Things Fall Apart?

No-one has a clue where the world economy is heading, do they? It will probably get worse (and feel worse) before things get better (or feel better), but apart from that, whose to say? I think all that money- obscene amounts- that Governments and international institutions have thrown into the global economy will have some sort of effect in mitigating the worst consequences of the 'downturn' (it's a euphemism), at least in the short-term, but no-one knows how it will finally pan out. As Keynes said, in the long-term we are all dead.

Instead of making predictions, I'll just post two articles that have caught my eye in recent days. This one by Larry Elliott will appear in tomorrow's Guardian:

Never give a sucker's rally an even break
Larry Elliott, guardian.co.uk, Sunday 8 March 2009

Even when times are really hard, stock­­­­markets never go down in a straight line. There are periods – often lasting months – when prices rally amid hopes that recovery is under way. Then the selling resumes and the market takes another downward lurch. Dealers call it a sucker's rally.

Bear this phrase in mind, because it is not only financial markets that can have false dawns. In the late 1970s, for example, the UK economy appeared to bounce back from the recession of 1974‑75 and the sterling crisis of 1976 only to be plunged into an even deeper slump in 1980-81.

The chances of a sucker's rally over the next couple of years are high. Hard though it is to envisage during these dark days, there will be a resumption of growth – and probably sooner than the financial markets envisage. Policy was so heavily geared to expansion – even before the Bank of England announced that it was to start creating money – that it would be a miracle if green shoots did not soon start to appear.

Just consider: six months ago, anyone with a £150,000 tracker mortgage was paying more than £600 a month to finance their home loan. They are now paying about £60 – a colossal increase in spending power that is bound to affect behaviour, despite the fear of unemployment. Falling inflation means those in work are seeing increases in real income, and that tends to be a key determinant of consumer spending. Add lower taxes to the mix and it is a heady cocktail that, in normal times, would be enough to generate a wild boom.

Clearly, though, these are not normal times. In normal times, the Bank of England likes to keep the bank rate at about 5% rather than 0.5%, and it would not be pursuing monetary policies more normally associated with banana republics. One City financier has what he calls a Gono index, which charts how far the UK is along the road travelled by Robert Mugabe's central bank governor. He estimates that we are halfway there.

Normally, Alistair Darling would be preparing a budget next month of such austerity that it would put Sir Stafford Cripps to shame. But the chancellor is considering an expansionary package that will lead to a further increase in the budget deficit. On some estimates, the Treasury may need to borrow £180bn next year to balance the books – 12% of GDP and unprecedented in peacetime (and probably wartime, for that matter).

The justification for all this is that the banking system has been rendered dysfunctional by the credit crunch. That is true up to a point. Homeowners and businesses are finding capital harder to come by, but the supply of loans did not entirely dry up even when the financial pressure on the banks was at its most intense last autumn.

Consider what the financial system was like before the crash: the Icelandic banks and specialist lenders filling the gap between domestic savings and demand for loans; mortgage providers gaily handing out home loans worth 125% of the value of the property. We have merely gone from one form of dysfunctionality to another.

Be that as it may, the re-capitalisation of the banks, the insurance scheme for their toxic loans and now quantitative easing should increase the supply of credit in the coming months. To make a difference, of course, there has to be a matching demand for credit, and the question is whether the impact of the policy stimulus will outweigh the negative effects of falling house prices, a bombed-out stockmarket, rising unemployment and weak global trade.

It will, not least because Mervyn King says the Bank will continue to print money until the policy has the desired effect. When will this happen? No one knows but after a horrendous start to the year and a poor second quarter the economy could begin to bottom out in summer. My guess is that there will be evidence of modest growth by autumn, at which point – sucker's rally or not – Gordon Brown will claim vindication for his handling of the economy.

There are, however, reasons to treat any recovery with caution. One is that the causes of the original problem – an economy heavily dependent on property speculation, easy credit and debt – have not been addressed and, indeed, will not be until Brown admits that the economy he presided over as chancellor was nowhere near as strong as he thought it to be.

What is true of Britain is also true globally. The problem in the boom years was that one half of the world spent too much and the other half saved too much, thus creating a fatal imbalance between creditor and debtor nations. One of the great fallacies of the bubble years was that the surpluses from the export booms in China, Japan and Germany could be recycled to finance the trade deficits in the United States, Britain and Spain.

What actually happened was that the flows of hot money into London and New York drove up the pound and the dollar, making exports dearer, and the higher exchange rate bore down on inflation and put downward pressure on interest rates. That kept consumer spending high, sucked in more imports, which in turn made the surplus nations even more dependent on exports.

Ironically, the recession is hitting the big exporters – Japan and Germany especially – harder than those that were living beyond their means. The exporters will enjoy their own sucker's rally on the back of the pick-up in demand in the US (and, to a lesser extent, Britain) but for a lasting recovery, the surplus countries have to increase their domestic demand and the debtor countries have to save more. There is no evidence that this is going to happen on the scale needed.

Even so, tentative signs of recovery will put pressure on policymakers to apply the brakes. Here, we are back to the dilemma Alan Greenspan had after the dotcom bubble in the early years of this decade. The then Fed chairman ensured the recession was short and shallow by cutting interest rates to 1% and leaving them there until he was absolutely certain that the economy was recovering. But monetary policy works with a time lag, and by the time Greenspan started to jack up interest rates it was too late and he then had to tighten aggressively to prick the housing bubble.

This is now Groundhog Day. Policy has been loosened to compensate for the tightening in mid-decade, which in turn was to compensate for overly lax policy at the start of the decade. Policymakers now have a choice: they can move early, anticipating recovery, but with a risk that they will move too soon – as Roosevelt did with his fiscal tightening in 1936 – and push the economy back into recession. Or they can do what Greenspan did and risk the build-up of inflationary pressures and a new bubble, this time in the bond market.

