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What happens when the money runs out?

Banks need the confidence of the public to survive and they have lost it for years to come. The dang

We are witnessing the collapse of the world financial system. To have said that even a month ago would have been to invite ridicule, but now it seems only a statement of the obvious as banks implode, governments panic and investors run. The initial liquidity crisis that broke in August 2007 and drove Northern Rock to the wall has evolved into a crisis of insolvency and finally into a crisis of confidence in the entire financial system.

The British government has been forced into an incremental nationalisation of the banking system, initially with Northern Rock, then Bradford and Bingley, and this week through the £50bn scheme to take equity stakes in leading British banks. But it is a race against time. Last week we started to see something that has never happened before in Britain, even in wartime: a generalised run on the banks. Mostly, this has been by computer - often within the banking system itself - rather than by orderly queues of depositors outside branches - but the result is much the same. The banks' capital reserves evaporate, leaving them insolvent. It is happening throughout Europe and has caused panic in governments. The very integrity of the European Union is under threat as member states resort to disordered and unco-ordinated acts of economic nationalism.

For most of us this chaos has appeared as if from nowhere. This is because financial institutions, regulators, analysts - with a few honourable exceptions like the New York economist Nouriel Roubini - have systematically underplayed the crisis over the past 12 months. When Alistair Darling warned of the severity of the crisis in an interview, he was castigated. We have been told that it is about a few sub-prime mortgages in the United States, that "the worst is over", that liquidity injections are working, when they clearly are not. This is as much a European crash as a Wall Street one and the stock markets of the world are now caught up in the financial psychodrama.

Public alarm is heightened by the incomprehensible language: "securitisation", "deleveraging", "structured investment vehicles" and "credit default swaps". Yet, behind the complexity and obfuscation, the essence of the crisis is simple: the banks have lent as if there were no tomorrow, and now tomorrow has arrived. Behind the fancy formulas lies the brutal truth: that financial institutions which loaned out 30, 40, 50 times their core capital now find themselves at the wrong end of their own leverage and are themselves being levered out of existence. They were not too big to fail after all.

Now they will have to be recapitalised - in other words real money will have to be injected into the banks to make them solvent so that they can lend again. This cannot now come from sovereign wealth funds, shareholders or loans from other financial institutions. It will have to come from the state - ultimately from the bank of you and me. It will require the government to buy large stakes in the banks or to nationalise them outright. This is an outcome governments desperately wished to avoid, but they are rapidly running out of alternatives.

Even though the United States has thrown $700bn at the Wall Street banks, stock markets have collapsed and bank lending remains frozen. Ireland has placed the entire collective wealth of its people at the disposal of its delinquent banks by guaranteeing all bank deposits. Germany righteously condemned beggar-my-neighbour Ireland, and then did the same, while insisting it had not. Denmark, Austria and Greece have followed suit. Bankrupt Iceland has called on trade unions to repatriate pension funds to throw into the black hole that used to be the economy.

As queues form outside London bullion dealers, we are seeing a breakdown of public trust in the banking system, and public trust is the one thing banks need to survive. Banking depends on a kind of benign confidence trick. They make their profits by lending out money they do not actually have - it is called fractional reserve banking. At any one time, a bank will have loans that far exceed its deposits. But the trick only works under certain conditions: if depositors can be persuaded not to withdraw their funds at the same time; if the banks are honest about their reserves; and if the assets they hold retain their value. At present, none of these conditions is being satisfied.

There is worse to come. The next stage will be corporate collapse as companies find they can't roll over loans from banks hoarding whatever cash they still have. Small companies are already having to pay penal interest rates. We may soon see global giants such as AT&T, Ford, General Motors go under. In Britain, companies that depended on the housing bubble are the first to feel the pressure - MFI, B&Q, estate agents. Then it will be high-end retailers, with chains such as John Lewis and Marks & Spencer under pressure, and then other high-street names financed by Icelandic banks. The shake-out in the financial sector will lead to further substantial job losses.

House prices, which have already plummeted, may now sink into the abyss as homes simply become unsaleable. In the worst case, if no one can get a mortgage, a house becomes worth only what people can afford to pay in cash. All those people who felt so secure in their bricks and mortar are about to find that their asset is in fact a liability swallowing money they don't have.

