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Guided by an invisible hand

The bank meltdown marks a turning point in our thinking about how the world works writes the Nobel L

Make no mistake: we are witnessing the biggest crisis since the Great Depression. In some ways it is worse than the Great Depression, because the latter did not involve these very complicated instruments - the derivatives that Warren Buffett has referred to as financial weapons of mass destruction; and we did not have anything close to the magnitude of today's cross-border finance.

The events of these weeks will be to market fundamentalism what the fall of the Berlin Wall was to communism. Last month in the United States almost 160,000 jobs were shed - making more than three-quarters of a million this year. My guess is that things will get considerably worse. I have been predicting this for some time, and so far, unfortunately, I have been right.

There are several reasons for my pessimism. The extreme credit crunch is a result of the banks having lost a lot of capital. And there is still uncertainty about the value of the toxic mortgages and other complex products on their balance sheets. The US economy has been fuelled by a consumption binge. With average savings at zero, many people borrowed to live beyond their means. When you cut off that credit you reduce consumption. This, in turn, will dampen the US economy, which helps keep the global economy growing. The American consumer has not only sustained the US economy, he has sustained the global economy. The richest country in the world has been living beyond its means and telling the rest of the world it should be thankful because America fuelled global economic growth.

There are further reasons for my pessimism about short-term economic prospects, in America and Europe. In the second quarter of this year, growth in the US would have been negative were it not for the growth in exports. But with the slowdown in Europe and problems in Asia it is difficult to see how we can maintain net export growth. The strengthening of the dollar - due not to greater confidence in the US but to reduced confidence in Europe - will make matters worse. The fall of energy prices will help a little, but not enough.

Treasury Secretary Hank Paulson has now come up with a new bailout scheme. The original plan - buying up the thousands of "troubled assets" (read: bad loans and complex products based on them that Wall Street created) - was badly designed and rife with problems. How would they have been priced? Call in the same Wall Street experts who got us into the mess and mispriced risk before? It is a heads I win, tails you lose situation.

The worry is that the taxpayer will be left holding the short end of the stick.

The British approach, which Paulson seems to be following, is far better, involving capital injections into banks, with preferred shares to protect against losses and warrants to share in some of the upside potential. This is the approach that I - along with most US economists and people with good street sense, like George Soros - had been saying America should adopt.

Ironically, though Paulson wouldn't listen to us, he seems to have listened to Gordon Brown.

Many of the problems our economy faces today are the result of the use of misguided models. Unfortunately, too many took the overly simplistic models of courses in the principles of economics (which typically assume perfect information) and assumed they could use them as a basis for economic policy. Many central banks use the notion of inflation targeting - that they should focus exclusively on inflation, raising interest rates when inflation increases. But I would argue that central banks have a broader responsibility; they are supposed to ensure the stability of a country's economy. While monetary authorities in the US and elsewhere focused on price stability, they allowed the financial system to undertake risks that put the whole economy in jeopardy.

This crisis is a turning point, not only in the economy, but in our thinking about economics. Adam Smith, the father of modern economists, argued that the pursuit of self-interest (profit-making by competitive firms) would lead, as if by an invisible hand, to general well-being. But for over a quarter of a century, we have known that Smith's conclusions do not hold when there is imperfect information - and all markets, especially financial markets, are characterised by information imperfections. The reason the invisible hand often seems invisible is that it is not there. The pursuit of self-interest by Enron and WorldCom did not lead to societal well-being; and the pursuit of self-interest by those in the financial industry has brought our economy to the brink of the abyss.

No modern economy can function well without the government playing an important role. Even free marketeers are now turning to the government. But would it not have been better to have taken action to prevent this meltdown? This is a new kind of public-private partnership - the financial sector walked off with the profits, the public was left with the losses. We need a new balance between market and government.

Professor Joseph E Stiglitz is chair of the Brooks World Poverty Institute at the University of Manchester and a 2001 Nobel prizewinner

This article first appeared in the 20 October 2008 issue of the New Statesman, My year with Obama

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Can Jeremy Corbyn and Labour MPs learn to get along?

The leadership candidate has the declared support of just 15 MPs. Both sides are preparing to enter what feels like an alternate universe.  

On the morning of 12 September at the QEII Centre in Westminster, Jeremy Corbyn will be declared the new leader of the Labour Party. This is the outcome that almost all MPs now expect. A result that scriptwriters would have rejected as too outlandish before the contest began is regarded as near inevitable. Given the number of ballots returned in the first week of voting, the game may already be over. “It’s like a bad dream” and “It’s like a bad film”, shadow cabinet ministers told me.

All sides are struggling to adapt to the strange new world in which Corbyn – lifelong backbencher, serial rebel – becomes leader of Her Majesty’s Opposition. When his candidacy was announced in four short paragraphs in his local paper, the Islington Tribune, on 3 June, most believed that he would struggle to avoid finishing last. No one believed that he would reduce two former cabinet ministers, Andy Burnham and Yvette Cooper, to an unseemly squabble over which of them is in second place.