Policymakers are more comfortable dealing with inflation, a problem they feel equipped to solve, than with a slump only Japan has experienced. They will do what they always do: increase borrowing costs, raise taxes and cut public spending. Unless they get it spot on, which they have conspicuously failed to do previously, the sucker's rally will be followed by sluggish growth or a double-dip recession.


The other simply shows that things must have got bad economically when mainstream economic pundits, such as HSBC Group's Chief Economist, have to admit that Karl Marx may have had more than a point:

As capitalism stares into the abyss, was Marx right all along?: We may avoid a 1930s Depression but the best we can hope for may be a 1990s Japan
Stephen King, The Independent, Monday, 2 March 2009



Karl Marx...in Lego!

"Modern bourgeois society ... a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells."

Those of you with revolutionary zeal will immediately recognise these words. Penned by Karl Marx in 1848, they form part of the Communist Manifesto. Marx, like Adam Smith before him, had a historical view of society's development. Capitalism, with its bourgeoisie, had replaced feudalism, but capitalism, according to Marx, would be replaced by communism. Capitalism was inherently unstable, as Marx noted later in the same paragraph:

".....the commercial crises... by their periodical return, put the existence of the entire bourgeois society on its trial, each time more threateningly. In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity – the epidemic of over-production."

Whatever else one thinks of Marx, he certainly knew a thing or two about the business cycle. Were he alive now, he would surely claim his theories were being vindicated. We are, after all, witnessing the most remarkable collapse in economic activity around the world. Take Japan. In November, industrial production fell 8 per cent. That was bad enough. In December, production dropped another 9 per cent. That was even more remarkable. January's production figures, though, are simply eye-wateringly awful, showing a further 10 per cent decline. Production, then, is down almost 30 per cent in just three months, a pace of decline unprecedented in Japanese post-war economic history.

Or how about the US, where we discovered last week that national income contracted in the final quarter of last year at an annual rate of more than 6 per cent, the biggest drop since the early 1980s. Then there's Taiwan, where exports have been in freefall in recent months. Not to mention dear old Blighty, where the economy might end up shrinking by approaching 4 per cent this year.

The pace of decline in global economic output is extraordinary. On virtually any metric, we are seeing the worst global downturn in decades: worse than the aftermath of the first oil shock in the mid-1970s and worse than the early-1980s downswing, when the world economy had to cope with a doubling of the oil price, the tough love of monetarism and the onset of the Latin American debt crisis. Moreover, this time we cannot use the resurgence of inflation as an excuse for lost output: the credit crunch in all its many guises has seen to that. Instead, we have a world of collapsing output combined with falling prices: a world, then, of depression.

For many years, Marxist ideas appeared to be totally irrelevant. The collapse of the Berlin Wall in 1989 brought to an end the era of Marxist-Leninist Communism, while China's decision to join the modern world at the beginning of the 1980s drew a line under its earlier Maoist ideology. In western economies, Marxist ideas were at their most potent after the First Word War when the likes of Rosa Luxemburg could smell revol-ution in the air and as the Roaring Twenties gave way to the Great Depression of the 1930s. I'm not suggesting we're entering revolutionary times. However, it seems increasingly likely that the economic landscape in the years ahead will be fundamentally different from the landscape that has dominated the working lives of people like me who entered the workforce in the 1980s. We've lived through decades of plenty, where incomes have risen rapidly, where credit has been all too easily available and where recessions have been mostly modest affairs. Suddenly, we're facing a collapse in activity on a truly Marxist scale. It's difficult to imagine the world's love affair with free markets being sustained under this onslaught. The extreme nature of this downswing will change our lives for decades to come.

The first change relates to the allocation of capital. Increasingly, policymakers are accepting that market forces, left to their own devices, will lead to a race to the bottom. The dangers are becoming greater by the day. Interest rates are close to zero while prices and wages are in danger of declining. If deflation takes hold, real interest rates on cash will start to rise, creating perverse incentives in capital markets. Why bother to buy equities or corporate bonds if you are nicely rewarded for hanging on to an entirely risk-free piece of paper?

The efforts to stop this vicious circle are increasingly focused on bypassing the banking and financial system. As central banks widen the assets they are prepared to purchase to maintain the flow of credit to the economy at large, they are increasingly getting into the capital allocation game. They, and not the market, will at the margin decide whether companies and households are creditworthy. And as governments increase their spending plans to ward off a catastrophic loss of demand, they, rather than companies, will decide on how our savings should be allocated.

The second change relates to an increased national bias in the allocation of capital. As Nicolas Sarkozy, the French President, pushes to offer government funding to French car companies on condition they don't outsource French jobs abroad, as US Congress signs off a stimulus package with more than a hint of a "Buy American" policy, and as the UK Government pushes to encourage bailed-out banks to lend domestically as opposed to internationally, we appear to be turning our backs on the previous world of heightened cross-border trade and capital flows. While these flows have undoubtedly been volatile, they have nevertheless allowed emerging economies, in particular, to gain a foothold on the development ladder. Are we about to cast these countries asunder in our desperate attempt to fix our domestic problems?

The third change relates to interference in the price mechanism. When it comes to Sir Fred Goodwin's pension, this isn't so surprising, but the price mechanism extends far and wide. At the microeconomic level, we'll enter a world of subsidised loans with murky political undertones. At the macroeconomic level, countries may take the opportunity to manipulate their exchange rates in an attempt either to gain a competitive advantage or to "default" to foreign creditors.

