Obama and Darling too soft on bankers

There has never been a better time to cut finance down to size, but Washington and London have ducked the chance to do so

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• • Larry Elliott
  • guardian.co.uk, Wednesday 17 June 2009 18.30 BST
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Two years ago, Gordon Brown used his last Mansion House speech to praise the City for its enterprise and verve. Labour's light-touch regulatory regime had, he boasted, created the right environment for London to become the world leader in financial services.

There will be a bit less of that sort of talk when Alistair Darling addresses the Square Mile's great and good tonight. We must learn the lessons of the past, the chancellor will insist. There must be no repetition of the behaviour that led to the most serious financial meltdown in living memory. Anyone who thinks we can carry on as before should think again.

In reality, though, the government is planning no more than a slap on the wrist for the discredited bankers. The message from London – and from the Obama administration in Washington today – is that the chance for radical overhaul has been ducked. The chancellor has made it clear he retains faith in the tripartite system of regulation that failed so badly in the run-up to the crisis and believes the first line of defence should be tougher scrutiny of banks by their own directors.

But, as Vince Cable noted today, it was self-regulation that got us into this mess and it would be madness to return to business as usual.

Obama has fallen into the same trap. The president has announced that the Federal Reserve, America's central bank, is to have a bigger role in supervision. That sounds tough but in fact creates the conditions for a classic conflict of interest. The running of the Federal Reserve in Washington reflects the views of the 12 regional reserve banks, each of which have nine-person boards, two-thirds of whom are elected by local banks. To be fair, bits of the Obama blueprint are welcome. He wants greater constraints on leverage and restrictions on securitised products; both are good ideas, but they do nothing to change the status quo.

So what's wrong with the softly-softly approach? First, this has been a financial crisis of extreme severity, with global economic ramifications. Second, it was not a one-off event, but instead the culmination of a period of speculative excess that spawned smaller, but still serious, financial upsets around the world in the preceeding years. Finally, the systemic weaknesses of de-regulated finance suggest that a failure to act decisively now to put financial capital back in its cage will lead to the problems of the past two years re-surfacing before long.

The past two years have seen a belated interest in the work of the US economist Hyman Minsky, who warned in the 1970s that left to its own devices the financial sector would move from stability to fragility, making the economy vulnerable to painful debt deflations. Unfortunately, Minsky's ideas do not seem to have penetrated the Treasury, either in the UK or the US.

Darling is right to say that lessons must be learned. The big lesson, though, is that we permit banks that are "too big to fail" at our peril. One of Roosevelt's first decisions in 1933 was to pass the Glass-Steagall act, which legally separated retail from investment banking. That could be achieved today either by taking the banks into public ownership, breaking them up and then returning them to the private sector. Or it could be done through a draconian use of capital requirements, which would make it prohibitively expensive for what are primarily retail banks to dabble in the more exotic financial instruments. But the chances of either happening look remote. Two years into the crisis, the carnage caused by the follies of finance is strewn around the global economy; taxpayers have bailed out the City and Wall Street; and the banks are even bigger than they were before. Never has there been a better moment to cut finance down to size.

Sadly, unforgivably, governments have bottled it.

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Universities merged into business