Several weeks before the result is announced, blame is already being cast around the party. Labour staff are furious with MPs for allowing Corbyn on to the ballot. Some are preparing their CVs, either having decided they will not serve under Corbyn out of principle or out of fear of being “liquidated by the new regime”.

When MPs lost their “golden share”, which gave them a third of the votes in Labour’s abolished electoral college, the nominations threshold was raised from 12.5 per cent to 15 per cent of MPs as a firewall against maverick candidates. Several of those who helped Corbyn over the barriers are now repentant. But others are not. “I can’t tell you how pleased I am that I nominated Jeremy,” Frank Field, the chair of the work and pensions select committee, told me. “The longer it goes on, the thinner the post-Blair gruel that the other candidates offer us appears. It is going to change the debate and, at the end of the day, we’ll owe Jeremy a huge thanks.”

When Denis Healey defeated Tony Benn by 0.8 percentage points in the 1981 deputy leadership contest, it was the moderate trade unions (with their 40 per cent share) and MPs (with their 30 per cent share) that saw off the hard-left constituency parties. This time, there is no such cavalry available. The two largest unions, Unite and Unison, have endorsed Corbyn, and an MP’s vote is worth no more than that of a registered supporter. Ben Bradshaw, a deputy leadership candidate, whose Exeter constituency party has the second-highest contact rate of any in the country, told me that 10 per cent of “supporters” in his area had consistently voted for other parties. Labour, however, has ruled that individuals cannot be excluded on this basis alone.

“The party’s processes were never set up to cope with this situation and nor was it foreseen that you would have a potential infiltration issue of this scale,” a shadow cabinet minister told me. “We don’t have copies of the TUSC [Trade Union and Socialist Coalition] membership list, or the Green Party list, or the Left Unity list, or the Alliance for Workers’ Liberty list. You can’t know how in-depth this has become.”

Yet Corbyn’s success owes less to entryism than thought. There are Labour voters who departed under Blair and now feel liberated to return; left-wing members who joined under Ed Miliband (and regard Corbyn as his successor); and young voters who are losing their political virginity. On the party’s right, there is self-reproach at their failure to sign up moderate supporters to counter the radicals. “We were hideously complacent,” one MP said.

Others attribute Corbyn’s rise to the ­unattractiveness of his opponents. “Andy, Yvette and Liz have a lot to answer for,” a senior MP told me. “If you can’t beat Jeremy Corbyn, how you can beat George Osborne, Boris Johnson or Theresa May?” Some of the other three’s own backers are stunned by how few new ideas they have offered. The decision of all three to position themselves to the right of Miliband following Labour’s defeat is regarded by Corbyn’s supporters as central to his success.

“They trusted Ed’s instincts,” an ally of the former leader said of Labour left-wingers. “They knew how he’d react in a crisis. They don’t feel like that about any of the others.” Burnham, who many expected would occupy this space, alienated the left by beginning his campaign with a pro-business speech at EY (Ernst & Young) and warned of the perception that Labour is “soft on people who want something for nothing”.

However, the Corbyn and Kendall campaigns say that Burnham remains ahead of Cooper in their internal data. Kendall’s chief lieutenants, such as John Woodcock and Toby Perkins, have endorsed Burnham out of fear that his supporters’ second preferences would transfer to Corbyn. But it is the title of leader-in-waiting, rather than leader, that most believe Burnham and Cooper are now fighting for.

The tens of thousands who have signed up explicitly to vote for Corbyn will not be dissuaded by apocalyptic warnings from Labour grandees. The shadow cabinet minister Jon Trickett, one of the left-winger’s most senior allies and a former adviser to Miliband, told me: “It’s become an article of almost blind faith for the anti-Corbyn camps that he can’t win an election. But nobody’s actually bothered to set out the case in detail to show he can’t win.”

If Gordon Brown’s intervention on 16 August was regarded as insufficient, those of Tony Blair and Peter Mandelson (who suggested that the three other leadership candidates try to halt the race by withdrawing) were regarded as actively helpful to Corbyn. “Mandelson and Blair are making it look as though the three other candidates are interchangeable, as if there are personality differences but no real political differences,” Trickett said. “There are clearly some differences – but essentially the effect of the these grandees’ interventions is to make the three look as though they are all a part of the same political establishment while Jeremy’s in a different camp. The consequence is that all those members who want to use their vote to achieve real change will clearly go to the only candidate who apparently represents something different.”

Conversation in Labour circles is increasingly turning to what the party would look like under Corbyn. Would he be ousted by MPs? Would he be able to form a shadow cabinet? To form a front-bench team? And how would he perform in a general election?

“The idea there’ll be some kind of coup – that’s total nonsense, it won’t happen,” John Mann, the Labour MP and Treasury select committee member, told me. Under Labour’s rulebook, rival candidates are required to attain the support of 20 per cent of MPs (46) in advance of the party’s annual conference. But in these circumstances, there would be nothing to stop Corbyn, or a left-wing successor, standing in the subsequent contest. Clive Lewis, the MP for Norwich South, a former BBC journalist and army reservist, is already being identified by some Corbyn supporters as a possible heir. “Personally, I think it’s the political kiss of death,” Lewis told me. “I know Owen [Jones] and others mean well but I’ve seen what this accolade has done to other MPs in the party who’ve had similar prophecies made about them.”