Some of these changes may be absolutely necessary to prevent an outright collapse in global economic activity (although the rise in protectionist pressures is surely a retrograde step). They also suggest, though, that there will be no return to "business as usual" for market forces. The cost of avoiding depression is a heightened level of state intervention on a scale unimaginable for those who believe in the virtues of free markets. While such intervention may help prevent the worst ravages of economic collapse, it will ultimately do little to foster the entrepreneurial spirit and risk-taking behaviour which have, in the past, contributed so much to rising living standards. We may avoid a 1930s Depression but, increasingly, we may find the best we can hope for is a 1990s Japan. Not quite a Marxist revolution, then, but certainly a lasting sea-change in economic performance.

In short, Marx may have got the answers wrong, but he asked the right questions...

How we got into this hole...and how we might get out?

Not much to say, apart from I think these are great articles. I'm not sure, as Peter Wilby says, that we on Airstrip One have all become capitalists; merely that we have been put under great pressure to think we are ones. However, that's a minor quibble.

All of us live by the logic of finance: Margaret Thatcher promised wealth for all in her new society. First, though, we all had to become capitalists. Peter Wilby on our long road to ruin
New Statesman, 5 February 2009

We now know that Alistair Darling was not joking when he said last summer that we faced the worst economic crisis in 60 years. The fall in GDP is now the steepest since 1947. But that was a mere blip on the road to postwar recovery. We cannot be confident that the present crisis is similar, or that comparisons with the most recent recessions – in the 1970s, 1980s and 1990s – are the right ones. Increasingly, politicians and economists recall the 1930s, with its grisly tales of bank closures, currency collapse, deflation and mass unemployment.

Yet none of these precedents provides adequate guidance. In the 1930s, the majority of Britons had not bought (I use the verb deliberately) into capitalism as they have over the past 30 years. Working-class families then accounted for three-quarters of the population, but less than one-fifth owned their home. Few held a bank account and almost none invested in shares or bonds, either directly or through pension schemes. For most of these families their only insurance was against funeral expenses.

Working-class life was based on cash, with surplus income, rare at the best of times, converted into portable possessions. Debt was widespread - it was sometimes the only way a working-class family, even if it had a regular income, could buy new clothes or shoes - but it was small-scale and local. Many were accustomed to existing on the margins of subsistence, and the dole, pitiful as it was, ensured that the Depression just made life more of a struggle. It did not frustrate ambition or aspiration, because most ordinary people had none. The consumer society had not been invented.

The Britain of 2009 is utterly different. The country was changed profoundly by Thatcherism (as the United States was changed by Reaganism), often in ways that were scarcely noticed at the time and are now forgotten.

The roots of the present crisis lie in the 1980s and early 1990s, but the effects of these years are only now becoming evident. At the time, politicians and economists explained that we were entering a post-industrial age. In future, the most successful countries would earn their living from services, not from the production of goods. Given the history and reputation of the City of London, Britain, it was said, was particularly well placed to lead in financial services.

Finance became the country's fastest-growing industry, expanding at 7 per cent a year on average, and dragging in its wake associated functions such as public relations and law.

The implications went far beyond a change in the economic structure. Just as a society based on industry favoured companies that assured themselves a steady supply of raw materials, so did one based on finance favour companies that assured a steady supply of money from the world's credit markets. Just as industry once required strong domestic markets if it were to flourish overseas, so did finance.

Above all, just as the Industrial Revolution transformed lifestyles, family relations, personal expectations and the very rhythm of existence, so did the financial revolution.

For all of us, the logic of finance has become ubiquitous, from the cradle to the grave. New Labour's "baby bonds" encourage parents, on a child's birth, to invest in a trust fund. Students take out loans to finance their higher education, a device that was preferred over a graduate tax precisely because it compels young people to consider their courses as "investments" with "rates of return". A home is no longer just a place to live, love and raise a family but a speculative investment, a source of security for credit, or "equity" that may be "released"; it turns all of us, as Martin Wolf, the Financial Times commentator, has put it, into "highly leveraged speculators in a fixed asset". With the decline of the state old-age pension (now worth less, as a proportion of average earnings, than when it was introduced in 1909) and, outside the public sector, the almost complete disappearance of pensions based on final salaries ("defined benefit" schemes), millions will depend on the vagaries of the bond and share markets for a decent income in old age.

Deregulation, enhanced by the internet, requires consumers to search for better "deals" on power supplies, car insurance, mortgages, savings rates, phone charges and so on. Social scientists have coined the word "financialisation" to describe this new world, as they used "industrialisation" to describe the old. As Essex University's Robin Blackburn has put it, financialisation "encourages households to behave like businesses, businesses to behave like banks, and banks to behave like hedge funds".

The new order followed the collapse in the 1970s of the postwar economic and social consensus, known as Keynesianism. Trade unions were weakened, partly by legislation, partly by the decline of heavy manufacturing industry. Labour could no longer drive a hard bargain.

Capital, assisted by deregulation of money movements across borders, held the whip hand. Under the Anglo-Saxon economic model, employers could now hold down wages - if necessary by relocating or threatening to relocate abroad - shed jobs and require longer hours and/or more productivity from their workforces. Faced with the devaluation of their labour, working people had to try and get a slice of the capitalist action. Money, they had to learn, no longer stopped with the wages generated from employment. As Randy Martin, the New York University public policy specialist, puts it in his illuminating book Financialisation of Daily Life (2002), "what once belonged to the workaday world beds down with leisure and domesticity".

This was exactly what Margaret Thatcher wished for. Once, western governments tried to subjugate the working class. The governments of the postwar era, by contrast, tried to pacify it. High wages, good working conditions, decent housing, stable employment, predictable pensions and, crucially, the power of a large state sector to head off deep recession through fiscal intervention delivered the workers’ consent to, even enthusiasm for, a capitalist economy. It also ensured the stable domestic markets that provided the basis for unprecedented economic growth. As the student rebels of 1968 understood, the workers were required not just to produce goods but to consume them, too.