Globally, we are seeing increasing state involvement. Ireland has in effect merged the state with the banks, as has Iceland. In America, the Federal Reserve and Wall Street tried to stage a kind of financial coup, in the original Paulson plan, which would have allowed the treasury secretary to spend public money without political or judicial oversight. Public anger was intense. The danger is that governments, faced with popular resentment at such attempts to resolve the crisis, find themselves resorting to undemocratic means of managing dissent. Phlegmatic Britain doesn't do civil unrest. But we know from what happened in Europe in the 1930s that systemic financial crisis can lead rapidly to the growth of political extremism.

We may be about to discover just how dangerous it was to allow all those CCTV cameras to be put up on every street corner; to arm the police and turn them into a kind of civil army; to extend detention without trial. With luck, our democratic institutions will remain a bulwark against such authoritarianism, but this will require vigilance. This is a pivotal moment.

Governments have no alternative now but to take over and recapitalise the banks. This will mean huge losses to shareholders, but they are losing already. The state is now at the heart of the financial system. We are at the end of the delusion that an economy can be built on debt. It is payback time. Unfortunately we are all liable.

This article first appeared in the 13 October 2008 issue of the New Statesman, The facade cracks

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Inside the minds of the Isis murderers

As pressure on the terror group who claimed responsiblity for the Manchester attack intensifies, the threat to Britain will only become more acute.

The police and security services had consistently warned that a significant terrorist attack in Britain was inevitable. Yet no warning could have prepared us for the horror of the suicide attack on the Manchester Arena on Monday night. Twenty-two people were killed and at least 60 were wounded as they were leaving a concert by Ariana Grande in what was the most deadly attack in Britain since the London bombings of 7 July 2005, in which 56 people died.

Like the London bombers, the Manchester suicide attacker, Salman Ramadan Abedi, was British. He was 22, lived in Manchester and studied business management at Salford University before dropping out. He worshipped at Didsbury Mosque. The son of Libyans, Abedi is said to have returned recently from a visit to the North African country, where Islamic State has a foothold.

Ariana Grande is a former children’s TV star who made her name on channels such as Nickelodeon. Her fan base is overwhelmingly young and female, and many of those killed or wounded were children, including Saffie Rose Roussos, an eight-year-old girl from Leyland, Lancashire.

Islamic State inevitably claimed responsibility for the massacre, dismissing the victims as “crusaders”, “polytheists” and “worshippers of the cross”. This is not the first time Islamist terrorists have targeted children.

A Chechen jihadist group calling itself ­Riyad-us Saliheen (meaning “Gardens of the Righteous”) took more than 1,100 hostages, including 777 children, in a school siege in Beslan, Russia, in September 2004. In the event, more than 330 were massacred, including 186 children. Gunmen from the Pakistani Taliban also stormed a school in 2014, killing 148.

For terrorist actors, these are neither whimsical nor irrational acts. Contemporary jihadist movements have curated a broad and expansive intellectual ecosystem that rationalises and directs their actions. What they want is to create an asymmetry of fear by employing indiscriminate barbarism to intimidate and subdue their opponents into submission.

We have grown accustomed to a wave of terrorist attacks being carried out in the name of the self-styled Islamic State ever since the group’s official spokesman Abu Muhammad al-Adnani began prioritising them in 2014. (He was killed in an American air strike on Aleppo province in Syria in August last year.)

The US-led coalition against Islamic State has weakened the terror group in its former strongholds of Mosul in Iraq and Raqqa in Syria. In response, IS has been forced to concentrate more on what it calls “external operations” – by which it means inspiring its sympathisers and operatives to carry out attacks on Western countries. Indeed, al-Adnani encouraged the group’s supporters not to migrate towards IS-held territory but rather to focus their efforts on attacks in their home countries.

“The tiniest action you do in the heart of their [Western] land is dearer to us than the biggest action by us,” he said in an audio statement released last year. “There are no innocents in the heart of the lands of the crusaders.”

Islamic State refers to its strategy as “just terror”. Its framing places culpability for attacks on Western states on these nations themselves by claiming that IS actions are a response to aggression or assault. That much has been outlined in the group’s literature. “When will the crusaders end their hostilities towards Islam and the Muslims? . . . When will they recognise that the solution to their pathetic turmoil is right before their blinded eyes?” the militants ask in the IS magazine Dabiq. “Until then, the just terror will continue to strike them to the core of their deadened hearts.”