If Corbyn wins he will do so with the declared support of just 15 MPs – 6.5 per cent of Labour’s Commons membership. “I’ll show him as much loyalty as he showed other leaders,” Mike Gapes MP told me. Those senior figures who have publicly pledged not to serve in a Corbyn shadow cabinet, such as Cooper, Kendall, Chuka Umunna and Chris Leslie, intend to keep their word. The view is that he deserves “maximum room for manoeuvre to implement his prospectus”. Shadow cabinet members are alive to the danger of a backlash if they appear to obstruct him. In time, they hope, not merely Corbyn, but his policies, will be discredited.

There will be no SDP-style split but the energetic Umunna is already preparing for life on the back benches. He has formed a new group, Labour for the Common Good, led by himself and Tristram Hunt and open to MPs from “the right to the soft left of the party”.

In spite of “the resistance” (as it has come to be known), most believe Corbyn would be able to form a shadow ministerial team. “The party always comes first,” a senior MP said. Contrary to reports, Corbyn does not intend to bring back shadow cabinet elections, and so could unite MPs from Labour’s old left and from the new intake (13 of whom nominated him). In addition, Clive Lewis told me: “A number of MPs I’ve spoken to who supported both Yvette and Andy are quietly very excited at this turn of events.” He also predicted that “many others, sensing an opportunity to move from virtual political obscurity to front-line politics, an option that wasn’t there three months ago, will do so with guarded enthusiasm”.

Corbyn’s supporters cite his genial manner and modesty as crucial advantages. “He’s one of life’s co-operators and will work with people,” Cat Smith, the newly elected Labour MP for Lancaster and Fleetwood, who worked for Corbyn for six years, told me. “He’s not seeking to exclude anybody, that’s not his way of doing things. When I was a member of his [constituency party], Islington North CLP, we had people who were very active and prominent in Progress, people who were in the LRC [Labour Representation Committee] and all the spectrum in the middle. Those CLP meetings were some of the nicest meetings I ever went to because it felt like people left a lot of that baggage at the door. Jeremy’s not going to hold any grudges.”

But MPs question whether Corbyn’s co-ideologues would be similarly ecumenical. “He has said all the way through this that he doesn’t want to do personal politics, he wants it all to be about policies, he’s not going to attack anyone and so on,” Pat McFadden, the shadow minister for Europe, said when we spoke. “And yet some of his supporters are saying some pretty nasty things on social media about other candidates.

“Will his supporters refrain from doing personal things? Jeremy rebelled 500 times against the whip. If other people were to do that would they be afforded the same tolerance that he has been afforded for the past 30 years, or would it be different?”

MPs who plan to oppose Corbyn’s stances fear deselection by their local parties. His team told me that he did not favour the reinstatement of mandatory reselection (abolished under Neil Kinnock in 1990) and would not endorse moves to “depose sitting MPs”. But grass-roots members would still have the power to initiate “trigger ballots” against recalcitrant Blairites.

Corbyn has announced that, if elected, he will review Labour’s membership fee (currently £46.56 a year) with the aim of attracting registered supporters (who paid £3) into the fold. Should he succeed, the party’s centre of gravity will move sharply leftwards. Labour faces a split not just between moderates and radicals but between MPs and members.

There are three early tests that senior figures believe Corbyn would face: Prime Minister’s Questions (his first appearance would be 16 September), relations with the media and next May’s elections in Scotland, Wales and England. John Mann told me that the left-winger had “talked a big game” and that most MPs would judge him by results. “The Tories are rubbing their hands with glee but they also know Labour’s not going to tolerate any leader who performs disastrously in elections.” Others fear, however, that the members will merely blame MPs for being insufficiently supportive of Corbyn if he flounders with the electorate. “It’ll be all our fault. They’re already preparing a great narrative of betrayal,” Gapes said.

Should Corbyn make it to a general election, shadow cabinet members believe that Labour would face a generation or more in opposition. One predicted that the party would lose between 30 and 50 seats and fall below 200 MPs for the first time since 1935. Some fear that the Conservatives, like the Christian Democrats in Italy and the Social Democrats in Sweden in past decades, would attain hegemonic status. The Tories, meanwhile, are divided between those intoxicated by this prospect and those who fear that a Corbyn-led Labour Party would force the Conservatives to move leftwards to occupy a redefined centre ground.

Others note, however, that Margaret Thatcher proved immune from this affliction in the 1980s as she dragged the political consensus rightwards.

In Labour, all sides are preparing to enter what feels like a looking-glass world, or an alternate universe. “There is going to be a new establishment: Corbyn, [Michael] Meacher, [John] McDonnell, [Ken] Livingstone, [Diane] Abbott,” a shadow cabinet minister told me. “They are now, for the first time in their political careers, going to be the political establishment. They are going to have responsibility and they will be running things. They won’t be able to pose as being outsiders or insurgents any more: they will be the establishment.” 

George Eaton is political editor of the New Statesman.

This article first appeared in the 20 August 2015 issue of the New Statesman, Corbyn wars