Thatcher offered what you might call a "third way". The working class was not to be enslaved or tamed, but abolished. Everyone would become, in their private if not in their working life, a member of the bourgeoisie, owning a house, acquiring debt to improve themselves, trading in shares and bonds. With such financial commitments, they would be reluctant to sacrifice regular income by going on strike.

Better still, they would vote Conservative, or at least for an alternative party that accepted, as new Labour did, the broad principles of Thatcherism. The spectre of communism or socialism would be exorcised.

But was it possible to create mass capitalism when large sections of the population lacked capital? Could a new liberalised economy - free from the constraints of either government regulation or union bargaining strength - deliver the stable mass consumer markets of the previous 30 years? To these questions, housing, along with the wide availability of credit, was the central answer.

The sale of council-owned dwellings – the best-known of Thatcher’s housing policies – took more space in the Conservatives’ 1979 election manifesto than health, education or social security. At the time, 85 per cent of British voters favoured the policy and, given that the discounts on sale prices to long-term residents could be as high as 60 per cent, it seemed a rare example of the state offering something for nothing. But it was also a form of gerrymandering, as the effect of the policy was to break up the public housing estates that formed the basis of Labour Party mobilisation.

The sales generated £17.5bn over ten years. But local authorities were not allowed to use the revenues - or the proceeds of other taxes - to build new council housing. Moreover, government subsidies to council house rents were reduced in favour of means-tested benefits available to those who rented private as well as public housing. The result was to make council housing less affordable, with rents rising 40 per cent in real terms between 1979 and 1984, and, as it increasingly became a ghetto for those who lacked either the means or the aspiration to buy, less attractive to live in. In a decade, the proportion of the population who were owner-occupiers jumped from under 55 per cent to more than 65 per cent (it is now 70 per cent).

They were assisted by a second revolution: the easier availability of mortgages. Until the 1980s, nearly all mortgage lending to the public came from building societies. The societies' history went back to the late 18th century and they were specifically designed to allow working people to pool and save their resources in order to build and buy houses. The savers were known as "members" and, nominally at least, owned the societies. Loans, financed purely from savings, were largely restricted to members. If savings were insufficient to meet demand, borrowers had to wait, often for several months. A regular income of sufficient size to support repayments, as well as a deposit from one's own resources, was essential. A building society manager would usually insist on meeting the borrower personally. There was no significant competition: managers of the leading societies met monthly to agree their interest rates.

This system was swept away in the 1980s as the Tories allowed banks to enter the mortgage market. If banks were allowed to behave like building societies, the societies reasoned, they should be allowed to behave like banks. The Building Societies Act 1986 gave them the necessary flexibility, including more freedom to raise funds from the wholesale money markets rather than their own savers and to advance unsecured credit. Crucially, it also allowed them, if a majority of members voted in favour, to demutualise and actually to become banks.

Abbey National - which had broken the societies' interest rate cartel even before the 1986 act - was the first to take advantage of this provision and several more followed over the next decade, as members were tempted by lump-sum "windfalls" that bought them out of their ownership rights. Labour opposed the bill but without great passion or conviction. As Larry Elliott and Dan Atkinson point out in their latest book, The Gods That Failed (2008), deregulation of all kinds was sold with a leftish slant; regulation, once considered a device to protect the public, was now seen as a conspiracy against the public.

In 1986, at least one Labour MP, Austin Mitchell, saw "no great harm in more unsecured credit". A Tory MP proposed that all building societies should be required to demutualise within ten years; in other words, that they should be abolished. Institutions that had survived for 200 years were thus quietly dismantled. An entire model of popular saving was undermined.

Working-class communities had long saved for special needs, such as Christmas or holidays, through local "clubs", often centred on the neighbourhood pub, with a trusted elder, usually a skilled artisan, acting as treasurer. Others, known as "friendly societies" (based, as the name suggests, on personal relationships), provided help in times of ill-health or unemployment. The pre-1986 building societies could trace their lineage directly back to this tradition, which Clive Thornton, then chief general manager of the same Abbey National that so enthusiastically embraced the new era, once called the highest form of socialism. The model, though on a larger, more sophisticated scale and now patronised as much by the middle classes as by the working classes, was essentially unchanged: lending and borrowing was between people who knew and trusted each other (if less intimately than they once did), and the community met its needs from its own resources. It was a world away from the deregulated banking that allowed loans to be split and repackaged as "asset-backed securities" sold to unknown investors on the other side of the planet.

Who benefited from demutualisation? The answer can be summed up in two figures: between 1993 and 2000, chief executives of the demutualised societies got pay rises of 293 per cent against 65 per cent for chief executives of the remaining mutuals. An all-party group of MPs concluded in 2006 that consumers got inferior savings and home loan rates. What the original members gained in windfalls, they lost in higher charges. It is just one example of how financialisation involves a substantial invisible “tax” on nearly all the transactions that ordinary people are encouraged to make: a rake-off by managers in the financial services industry that can amount, according to some estimates, to 25 per cent. Blackburn calls it “insider looting on a grand scale”. No wonder Labour’s scheme for “stakeholder pensions” – intended for people on low or middling incomes who were no longer covered by final-salary schemes – flopped so badly. It set a 1 per cent cap on charges.

A second housing revolution followed legislation on the building societies. In 1988, a housing act introduced the assured shorthold tenancy, which gave tenants - who until then had been notoriously hard to evict - security for just six months, after which landlords need give them only two months' notice, without stating reasons. A second act in 1996, at the fag end of Tory rule, made the assured shorthold the default agreement for any new renting. Henceforth, new assured tenancies became very rare. Lenders and letting agents, recognising the opportunities, introduced a type of mortgage that would allow the small-scale landlord to be treated as an owner-occupier rather than a business.

