The protesters and the corporation

The focus now shifts to how the City of London is governed.

The doors of St Paul's Cathedral open today. Of course, they should not have been closed in the first place, at least on the purported "health and safety" grounds cited, as the New Statesman was early to point out. Even the Conservative MP for the City of London said:

I think to be brutally honest the decision to close the cathedral on the basis of health and safety grounds [was] based on spurious grounds.

The former Archbishop of Canterbury George Carey has gone even further:

After their initial welcome to Occupy, the cathedral authorities then seemed to lose their nerve. In daily-changing news reports, the story see-sawed between a public debate about the merits or otherwise of the protest, the drama of internal disputes at St Paul's over lost income from tourists, and the ill-defined health, safety and fire concerns that caused it to close its doors to worshippers.

One moment the church was reclaiming a valuable role in hosting public protest and scrutiny, the next it was looking in turns like the temple which Jesus cleansed, or the officious risk-averse 'elf 'n safety bureaucracy of urban legend. How could the dean and chapter at St Paul's have let themselves get into such a position?

Now attention as to how the "Occupy LSX" protesters should be dealt with moves on from the idiocy at the Cathedral to the opaque and undemocratic Corporation of the City of London.

This remarkable and strange entity, the last unreformed borough in the United Kingdom, has already been well described in the New Statesman by Nicholas Shaxson. And this morning it will decide whether to activate the eviction process of the "OccupyLSX" protesters. It is this process which Dr Giles Fraser has warned could end in violence and over which he resigned. The Corporation is profoundly undemocratic. Behind the quaint vocabulary of aldermen and livery companies, it is deliberately structured so that those people resident in the City of London have significantly less electoral power than City businesses. In a throwback to the time before the 1830s reforms, the larger the business, the more formal power the business has over the Corporation. To call it a plutocratic oligarchy is not to just indulge in Marxist whimsy, or even to express an opinion, it is simply a matter of deliberate and demonstrable fact. As Nicholas Shaxson explains:

Like any other local authority, the City of London is divided into wards. These elect candidates to serve on the Court of Common Council, the City's principal decision-making body. Unlike any other local authority, however, individual people are not the only voters: businesses can vote, too. Political parties are not involved - candidates stand alone as independents - and this makes organised challenge to City consensus all but impossible.

But does this matter? In some ways it does not. The Corporation governs the City of London with business-like quiet efficiency. The City is clean and its public facilities are well-resourced. Particular praise can go to its excellently funded libraries, which are now surely the envy of the nation. The Corporation also does an impressive job of protecting and promoting the interests of City institutions whilst always keeping a low media profile. The Corporation is, its supporters will maintain, a perfect example of enlightened paternalism.

One price for this is a lack of legitimacy in respect of certain decision-making. The planning and transportation committee which is today scheduled to make the decision to proceed with the eviction of the "Occupy LSX" protesters is not even going to debate the issue in public Any decision made is to be communicated only by press release. The unconvincing excuse being offered for this needless lack of transparency is "legal advice". But whilst no one disputes that the Corporation, like everyone else, is entitled to take legal advice in private, that does not explain whatsoever why the debate on whether to evict the protesters, and the decision made by the committee, also have to be in private.

The Corporation is anxiously seeking to present the eviction of the protesters as entirely a private matter. It has a vision of what the City of London should look like. And this ideal does not include the presence of protesters in their tents pointing out various perceived failures of capitalism.

The Corporation's clear intention is to frame the issue as one to do with "campers" not "protesters". But this approach is not sustainable, either legally or in terms of public relations. The Corporation is a public authority as a matter of law whether they like it or not, and the protesters are exercising their rights to free expression and assembly whether that is liked or not. Any public authority can only interfere with those rights proportionately and with good reason. It may seem to the Corporation that it is a clever idea to try to make this about mere trespassing "campers", just as those at St Paul's Cathedral thought it jolly clever to make the protests a "health and safety" issue. Thinking something does not make it so.

There is no doubt that the Corporation has the resources to seek the eviction of the protesters. It may well have the legal powers to do so, though it seems wrongly to be treating this as an entirely private law matter. But there remains the question is whether they have the appetite to commence a process which may well bring (for them) unwelcome scrutiny as to the lack of transparency and democracy of the Corporation. Just because one has the legal power to do something, it does not follow that it is sensible for that power to be exercised to the full.

David Allen Green is legal correspondent of the New Statesman and is a solicitor working in the City of London.

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?