England's department for higher and further education has been scrapped, just two years after its creation.
The prime minister has created a new Department for Business, Innovation and Skills under Lord Mandelson.
Universities do not figure in the name of the new department, whose remit is "to build Britain's capabilities to compete in the global economy".
Number 10 said it would invest in a higher education system committed to widening participation.
The role would include "maintaining world class universities, expanding access to higher education, investing in the UK's science base and shaping skills policy and innovation".
"It also puts the UK's further education system and universities closer to the heart of government thinking about building now for the upturn," the statement said.
'Unhelpful'
The new department will be headed by Lord Mandelson.
John Denham, the secretary of state for the former Department for Innovation, Universities and Skills (Dius), has become Communities Secretary.
Mr Denham had run Dius since June 2007, when it was created from the division of the education department, when Gordon Brown became prime minister.
Dius had been created as a separate department for higher and further education - with the remainder of education becoming the Department for Children, Schools and Families, currently headed by Ed Balls.
The schools minister, Jim Knight, has also moved in the reshuffle, becoming minister of state for employment in the Department for Work and Pensions.
In response to the latest shake-up, the further education organisation, the Association of Colleges, said that "in the middle of a recession and with less than a year to run to an election it's unhelpful to introduce this degree of change in terms of ministerial responsibility".
Diana Warwick, head of the higher education body, Universities UK, said: "We are looking forward to an early meeting with Lord Mandelson."
"We want to work with him to continue the momentum in developing a higher education system that will equip people with the knowledge and skills to compete in a global economy and enhance Britain's existing world-class research base."
Pressure on places
The Million+ group, representing new universities, said that the department would have to address "immediate challenges".
"In particular the tens of thousands of potential students who will be turned away because there are no places for them at university this year."
This refers to a problem facing the new department this summer if, as has been forecast by universities, there is a shortfall of places following a surge in applications.
The UCU lecturers union expressed its disappointment at the scrapping of Dius.
General secretary Sally Hunt said she was "very concerned" that the "merger seems to signal that further and higher education are no longer considered important enough to have a department of their own".
"The fact they have been lumped in with business appears to be a clear signal of how the government views colleges and universities and their main roles in this country."
It is not yet clear how the new department will work in terms of devolved government, as the defunct department was an England-only structure.

Disarray over terror control orders after law lords ruling

Frances Gibb, Legal Editor
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Three men have won a unanimous ruling from Britain’s highest court that strikes a massive blow to the “control orders” regime for detaining terror suspects.
A rare panel of nine law lords allowed an appeal by three terror suspects on the grounds that they did not know what they were accused of and secret evidence was used against them.
The strongly-worded ruling, hailed as “historic” by human rights groups, means that many of the 17 terror suspects now held under the controversial orders will have to have their cases re-examined.
One of the law lords, Lord Hope of Craighead, said: “If the rule of law is to mean anything, it is in cases such as these that the court must stand by principle. It must insist that the person affected be told what is alleged against him.”
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Alan Johnson, the Home Secretary, said he was “disappointed” but made clear that the Government would contest each case vigorously.
He said: “This is an extremely disappointing judgment. Protecting the public is my top priority and this judgment makes that task harder. Nevertheless, the Government will continue to take all steps we can to manage the threat presented by terrorism.”
He said that all control orders would remain in force for the time being, adding: “We will continue to seek to uphold them in the courts. In the meantime we will consider this judgment and our options carefully.
“We introduced control orders to limit the risk posed by suspected terrorists whom we can neither prosecute nor deport. The Government relies on sensitive intelligence material to support the imposition of a control order, which the courts have accepted would damage the public interest to disclose in open court.
“We take our obligations to human rights seriously and as such we have put strong measures in place to try to ensure that our reliance on sensitive material does not prejudice the right of individuals subject to control orders to a fair trial.”
The control order regime was introduced in March 2005 as a means of holding terror suspects who have not been charged or tried and where the evidence is largely sensitive and derived from intelligence sources.
Instead they are held under a home curfew with electronic tagging and bans on whom they can meet and where they can go.
It is the third set-back by ministers in their efforts to deal with terror suspects while preserving the confidentiality of evidence obtained from intercepts.
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The control orders regime was introduced under the Prevention of Terrorism Act 2005 in response to the law lords’ landmark ruling that to hold foreign terror suspects without charge or trial in Belmarsh prison was a breach of their human rights and unlawful.
The men can challenge their control orders - but they are not allowed to see any of the secret intelligence assessments that form the basis of decision to restrict their liberty.
In October 2007 the law lords ruled that the most draconian restriction under the control order regime, an 18-hour curfew, was also a breach of the European Convention on Human Rights.
Today, ruling in favour of the men, Lord Phillips of Worth Matravers, the senior law lord, said: "A trial procedure can never be considered fair if a party to it is kept in ignorance of the case against him."