The stage was set for the buy-to-let revolution, which would eventually involve more than half a million landlords, most owning four properties or fewer, "contributing" (if that is the right word) four times as much to the UK economy as the motor industry. It seemed, for a time, like a win-win for the country: the young, unattached and mobile got a plentiful supply of rentable property while their more settled elders (the median age of buy-to-let landlords is in the early forties) got a new income stream allied to an appreciating asset. All done by the magic of easier credit.

Housing became a national obsession. In an intensely competitive, deregulated mortgage market, lenders fell over each other to offer favourable terms and cared not at all if a high proportion of the money "leaked" to consumer spending. Retired couples were encouraged to remortgage their houses to fund holiday cruises or grandchildren's trust funds. Young couples of all classes stretched their resources to get "on the housing ladder", knowing councils had sold off the best of their housing stock and, for the aspirational family, a council home was no longer an option. Couples in their middle years saw buy-to-let as an additional stream of income, a hedge against redundancy or declining earning power. Second homes became increasingly fashionable. The Tory government abolished rates, which linked local taxes to house values, and substituted first poll tax and then council tax, which was only slightly less regressive. All this created a housing bubble which, in turn, made ownership of houses yet more desirable, even mandatory. Despite occasional crashes, there seemed no end to the upward surge in house values.


Housing thus allowed neoliberalism to deliver what, up to the 1970s, Keynesianism had delivered through high wages, secure employment and guaranteed pensions: buoyant, confident consumer markets and a population that had an interest in preserving the existing political and economic order. The new economic order could not otherwise bring to the masses the stable and rising living standards that it promised.

In the 1980s and early 1990s, it brought deep recession and chronic unemployment, the consequence of the instability of a globalised and deregulated financial system that allowed capital to cross national boundaries at a single computer keystroke. In Britain - and even more so in America - it brought gross inequality of incomes. Average US wages, in real terms, are no higher than they were 30 years ago and in Britain, too, they have stagnated over the past five years.

Credit, normally secured on rising house values but increasingly unsecured, was the rabbit in the neoliberals' hat, as they discovered during the recession of the early 1980s. In 1982, under Sir Geoffrey Howe's chancellorship, controls on hire-purchase, which strictly regulated the amount that could be borrowed, were abolished. Credit cards were then in their infancy, confined to sections of the younger and more affluent middle classes. Now, they are held by some two-thirds of the UK adult population, the highest proportion in Europe.

Colin Crouch, professor of governance and public management at Warwick University, describes the effect of this unprecedented liberalisation of credit as "privatised Keynesianism". J M Keynes argued that, when economies needed stimulating, governments should take on debt. Under the privatised version of his doctrine, individuals do the borrowing.

By the end of 2008, UK personal debt had risen to nearly £1.5trn, more than twice the national (public-sector) debt, and more than 170 per cent of disposable income. When the government incurs debt on a comparable scale - as it has done in its efforts to soften the effects of the recession - Tory politicians and economists ask how it can ever be paid off. No similar questions were asked as private debt ballooned.

The dominant political message of the past 30 years was that the private citizen was on his or her own. Risks previously borne by the state or employers were transferred to individuals, particularly in pension provision. Britain moved towards the stage where, beyond a bare minimum “safety net”, each of us was required to make provision for financial security and social care in our old age, for our children’s post-school education, for our housing, for our capacity to survive spells of unemployment or illness.

As Robin Blackburn puts it in his book Age Shock (2006), citizens "have to learn how to hedge risks and spread income over their life cycle". Each individual needed "to convert himself or herself into a two-legged cost centre and profit centre, with loans and insurance used to shift costs to where they can most advantageously be borne". Collective provision, whether through the state, local authorities, trade unions or mutuals such as the building societies, was discouraged. Like those who travelled on trains or buses, those who relied on such supports were failures.

Anybody who failed to buy shares in privatised utilities, to grab the offer of a windfall from demutualisation, or to take advantage of the tax breaks for owning private pensions or equities was a fool.

New Labour and, in the US, its Democratic equivalents, did little to question this philosophy or to reverse its effects. The idea that individuals should become, as the Blairite guru Anthony Giddens put it, "responsible risk-takers" was fundamental to the Third Way. The US Democrat Philip Bobbitt, nephew of the former president Lyndon B Johnson, explained with approval in his much-praised Shield of Achilles (2002) how the welfare state had been succeeded by the "market state", which abdicated responsibility for the well-being of its citizens and merely provided them with opportunities.

Financialisation is now unravelling, with the state striving desperately to shore it up. With financial institutions facing bankruptcy and credit markets frozen, it can no longer deliver prosperity - or the illusion of it - to the masses. Ruination, which capitalism so regularly visited on the Victorian middle classes and which was portrayed so often in the fiction of the period, threatens to envelop millions. The promises of neoliberalism are revealed for what they were: a sham. An ideology that seduced most of the population is broken. The psychic and political consequences are incalculable.



The only real flaw in Naomi Klein's piece below is that she misses Britain out of her mini-list of 'today's basket cases' that are 'yesterday's "miracles"'...

All Of Them Must Go
Naomi Klein, The Nation, February 5th, 2009

Watching the crowds in Iceland banging pots and pans until their government fell reminded me of a chant popular in anti-capitalist circles back in 2002: "You are Enron. We are Argentina."

Its message was simple enough. You--politicians and CEOs huddled at some trade summit--are like the reckless scamming execs at Enron (of course, we didn't know the half of it). We--the rabble outside--are like the people of Argentina, who, in the midst of an economic crisis eerily similar to our own, took to the street banging pots and pans. They shouted, "¡Que se vayan todos!" ("All of them must go!") and forced out a procession of four presidents in less than three weeks. What made Argentina's 2001-02 uprising unique was that it wasn't directed at a particular political party or even at corruption in the abstract. The target was the dominant economic model--this was the first national revolt against contemporary deregulated capitalism.