IS offered a rationale of this sort as justification for its bombing of a Russian commercial aircraft – Metrojet Flight 9268, travelling from Sharm el-Sheikh in Egypt to St Petersburg. That attack in October 2015 killed 224. Similar reasoning was offered for the attacks in Paris the following month in which 137 people were killed, in a series of co-ordinated, commando-style gun and bomb outrages across the city.

“Revenge was exacted upon those who felt safe,” IS declared in Dabiq. “Let the world know that we are living today in a new era. Whoever was heedless must now be alert. Whoever was sleeping must now awaken . . . The [caliphate] will take revenge for any aggression against its religion and people, sooner rather than later. Let the ­arrogant know that the skies and the lands are Allah’s.”

***

Through my academic research at King’s College London, I have ­interviewed scores of Westerners who became foreign fighters in Syria and Iraq to quiz them about their motives. Last year, one man from High Wycombe who had joined IS told me that it wanted to attack British targets in response to the vote in the House of Commons to extend British air strikes against IS targets to include sites in Syria (the British had only been targeting the group in Iraq until that point). “Do they [the British government] expect us to sit back and do nothing? ­Idiots,” he said.

In this respect, IS frames its attacks as acts of “revenge” and predicates its response on the Islamic principle of qisas, which is comparable to lex talionis or the doctrine of “an eye for an eye”. Qisas was always intended to be a tool of private redress for an individual or his/her family to seek justice in matters relating to bodily harm. Typically, it relates to cases of murder and manslaughter, or acts involving physical mutilation (say, leading to loss of limbs). The principle creates a framework for retributive justice.

The contemporary Salafi-jihadi movement has adopted a particularly innovative approach to the concept of qisas in two ways. First, groups such as IS have taken the idea and construed it in a way that justifies indiscriminate terrorism, such as the attack in Manchester. They argue that qisas has a political dimension and that it can be applied to international affairs in a way that holds civilians responsible for the perceived crimes of their governments.

Second, qisas is normally applied only in cases where the aggressor is known. IS, by contrast, holds every citizen-stranger of an enemy state responsible for the actions of his or her government. Thus, when it released its statement claiming responsibility for the Manchester attack, it said that it had struck against a “gathering of the crusaders . . . in response to their transgressions against the lands of the Muslims”.

It is this militaristic construction of qisas that allows IS to rationalise the bombing of a venue where large numbers of young girls had gathered to watch a pop concert, dismissing them as “crusaders”.

This is not new. In 1997, Osama Bin Laden told CBS News that “all Americans are our enemies, not just the ones who fight us directly, but also the ones who pay their ­taxes”. His rationale was that all Americans, by virtue of citizenship alone, are vicariously liable for the actions of their government.

Just a few years later, Bin Laden used the same idea to justify the 11 September 2001 attacks and also invoked it in reference to the Israeli-Palestinian conflict. “The blood pouring out of Palestine must be equally revenged,” he wrote. “You must know that the Palestinians do not cry alone; their women are not widowed alone; their sons are not orphaned alone.”

IS used the concept most dramatically in January 2015, when it burned alive a Royal Jordanian Air Force pilot, Muath al-Kasasbeh, whose plane had crashed in its territory. A video of the killing was circulated on the internet and social media. The group claimed his bombing raids had killed civilians and that it wanted to punish him with “equal retaliation”, in keeping with qisas.

What is well known about al-Kasasbeh’s murder is that he was burned alive inside a cage – but that is not the whole story. To understand how IS tethered this to the principle of qisas, it is the end of the gruesome video that is invested with most significance. After al-Kasasbeh has died, a truck emerges and dumps rubble over the cage. It was claimed this was debris from a site he had bombed, thus completing the “equal retaliation” of returning like for like. The idea was that IS had retaliated using the two principal forms in which a missile attack kills – by fire or debris.

***

The Manchester attack came on the fourth anniversary of the brutal murder of Fusilier Lee Rigby in Woolwich, south London. Rigby was killed by Michael Adebolajo and Michael Adebowale in the middle of the afternoon on a street outside a military barracks. That attack was in keeping with a pattern we have become increasingly accustomed to in Europe: an unsophisticated plot that employs ordinary, everyday items – a car, say, or a knife.