We won't collude with efforts to use the academy to police immigration

7 May 2009
Ann Singleton, Steve Tombs and David Whyte decry the insidious way in which academics are being used to monitor foreign students and staff
We are among the growing number of academics across the UK voicing our concern about being drawn into playing a key role in an ever-tightening system of immigration control. Many of us are now being asked to implement procedures and checks related to immigration status on both our colleagues and our students. The creeping imposition of such practices raises questions about the legal responsibilities and contractual requirements of university and college staff, the methods the UK is using to police immigration, and the compromising of what remains of academic freedom in Britain.
In February 2008, the Government introduced major changes to UK immigration policies and laws, seeking to consolidate a plethora of immigration-control measures. The main plank of these changes was the introduction of a points-based system (PBS) under which potential employers of migrant workers from outside the European Union must be approved and licensed by the Government before workers are granted permits to take up employment. Thus, universities and colleges must now be licensed as "approved education providers" to bring non-EU students into the UK to study. In addition, before they are admitted to the country, these students must hold a visa giving them permission to enter for the purposes of study at the approved institution, and prove that they have enough money to pay their fees and maintain themselves in the UK.
The Home Office has issued the same guidance to all higher education institutions, but universities differ markedly in the interpretation and implementation of their duties. Many have introduced a variety of new practices to monitor both the employment and education of non-EU nationals. Some academics and administrators are being instructed to take full registers at lectures and seminars, and to report non-attendance (even if attendance is not compulsory); others are being asked to take the passport information or driving licence details of colleagues who are invited to act as external examiners.
What is common to these responses is that they are discriminatory and likely to result in at best prejudicial and at worst unlawful actions against individual colleagues and students. Across the sector, management responses are confused and overzealous. The atmosphere for non-EU students and colleagues is becoming increasingly hostile and surrounded with doubt and suspicion.
Our role does not extend to policing or monitoring immigration - nor should it. It is important that academics resist collusion with the creeping surveillance mentality being introduced into institutions on the back of the PBS. The only reason for monitoring student activity or achievement should be to inform best pedagogic, pastoral and ethical practices.
And such surveillance, while a breach of trust and a distortion of our mentoring and pastoral roles, is just the thin end of the wedge. Some universities have been visited by "anti-terrorism" police and asked to report (Muslim) students whose work shows signs of "radicalisation". What next? Reporting anyone who shows signs of radicalism? All of this flies in the face of the better traditions of academic life, the educational process and the ethics of ensuring that no one is discriminated against in the classroom or the lecture hall. We urge, along with Susan Edwards ("Call off the witch-hunts", 30 April), tolerance and free debate in university life.