It's taken a while, but from Iceland to Latvia, South Korea to Greece, the rest of the world is finally having its ¡Que se vayan todos! moment.

The stoic Icelandic matriarchs beating their pots flat even as their kids ransack the fridge for projectiles (eggs, sure, but yogurt?) echo the tactics made famous in Buenos Aires. So does the collective rage at elites who trashed a once thriving country and thought they could get away with it. As Gudrun Jonsdottir, a 36-year-old Icelandic office worker, put it: "I've just had enough of this whole thing. I don't trust the government, I don't trust the banks, I don't trust the political parties and I don't trust the IMF. We had a good country, and they ruined it."

Another echo: in Reykjavik, the protesters clearly won't be bought off by a mere change of face at the top (even if the new PM is a lesbian). They want aid for people, not just banks; criminal investigations into the debacle; and deep electoral reform.

Similar demands can be heard these days in Latvia, whose economy has contracted more sharply than any country in the EU, and where the government is teetering on the brink. For weeks the capital has been rocked by protests, including a full-blown, cobblestone-hurling riot on January 13. As in Iceland, Latvians are appalled by their leaders' refusal to take any responsibility for the mess. Asked by Bloomberg TV what caused the crisis, Latvia's finance minister shrugged: "Nothing special."

But Latvia's troubles are indeed special: the very policies that allowed the "Baltic Tiger" to grow at a rate of 12 percent in 2006 are also causing it to contract violently by a projected 10 percent this year: money, freed of all barriers, flows out as quickly as it flows in, with plenty being diverted to political pockets. (It is no coincidence that many of today's basket cases are yesterday's "miracles": Ireland, Estonia, Iceland, Latvia.)

Something else Argentina-esque is in the air. In 2001 Argentina's leaders responded to the crisis with a brutal International Monetary Fund-prescribed austerity package: $9 billion in spending cuts, much of it hitting health and education. This proved to be a fatal mistake. Unions staged a general strike, teachers moved their classes to the streets and the protests never stopped.

This same bottom-up refusal to bear the brunt of the crisis unites many of today's protests. In Latvia, much of the popular rage has focused on government austerity measures--mass layoffs, reduced social services and slashed public sector salaries--all to qualify for an IMF emergency loan (no, nothing has changed). In Greece, December's riots followed a police shooting of a 15-year-old. But what's kept them going, with farmers taking the lead from students, is widespread rage at the government's crisis response: banks got a $36 billion bailout while workers got their pensions cut and farmers received next to nothing. Despite the inconvenience caused by tractors blocking roads, 78 percent of Greeks say the farmers' demands are reasonable. Similarly, in France the recent general strike--triggered in part by President Sarkozy's plans to reduce the number of teachers dramatically--inspired the support of 70 percent of the population.

Perhaps the sturdiest thread connecting this global backlash is a rejection of the logic of "extraordinary politics"--the phrase coined by Polish politician Leszek Balcerowicz to describe how, in a crisis, politicians can ignore legislative rules and rush through unpopular "reforms." That trick is getting tired, as South Korea's government recently discovered. In December, the ruling party tried to use the crisis to ram through a highly controversial free trade agreement with the United States. Taking closed-door politics to new extremes, legislators locked themselves in the chamber so they could vote in private, barricading the door with desks, chairs and couches.

Opposition politicians were having none of it: with sledgehammers and an electric saw, they broke in and staged a twelve-day sit-in of Parliament. The vote was delayed, allowing for more debate--a victory for a new kind of "extraordinary politics."

Here in Canada, politics is markedly less YouTube-friendly--but it has still been surprisingly eventful. In October the Conservative Party won national elections on an unambitious platform. Six weeks later, our Tory prime minister found his inner ideologue, presenting a budget bill that stripped public sector workers of the right to strike, canceled public funding for political parties and contained no economic stimulus. Opposition parties responded by forming a historic coalition that was only prevented from taking power by an abrupt suspension of Parliament. The Tories have just come back with a revised budget: the pet right-wing policies have disappeared, and it is packed with economic stimulus.

The pattern is clear: governments that respond to a crisis created by free-market ideology with an acceleration of that same discredited agenda will not survive to tell the tale. As Italy's students have taken to shouting in the streets: "We won't pay for your crisis!"

So how will the crisis be solved here politically? While I was reading an edited version of the above in yesterday's Guardian, on the opposite page Martin Kettle, Tony Blair's Vicar On Earth, was contemplating a 'National Government' in the next year or two (a Far Centre 'Government Of All The Talents'...without much talent). You have been warned!

Another 'British Economic Miracle' Bites The Dust

I had meant to type a lot today but I feel like I've got a slight chill, so I'm not going to do as much as I'd hoped. However, I will give you something to chew on about the current economic situation. We may have averted a total collapse of the global financial system (courtesy of obscene amounts of money donated by taxpayers, which never seems to be available for help pay for schools, hospitals, pensions, renewable energy, anti-crime initiatives etc) but it doesn't look we're going to avoid a recession here in the UK. At least we'll be spared the expression "No return to boom and bust" for a while...

The markets are clear: Britain is mutton dressed up as lamb
Labour has failed over 11 years to build an economy fit for the 21st century. And it seems no one has learned the lessons
Larry Elliott, The Guardian, Wednesday October 29 2008

Repossessions up 71%. Activity in the high street down for the seventh month in a row. Short-term working at Honda's Swindon plant. An estimate by the Bank of England that losses from the financial turmoil now stand at $2.8 trillion. Just another normal day in the economy.

For most people, $2.8 trillion is a meaningless number, as is the news of BP's £10bn profit. What they want to know is how bad is it going to get, who is to blame and whether life will be any better when the economy emerges, as it eventually will, from its problems.

