as the first one of the "ordinary people" cases to lead on was made -- consciously or not -- during a perfect storm combining the renewed awareness of the awful facts of her disappearance and death with the commercial vulnerability of the Murdoch empire.

The second interesting feature of the developing scandal is the weakness of the News International response.

For a media organisation who deals with those engaged in reputation management on a daily basis, the reaction of News International was unimpressive. Yesterday's email from Rebekah Brooks was barely even literate, with "allegeds" and "allegations" inserted so as to render propositions and sentences almost meaningless. The unfortunate spokesperson put up for interviews on the evening news came across as evasive and hapless.

However, this flat-footedness should not be any surprise.

The tactic of News International at each phase of the scandal is to try and close the matter down by explaining away the available facts. Hence we have had the "lone rogue reporter" theory for the Royal Household hackings; and the dismissive "just media tittle-tattle" excuses for the celebrity hackings. That the hacking have now moved on to ordinary people caught up in events has exposed the limitations of previous narratives.

As it stands, News International clearly cannot decide whether to claim it has all the necessary facts (so that it can say that the problem has been dealt with) or that it has not got the necessary facts (so that it cannot comment on what it does not know).

And News International also seems not to know what to say or do about Glenn Mulcaire. On one hand, it is has been very convenient for Mulcaire to be caught by the confidentiality provisions of a settlement agreement, but such a settlement agreement only makes legal sense if he indeed had any employment claims against News International: that he was an employee.

Now, on the other hand, News International is now desperate to distance him as a "freelance inquiry agent". If that is correct, then the settlement agreement binding him to confidentiality would appear to be consistent with it being merely a useful device so as to prevent unwelcome disclosures. They cannot have it both ways.

The stories so far put out by News International are now unravelling. It is early to tell what actually did happen. But it is certain that the "lone rogue reporter" and "freelance inquiry agent" explanatory tactics may be of limited value, if they are of any value at all. However, it must be remembered: the "lone rogue reporter" excuse was the one which Murdoch, Coulson, and Brooks have wanted us -- and Parliament -- to believe all along.

Also for some time, politicians and other journalists have -- as has been pointed out repeatedly by Tom Watson MP -- been too scared to take on News International. But News International surely cannot bully its way out of this scandal as it is today. Whatever damage limitation exercise they mount in the coming hours, their intimidatory bluff has now been called. It is now News International that is having pressure applied upon it so as to force involuntary outcomes.

News International is currently the victim of events, not the master.

If Hugh Grant was able to show a bugger bugged, today we may be seeing what happens when a bully is bullied .

 

David Allen Green is legal correspondent of New Statesman and was shortlisted the George Orwell blogging prize in 2010.

David Allen Green is legal correspondent of the New Statesman and author of the Jack of Kent blog.

His legal journalism has included popularising the Simon Singh libel case and discrediting the Julian Assange myths about his extradition case.  His uncovering of the Nightjack email hack by the Times was described as "masterly analysis" by Lord Justice Leveson.

David is also a solicitor and was successful in the "Twitterjoketrial" appeal at the High Court.

(Nothing on this blog constitutes legal advice.)

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?