For all these reasons, we refuse to collude with attempts by Government and higher education institutions to use academics to police and monitor immigration controls. But what, concretely, does this refusal mean? There are some things that individuals can do. Take, for example, external examining, that (largely unpaid) system of collegiate goodwill upon which all of our undergraduate and postgraduate assessment rests; increasingly, those of us undertaking such work are being asked to provide evidence of citizenship (and by implication residency) - so a refusal to engage in any such process would quickly pose problems for those making the demands.
But we cannot leave it to individuals to take isolated action. As we write, a campaign is developing from the ground up through the University and College Union, and should result in a debate on motions of non-cooperation at the UCU's national congress at the end of May. We must also join with other unions across the sector, notably those that represent administrative staff. Among those things worth defending across universities and colleges, relationships based upon mutual trust and tolerance are surely of the highest priority.
Ann Singleton is senior research fellow, School for Policy Studies, University of Bristol; Steve Tombs is professor of sociology, Liverpool John Moores University; and David Whyte is reader in sociology, University of Liverpool.
Postscript :
Full list of signatories:
Rachel Aldred, University of East London
Nicole Asquith, University of Bradford
Andrea Beckmann, University of Lincoln
Eileen Berrington, Manchester Metropolitan University
Ben Bowling, Kings College London
Jon Burnett, University of Liverpool
Hazel Cameron, University of Liverpool
Elizabeth Capewell, Centre for Action Research in Professional Practice
Sarah Cemlyn, University of Bristol
Paul Chatterton, University of Leeds
Bankole Cole, University of Hull
Charlie Cooper, University of Hull
Gary Craig, University of Hull
Heaven Crawley, Swansea University
Erika Cudworth, University of East London
Bill Dixon, Keele University
Iain Ferguson, University of Stirling
Robert Fine, University of Warwick
Steven French, University of Leeds
Diane Frost, University of Liverpool
Geetanjali Gangoli, University of Bristol
Barry Goldson, University of Liverpool
Dave Gordon, University of Bristol
Penny Green, Kings College London
Simon Hallsworth, London Metropolitan University
Mark Hayes, Southampton Solent University
Stuart Hodkinson, University of Leeds
Gerry Johnstone, University of Hull
Helen Jones, Manchester Metropolitan University
Paul Jones, University of Liverpool
Majella Kilkey, University of Hull
Dave King, University of Liverpool
Joan Langan, University of Bristol
Ana Lopes, University of East London
Diana Medlicott, Buckinghamshire Chilterns University College
Lucy Michael, University of Hull
David Miller, University of Strathclyde
Linda Moore, University of Ulster
Lydia Morris, University of Essex
Bill Munro, University of Stirling
Gabe Mythen, University of Liverpool
Gbenga Oduntan, University of Kent
Christina Pantazis, University of Bristol
Stephanie Petrie, University of Liverpool
Scott Poynting, Manchester Metropolitan University
Anandi Ramamurthy, University of Central Lancashire
Vincenzo Ruggiero, Middlesex University
Jill Rutter, Migration team, Institute for Public Policy Research
David Scott, University of Central Lancashire
Phil Scraton, Queens University Belfast
Prakash Shah, Queen Mary, University of London
Joe Sim, Liverpool John Moores University
Ann Singleton, University of Bristol
Graham Smith, University of Manchester
Iyiola Solanke, University of East Anglia
Keith Soothill, Lancaster University
Steve Tombs, Liverpool John Moores University
Dermot Walsh, University of Limerick
Reece Walters, The Open University
John Watson, University of Hull
David Whyte, University of Liverpool
Richard Wild, University of Greenwich
Mick Wilkinson, University of Hull
Stuart Wilks-Heeg, University of Liverpool
Derek Williams, Southampton Solent University
Emma Williamson, University of Bristol
Majid Yar, University of Hull
Nira Yuval-Davis, University of East London