The consequences of such attacks have been seen across Europe, most notably in Nice on 14 July 2016, when 86 people were killed during Bastille Day celebrations after a jihadist drove a truck into crowds on the promenade. Similar attacks followed in Berlin, Westminster and Stockholm.

The security services find that these murderous attacks are extremely hard to disrupt because they typically involve lone actors who can mobilise quickly and with discretion. The Manchester attack was different. Explosives were used, which means the plot was inherently more sophisticated, requiring careful planning and preparation.

We know that two of the 7/7 bombers had previously trained in Pakistan’s lawless tribal regions, where they honed their skills. In other plots, such as the connected attacks in London and Glasgow Airport of 2007, the explosive devices failed mainly because the bomb-makers had found it difficult to travel abroad and develop their skills in safe environments. Whatever Abedi’s connections, the long war in Syria and Iraq has once again created a permissive environment for terrorist training and attack planning.

The devastating impact of this has already been felt across Europe. Since the Syrian uprising began in 2011, more than 800 Britons are believed to have travelled there to fight. From Europe as a whole, the figure is over 5,000, of which a significant number are believed to have joined IS. Of the British contingent, the security services estimate that about half have returned or become disengaged from the conflict. Of those who remained, a hundred are believed to be active, the rest having been killed.

It is improbable that Abedi acted alone in Manchester or that this plot had no international component. Indeed, he was already known to the authorities (and had returned recently from Libya). As pressure on IS intensifies across Syria and Iraq, the threat to Britain will only become more acute as the group’s sympathisers prepare for what they consider to be a fightback.

This speaks to the scale of the threat facing Britain, and Europe more generally. Our police and security services have been stretched and continuously tested in recent years. Just recently, in March, the Metropolitan Police assistant commissioner Mark Rowley told Radio 4’s Today programme that 13 plots had been thwarted since Lee Rigby’s murder in 2013. Put another way, the police have disrupted terrorist plots every four months for the past four years.

Naturally, Islamic State is not the only threat. On 13 May, one of Osama Bin Laden’s sons, Hamza, released a video, titled “Advice for martyrdom-seekers in the West”, on behalf of al-Qaeda. Hamza, 27, who was his father’s favoured successor to lead the group, called on its supporters to concentrate on attacks in the West rather than migrating to conflict zones in the Middle East and beyond. Scenes of previous ­terrorist attacks in Britain played throughout the video.

The central leadership of al-Qaeda is increasingly looking for opportunities to reassert itself after being eclipsed by Islamic State and losing control of its affiliates in Syria. It needs attacks and a cause in the West with which to revive itself. Hamza therefore cited the January 2015 Charlie Hebdo attack in Paris as a critical example, calling for the assassination of anyone deemed to have “insulted” Islam.

The Charlie Hebdo attack was especially important for al-Qaeda because it enabled the group to transcend the fratricidal conflicts that frequently define relations between the various jihadist groups. In Syria, for instance, al-Qaeda’s affiliates (when it had better control over them) and Islamic State have been in open war with each other.

Yet, the Charlie Hebdo attack brought warm praise from the group’s Islamist rivals because none of them wanted to appear ­unsupportive of an atrocity that had, as the terrorists proclaimed, “avenged” the Prophet Muhammad’s honour.

The British man from High Wycombe who joined IS told me the group had welcomed the attack for precisely those reasons. It was something that, in his view, had confirmed the “nobility” of the attackers, even if they had not been members of IS.

Is it too late for the West to save itself, I asked him. What if the West simply accepted all of Islamic State’s demands: would that provide respite?

The answer was as emphatic as it was stark: “We primarily fight wars due to ppl [sic] being disbelievers. Their drones against us are a secondary issue.”

He went on: “Their kufr [disbelief] against Allah is sufficient of a reason for us to invade and kill them. Only if they stop their kufr will they no longer be a target.”

In other words, we are all guilty, and we are all legitimate targets.

Shiraz Maher is a contributing writer for the New Statesman and a senior research fellow at King’s College London’s International Centre for the Study of Radicalisation.

This article first appeared in the 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

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