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The Fred Goodwin knighthood row: Mehi Hasan on five things to consider

Don't be distracted by Goodwin; the real issue is bonuses.

1) Let us be under no illusions: Frederick Anderson Goodwin is an awful, awful man who doesn't deserve anyone's sympathy - or pity. I say this not just because, as Alex Brummer points out in today's Mail, "he was he felt able to conduct an extramarital affair with a senior female colleague" and "then hid behind a court injunction until he was found out", but because, by all accounts, he was a terrible, terrible boss to work for. Have a read of the recent book, Masters of Nothing by Tory MPs Matthew Hancock and Nadhim Zahawi, which paints an, ahem, unflattering portrait, shall we say, of the power-crazy former RBS boss.

From the Evening Standard:

The book claims Sir Fred, 53, could not control his anger if the wrong type of biscuit was put in the boardroom, and even threatened catering staff with disciplinary action in an email titled "Rogue Biscuits" after executives were offered pink wafers.

RBS staff also "went into panic mode" after a window cleaner fell off a ladder in Sir Fred's office and broke a toy plane, the authors allege.

At dinner functions, an engineer was also kept on standby until the early hours to switch off fire alarms when executives wanted to smoke.

Peter de Vink, managing director of Edinburgh Financial & General Holdings, said bank staff "were absolutely terrified of him".

2) Having acknowledged how bad a boss Goodwin was, and how odious an individual he is, it is, however, worth noting that he has been made a bit of a convenient scapegoat since the crash in 2008. Remember: Goodwin's disastrous decision to pay a total of £71billion for debt-laden Dutch bank ABN Amro in the autumn of 2007, just as the credit crunch took hold, was backed by the RBS board and not prevented or questioned by the regulators. Few financial journalists sounded alarm bells; there was not a peep from Downing Street or the Treasury.

Also, it is often forgotten that the then Barclays boss John Varley had been involved in a bidding war with Goodwin for ABN Amro - which helped drive the price up. Had Barclays, rather than RBS, ended up buying the Dutch bank, Varley might be as reviled and ridiculed today as Fred "the Shred" Goodwin. Instead, Varley retired from his post as chief executive of Barclays in 2010 with his reputation - and his windows - intact.

3) Is it unfair and/or disproportionate to strip Goodwin of his knighthood? The government revealed yesterday that Goodwin's title had been referred to the "forfeiture committee".

Goodwin is not guilty of any crime. The Guardian points out:

Since 1995, the committee has recommended that 34 people, including the Zimbabwean president, Robert Mugabe, be stripped of their honours. Honours are normally taken away only if someone has been found guilty of a criminal offence or has been reprimanded by their professional regulator, including a professional register.

But the question is: why wasn't Goodwin investigated or prosecuted? Why weren't bankers arrested and charged with breaking the law, as they drove the economy off a cliff? Why wasn't the Serious Fraud Office brought in at the start of the financial crisis? These are questions that are starting to be posed on both sides of the Atlantic.

"Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that's wrong," said Charles Ferguson, director of the documentary Inside Job, as he accepted his Oscar last year.

"Why have no bankers been arrested?" Jon Snow asked Treasury minister Mark Hoban on Channel 4 News in September 2011. Snow later noted on his blog:

[I]nvestigators on both sides of the Atlantic have had no doubt that criminality, subterfuge, and downright dishonesty accompanied many of the ingredients that brought about the crash. At the very least there was gross dishonesty in the representation of exposure to the sub-prime mortgage business.

...In one month, hundreds of rioters and looters have been prosecuted and punished by the English courts, often for offences with a value of under fifty pounds. Yet the threat to the wellbeing of UKplc was far greater from the bankers than from any number of more arrestable rioters.

There is a strong impression abroad that the UK doesn't want to prosecute anyone for the banking crisis, a crisis that has affected every tax payer in the Kingdom.

Soon enough the statute of limitations will kick in to ensure that no-one will ever be prosecuted for their role.

4) If Ed Miliband is looking to apologise for things Labour did wrong in its 13 years of office, in order to win back public trust, he could start by saying sorry for the party's indulgence of all the top bankers in the City, not just "Fred the Shred". According to an investigation by the Daily Mail in 2009:

Labour has given 23 bankers honours, brought three into the Government as ministers and involved 37 in commissions and advisory bodies.

In today's Independent, John Kampfner reminds us of how deferential to, and in awe of, the City, Labour's leaders were:

It is salutary at moments like these, with David Cameron opining about the miscreant behaviour of Fred Goodwin and his like, to recall a speech given by Gordon Brown. It was delivered in April 2004, as he was trying to oust Tony Blair. "I would like to pay tribute to the contribution you and your company make to the prosperity of Britain," the then Chancellor declared. He was opening the European headquarters, in London's Canary Wharf, of Lehman Brothers, the bank that later went down the Swanee, almost taking with it the entire financial system. Talking of "greatness", Brown added: "During its 150-year history, Lehman Brothers has always been an innovator, financing new ideas and inventions before many others even began to realise their potential."

5) The shadow business secretary, Chuka Umunna, among others, is right to warn that Cameron and co must not be allowed to use a story about the former RBS chief executive to distract attention from the current RBS chief executive, Stephen Hester, and reports that he is in line to receive a £1.5m bonus - despite the RBS share price having halved over the last year. This is the real test for Cameron - not whether he strips Goodwin of his title but whether he has the power and resolve to deny Hester his ludicrous bonus

Channel 4 News's Gary Gibbon asks on his blog:

Is going for Sir Fred a decoy for bonus row?

I suspect it is. The real issue is bank bonuses: despite the tough talk, the Conservative-Lib Dem coalition has so far failed to stop massive payouts. So don't be distracted by Goodwin; keep your eyes on Hester.

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

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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?