Fighting secrecy in court

A judgment condemning the use of special advocates in imposing control orders is another blow to an unfair system
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Afua Hirsch
guardian.co.uk, Wednesday 10 June 2009 12.30 BST
Article history
Welcome to a new phase in the battle over counter-terrorism laws between parliament and the courts. Today's unanimous condemnation of the use of special advocates in imposing control orders by the House of Lords came as quite a surprise – overturning previous decisions upholding the system by the high court and the court of appeal.
There have been judicial blows to this system in the past; including a House of Lords decision in October 2007 which ruled that the special advocate system did not provide sufficient safeguards. But the law lords disagreed wildly on the extent to which the "controlee", as those under control orders are known, should be provided with the case against him, and left the overall system of control orders in place.
But today's judgment is a more fundamental blow. The House of Lords – in a powerful panel of nine judges – has decided that the system of secret advocates violates the right to a fair trial unless the controlee has access to at least the irreducible minimum of the case against them.
The current system of secret advocates has not allowed this. There are 100 or so special advocates currently accredited to act in secret proceedings although ironically, as a Justice report (pdf) released today points out, even in creating a system dealing with such sensitive information the government has not managed to gather its own intelligence on the exact number of lawyers appointed.
Special advocates operate according to a strict regime. As one told me, signing up involved rigorous security checks including interviews with friends and neighbours, requiring him to keep a safe in his office where all the papers are locked and providing him with secure transport whenever he needed to travel with them.
Some special advocates have expressed unease with operating in a system so antithetical to the usual ethics of legal representation – communicating key evidence with your client and taking their instructions is a fundamental part of what most advocates do.
Ian Macdonald QC, a renowned human rights barrister and one of the first special advocates to be appointed after the system was introduced for the first time in 1997, resigned in 2004 stating publicly that "whatever difference I might make as a special advocate on the inside is outweighed by the operation of a law, fundamentally flawed and contrary to our deepest notions of justice".
My role has been altered to provide a false legitimacy to indefinite detention without knowledge of the accusations being made and without any kind of criminal charge or trial. Such a law is an odious blot on our legal landscape and for reasons of conscience I feel that I must resign.
Today the law lords appear to be in agreement with the gist of this argument – criminal proceedings that deny the accused the right to know the case against them go against the grain of hundreds of years of carefully developed legal principles of which the British legal system has, ironically, been a proud exporter to countries around the world.
The erosion of openness in legal proceedings has not been confined to criminal trials or deportation either. Lawyers have been speaking for some time of the "creep" of secrecy throughout the legal system, including Louise Christian, who has been particularly vocal in warning of the use of closed evidence in employment tribunals and inquests.
Speaking at the Guardian Hay festival last month in a debate on civil liberties, former home secretary Charles Clarke – not widely known for his excessive liberalism – added his voice to the growing disquiet, acknowledging that the spread of secrecy needed to be scaled back.
The government was maintaining its official line today, however, stating that the system of special advocates was necessary to "manage the threat presented by terrorism".
"Protecting the public is my top priority and this judgment makes that task harder," home secretary Alan Johnson said this morning.
But given that cabinet members have been privately expressing their own unease at the continuation of counter-terrorism measures which were always intended to be temporary, including Jack Straw who spoke publicly about this to the Guardian last month, there is a subtext to today's judgment which is coming over loud and clear.
As the home secretary also said in his statement today "we take our obligations to human rights seriously". Of course the government is anxious to protect the public from any genuine security threat – no one, least of all the courts, would disagree with the importance of this. The government knows the system of control orders and special advocates is a deeply unfair way to respond to that threat and, reading between the lines, it looks like it simply has not come up with a Plan B.