The answer to the first question is simple: for the UK this is going to be a painful reality check after all the years of living on tick. As things stand, the economy could contract for at least four of five quarters, leading to rapidly rising unemployment. Falling house prices will expose more and more families who bought homes from 2005 to 2007 to the perils of negative equity. After 15 years of growth, prolonged austerity will come as an almighty shock.

Gordon Brown has no doubt who is to blame for all this: the irresponsible bankers who invested unwisely in all those US sub-prime mortgages during the boom years. Britain, he insists, is being sucked down by global forces beyond the control of a government doing its level best to help. Not all of this is piffle - although much of it is.

Clearly, Britain is not alone in going through tough times: the fact that there are daily bulletins on the economic health of Iceland, Hungary, Ukraine, Argentina and Turkey, in addition to the usual diet of gloomy news from the G7, is evidence that this is a global downturn of some severity. Yet, as Warren Buffett once put it, when the tide goes out you learn who's been swimming naked - and as the water has receded rapidly down the beach, it has been possible for the first time in many years to see the UK economy as nature intended. And it is clear we are not getting a glimpse here of Botticelli's Venus.

The markets have certainly come to the belated conclusion that the UK is mutton dressed up as lamb. Shares have bombed in London over the past month because of the recognition that the UK corporate sector is about to endure a long and painful recession, which will lead to a sharp reduction in profits. Sterling fell against the dollar last week by more than it did in the immediate aftermath of Black Wednesday in September 1992. Why? Because the UK has papered over the cracks of a hollowed-out industrial base by taking risky bets in the global financial markets. The epic scale of the UK's trade deficit has been disguised, up to a point, by the willingness of the City to act like a hedge fund - borrowing for short periods and lending for long periods. Hedge funds are risky businesses; they thrive in the good times but can go bust when the weather changes, as it has over the past year. In those circumstances, the foreign holders of sterling seem resolutely unconvinced by Brown's claim that Britain is better placed than before to ride out the storm. They have had a quick squint at the 6% of GDP trade deficit, the debt-sodden consumer, the crashing housing market - and headed straight for the exit.

Again, it would be fatuous to make Brown the scapegoat for structural problems that have been long gestating. The brutal fact, though, is that the economy is more unbalanced after 11 years of Labour government; this is not, despite the hype, a knowledge economy fit to meet the challenges of the 21st century, it is a debt-dependent economy once again about to go into rehab.

The cold turkey will be all the more painful because of the mess the Bank of England has made of setting interest rates. Monetary policy was kept far too tight for far too long: something only one member of the MPC appeared to realise as the economy headed unerringly towards the rocks over the past six months. While the Federal Reserve in the US was cutting interest rates aggressively to cushion the impact of recession, the MPC here was twittering away about inflation. The bank normally moves rates in quarter-point moves: it is now under pressure from the markets to reduce borrowing costs by a full point next week in order to make up for lost time. That's how far behind the curve it now is. If Mervyn King had been managing his beloved Aston Villa rather than a central bank, he would have been fired by now.

And after the deluge, what then? It would be nice to report that lessons have been learned and that the future promises tougher controls on credit creation, the renaissance of the industrial base to meet the environmental challenge, the permanent cageing of the City. But do you honestly believe that is going to happen, whoever is in charge? No, me neither.

Larry Elliott is the Guardian's economics editor
larry.elliott@guardian.co.uk

When I hear the word 'recession' I reach for my culture...

The Boys From The Black Stuff, 1982: Looks like the catchphrases 'Gissa Job' and 'I Can Do That' might be back...

Do economic downturns create great works of art? Two takes on this question. First, from John Harris:

And now for the good news: The West End's struggling, the art market's faltering ... but might the slump be a boon for culture? John Harris reports
The Guardian, 21st October 2008


Last week, the director Richard Eyre sent an email to a friend. With governments busy nationalising banks, and the consumerist boom giving way to a new sense of dread, he decided that now was the moment to cast the net for material that captured the spirit of the times. Was anyone already on the case, he wondered. "It's only - what? - 20 years since the death of communism and socialism was announced," he says, "and now the age of the self-regulating free market turns out to have only lasted 20 years. Right now, I think that's The Great Subject."

Eyre has yet to discern the kind of clear plotlines that might make for compelling drama. "'String up the bankers' would be pathetic, but kind of understandable, because of all that very visceral rage and despair," he says. "But I think what we're looking at is similar to the response to global warming: the sense that people feel terribly impotent. I suppose you're looking for someone who expresses that, and it's difficult to dramatise despair, confusion and uncertainty."

"But I'm optimistic," Eyre maintains. "Cometh the hour, cometh the genius."

Across the arts, consensus has yet to emerge about what the slump may bring. There is anxiety about ticket sales, sponsorship and subsidy - but also, in some places, optimism about a rising public need to seek solace in a music download or a trip to the cinema.

Lean times, many observers point out, tend to lead to a surge in creativity. The Roaring Twenties have their fans, but plenty of people prefer the stuff that came in the wake of the Wall Street crash: the politicised plays of Clifford Odets, John Steinbeck's novels, the songs written by Woody Guthrie, even Charlie Chaplin's Modern Times. The New York that still partly grips our imagination is not the gentrified, upmarket city of the early 21st century, but the graffiti-strewn, crime-ridden place of the 70s and early 80s, which catalysed the art of Julian Schnabel and Jean-Michel Basquiat, the first stirrings of hip-hop, and the music of Blondie and the Ramones. Similarly, thousands of people still get misty-eyed about the explosion of British creativity prompted by the messy end of the postwar consensus and the battles of the 1980s: drama written by Alan Bleasdale, Howard Brenton and David Edgar, the confrontational sculpture of Tony Cragg, or the sparse, cutting songs written and sung by the young Billy Bragg.

