At this week’s UK Treasury Select Committee hearing on the Budget of 2012, attendees were invited to draw parallels between George Osborne’s view of economics and the military stratagems of Field Marshall Haig. It seems that the British Chancellor of the Exchequer has followed Haig in believing that the best way to confound one’s enemies is to do what any rational being would least expect: to make the same mistake again and again, stubbornly and without recourse to compassion.
The moment of particularly acute pinching of one’s nasal bridge came when Osborne set forth his ideas for boosting lending to small businesses; a matter on which his much trumpeted Project Merlin has miserably failed its aims. Osborne’s ingenious solution was to have a pseudo-public body lend this money, but then bundle up the loans into a special purpose vehicle, which would then issue securities to private investors. Let us not mistake the Chancellor’s intent here; he used the word “securitisation” without irony, and even stated that while securitisation of such loans had ended with the Credit Crunch:
“Restarting it is not easy and we’re not aware of any country that has successfully done this on a large scale since the crash.”
I will not insult our readers by specifying the reasons for this strange lack of success in the field of securitisation post-2008. It is quite evident that Osborne, though out of his depth, has not decided to resurrect sub-prime debt schemes out of ignorance, but because he has been “got at” by investment bankers. There are two aspects to this “getting at”:
1) the flattery thesis: Osborne does not understand what has been proposed to him by the City chaps who have approached him, but he thinks it sounds clever, and if he is to sound clever too, he needs to be able to repeat what the City chaps said, carefully avoiding discussion of anything technical. It is this need for people to feel that they are part of the “in-crowd” which as much explains Berni Madhoff’s fraud as the sale of useless if not deleterious financial products to Goldman Sachs’ many “muppet” clients.
2) the kick-start thesis: nevertheless Osborne does understand that securitisation was big business in the City pre-2008. It is a market he himself admits is dead, and by so doing, it suggests that his thinking (thought for him by the City) is to attempt to piece together a new Creature from the viable body parts, supplemented with elements robbed from British graves. On this view, Osborne wants to use state money to force open the market for securities by flooding the City with presumably state-backed paper; this sudden burst in activity creating a space into which private securitisations can return.
These two reasons have nothing to do with whether the underlying programme, of small business lending, would actually work. The evidence from the United States is that it will not, principally because the finance side of the scheme (on-sale of securities to willing investors) runs counter to the public-good side of the scheme (lending money to businesses that private lenders won’t touch). The result in the U.S. mirrored what happened with sub-prime mortgages granted by Fannie Mae and Freddie Mac: loans written without due diligence to people who could not pay, leading to massive funding problems and state intervention, with debt transferred to state balance sheets. Given that Osborne will have to provide even greater sweeteners upfront to get his securities up and running, we will not have to wait to the next crash for the downside.
We have another case, therefore, of not merely refusing to make any positive changes to the financialised world in which we live, but of active restoration if not extension of financialisation; of repeating mistakes each time with greater fury. Osborne, like King John of Bohemia at Crècy, is unable to perceive the world around him but nevertheless orders his aides to tie their horses together to his, so they might lead him into the battle:
“[The aides] said they would do his commandment, and to the intent that they should not lose him in the press, they tied all their reins of their bridles each to other and set the king before to accomplish his desire, and so they went on their enemies. The lord Charles of Bohemia his son, who wrote himself king of Almaine and bare the arms, he came in good order to the battle; but when he saw that the matter went awry on their party, he departed, I cannot tell you which way. The king his father was so far forward that he strake a stroke with his sword, yea and more than four, and fought valiantly and so did his company; and they adventured themselves so forward, that they were there all slain, and the next day they were found in the place about the king, and all their horses tied each to other.”
- Jean Froissart, Chronicles