The recession is far from over

Economists and bankers are now putting positive spin on a supposed end to the economic crisis. Let's look at the real figures
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Ann Pettifor
guardian.co.uk, Friday 12 June 2009 08.30 BST
Article history
A banker, Alan Clarke of BNP Paribas, citing a NIESR report, confidently tells the Guardian that the recession is over. Should we take the word of any banker – especially one that claims to be an economist – seriously? Given that the economics profession was blind-sided by the "debtonation" (August 9 2007), I am deeply sceptical. Second, given that this is a banker-induced recession, that reckless and often fraudulent behaviour by bankers led to a loss of $60tn of yours and my wealth (in the form of pensions, equities, lost interest on savings, and lost income from job losses) last year, should we believe a banker's particular spin on the crisis?
I say firmly, no, for a number of reasons, outlined below. But the most important reason for pessimism, in my view, is the hegemonic role played by fiscal conservatives. By raising fears over government deficits, and by refusing to acknowledge that government spending pays for itself, these conservatives have set the economic and political agenda in all the British media, and in every British political party (with the Green party the honourable exception). As a result, Alistair Darling seems hell-bent on committing electoral suicide, with shadow chancellor George Osborne actively encouraging him. The private sector will not be able to rely on the public sector for the stimulus vital to recovery. As things stand, any fragile signs of economic recovery will quickly be crushed by the failure of government to intervene and spend at an appropriate level. Instead, government cutbacks will impact with considerable force on the fragile economy, and will hurt the middle and working classes. As the year proceeds many will discover the true, and often pitiful value of their pensions, and will be hurt by cuts in services and job losses in the public sector. This will hamper recovery and deepen, if that is possible, the alienation of British voters from the Labour government.
Unfortunately, the hegemony of fiscal conservatives reaches far and wide, and includes Germany's chancellor, Angela Merkel, President Sarkozy of France and the US's Federal Reserve governor, Ben Bernanke.
So, at a time of grave private economic failure, cuts in government spending in Europe and the US will arrest recovery. Furthermore, central bankers will have no room for manoeuvre to lower rates further, as they have done this year. Instead, interest rates may well rise at a time when low rates are needed to reflate the deflating body of the global economy.
So, while it must be accepted that the economy seems to have slowed its freefall into the abyss and that there are now fewer jobs to lose and fewer businesses to go bust – there is no real cause for confidence in sustained, or even halting recovery. The real economic outlook remains grim.
All G7 economies will report negative growth in 2009 for the first time in 100 years, according to the Economist Intelligence Unit's senior vice-president, Dr Daniel Thorniley, in a report to the EIU's corporate network. Darling, along with the British prime minister, Gordon Brown, constantly assure us that the "bankers' recession" was not made in Britain, but is a global phenomenon. By this reasoning negative growth in the G7 economies means little chance of recovery for the UK economy.
Foreign direct investment could fall globally by 45% this year, according to the same report, and corporate profits will decline by 20-25%. Global trade is down 25%, and the EIU predicts trade will be down by 10-15% by year end – the worst figure since 1945.
In April this year, consumer prices turned negative in the US, the UK, Germany and Japan. This may be good news for consumers, and may help lower food prices for the poor, but it is not good for the economy as a whole. Businesses cannot profit from negative prices, so they are bankrupted and lay off employees. The rocketing numbers of unemployed (whose plight is seldom taken seriously by orthodox economists) will cut back on borrowing and shopping and may even default on loans. This is not good news for the productive sector of the economy, and it's very bad news for the banking sector. Banks have still not fully de-leveraged the debts on their balance sheets. Now, thanks to rising unemployment, non-performing loans are "set to rise sharply around the world over the next 12-18 months" according to the EIU. This is very scary, if one considers that there are still $600tn of liabilities in the form of derivatives on balance sheets out there – backed up by a mere $38tn of so-called credit default swaps (in reality a form of insurance on derivatives).
Finally, the rising price of oil seems set to exacerbate this dismal economic outlook. To everyone's surprise, it has been rising lately and is now at $71. This is strange, because as Business Week's Stanley Reed reports, "stockpiles are so high that an ocean of oil is building up around the world in tankers or in depots". Yet the price of US crude has almost doubled. While Opec has cut back and maintained quotas of production, and contributed substantially to the price rise, it turns out that once again, the finance sector is playing fast and loose in oil markets. Göran Trapp, head of global oil trading at Morgan Stanley in London is quoted as saying: "Hedge funds and asset managers who have been sitting on cash now feel it's time to buy [oil]." $3.8bn has flowed into oil and gas exchange traded funds this year, versus $1.4bn in the first half of 2008.
The US and British governments appear relaxed, even passive, about the impact of hedge-fund speculation on the oil price and the global economy. Indeed they seem determined to maintain the dominant status of the finance sector within the economy. Banks that are "too big to fail" are not just tolerated, but encouraged in their morally hazardous behaviour. In Britain, the Labour government has actively helped consolidate the banking sector, and shrink the competition, as the forced Lloyds/HBOS merger demonstrated. Hedge funds remain free to gamble in the casino that is the global economy.
Nothing has been done to restructure the global economy and limit financial imbalances – including Anglo-American deficits and the Chinese surplus. Indeed these matters were not even discussed at the last G20 summit. Big, reckless money continues to be made from currency speculation, just when the global economy requires currency stability.
We – employees, consumers, investors and borrowers – have been misled and fooled by the economics profession and finance sector for years before this crisis. As a result of our gullibility, we lost $60tn of wealth in the past year. We would be wise now to dismiss their vain efforts at confidence-boosting, and instead rest our judgments on the real world economic outlook.