Like all of those names, Bragg is still very much with us, cited as an influence on a new crop of rock groups - the Enemy, Hard-Fi, Arctic Monkeys - whose social-realist songs served early notice of the insecurity that preceded the financial plunge. Bragg discovered the Enemy, he tells me, when he was handed a promotional flyer linking their music to the closure of the Peugeot factory in their native Coventry. It is voices like theirs, he believes, that will most convincingly soundtrack a recession.

"What happens in times like this is that songwriters go from staring at their belly-buttons to staring at the TV," he says. "When the economy is relatively stable, there's plenty of room for 'poor pitiful me'. But when times are hard, it becomes 'poor pitiful us'. People are going to have to start articulating these things, because what's happening is going to affect everybody. It's going to be very, very interesting."

If some of music's loudest voices were almost prophetic about the downturn (have a listen, for example, to Hard-Fi's 2006 hit Cash Machine, complete with its refrain, "There's a hole in my pocket") , the fortunes of the record industry have also been ahead of the curve. It has been in the midst of lay-offs and budget cuts for at least five years.

Sounding a note of optimism, Paul Williams, the editor of trade magazine Music Week, points to creditable recent sales for the likes of Oasis and Kings of Leon, and a pre-Christmas schedule that includes records by such big sellers as Beyoncé and Snow Patrol. But he also admits to the key difference between recessions past and present. "If you look at downturns in the past, there doesn't seem to be any great evidence of declines in music sales," he says. "But what's different this time is file-sharing and what it entails. It's illegal, of course, but there's now the possibility of getting hold of free music. From that perspective, the industry is entering into the unknown."

Should the music industry nosedive, it may not be a calamity for creativity. "What you need in difficult times is a hard edge, and strong integrity," says Bragg. "If you have those things, I think you'll find an audience, particularly because of the internet. More and more will recognise the viability of doing it themselves."

In the art market, there are no signs of panic just yet. Some insiders insist that the arrival of blue-chip collectors from eastern Europe, India and China will cushion the top end against recession, citing as evidence the recent Damien Hirst auction at Sotheby's, and steady trading at last week's Frieze art fair. Then again, another Sotheby's auction last week, including works by Hirst and Andy Warhol, saw sales falling well short of predictions: the total take was £22m, against estimates of as much as £43m. On Sunday at Christie's, Lucian Freud's portrait of his friend Francis Bacon fetched just £5.4m, near the low end of the £5m-£7m guide price.

There is also a lot of anxiety about "the death of the middle", where artworks trade for between £5,000 and £50,000. The over-arching prediction seems to be something serious, but not drastic: a pronounced slowdown rather than a crash.

What will definitely suffer, it seems, is the kind of art that sits well outside the market, and depends on sponsorship and subsidy: the series of giant installations in Tate Modern backed by Unilever, for example, or Antony Gormley's Angel of the North.

"The idea of creating very expensive, ambitious installations and grandiose public projects and sculptures - by definition, during a recession that has to decrease," says Tim Marlow, director of exhibitions at London's White Cube gallery. "Artists will have to start thinking, 'Can we actually justify doing something that exists, will then be destroyed, can't possibly be sold, and gets lots of public money?'"

Marlow adds that anyone looking to art for commentary on the economic crisis will be disappointed. Partly, he says, this is because of the democratisation of video and photography, and the profusion of images on the web. "If you want something much more explicit, that's the place to look."

Perhaps, I suggest, contemporary art has proved much more suited to documenting boom rather than bust. One thinks of the overblown excesses of that former Wall Street broker Jeff Koons, or, more recently, Damien Hirst's £50m diamond-encrusted skull.

'I'd actually argue that the skull contained within it the inevitability of bust," says Marlow. "One of the whole points about it was, 'You can't take it with you,' and Damien said so. It subverted the idea of boom, and hinted at a downturn."

It's a description that rather brings to mind the title of Hirst's most famous installation, The Physical Impossibility of Death in the Mind of Someone Living.

"Exactly," Marlow agrees. "The physical impossibility of bust in the mind of someone booming."

What about the theatre? The West End is already suffering, with a string of shows ending their runs early, ranging from Girl with a Pearl Earring to the musicals Never Forget, Avenue Q and Eurobeat. One recent report in the Times claimed that every theatre on Shaftesbury Avenue had tickets to spare - even productions with big-name leads such as Rain Man, with Josh Hartnett.

At Manchester's Royal Exchange Theatre, artistic director Sarah Frankcom does not need much persuasion to sketch out the anxious times ahead. Her theatre's current three-year agreement with the arts council is up for renegotiation in 2010, and there are worries about a possible cut in funds, not least because of the diversion of £675m of lottery money from the arts to pay for the Olympics. She sounds even more fearful about the prospects for corporate donations to the Royal Exchange - which last year totalled £500,000, and included gifts from Royal Bank of Scotland and Barclays.

"That money is vulnerable, and it's going to be dramatically cut, one would think," she says. "I don't think you'll see signs of it right away, but for the next generation of actors, directors and writers, the sources of money that support them in the early part of their careers will either dry up or be drastically reduced."

On the plus side, the Royal Exchange is attracting more people than it has done for four years. "I think our audience is facing a sense of uncertainty, and they seem to be responding to big plays and big themes. That's very interesting: from what I'm told, in the recession of the early 1980s, a lot of theatres were encouraged to move their repertoires towards entertainment, but the people who are coming through our doors at the moment are very hungry for plays that make them think." She mentions the 2,000-plus new scripts that have just been entered for the Royal Exchange's biennial playwriting competition, sponsored by property company Bruntwood - brimming, she says, with work that "wants to make sense of what's happening with the world: globalisation, social exclusion, personal responsibility, political accountability".

Though all that suggests rude creative health, it rather bumps up against a fear that runs across all areas of the arts: that what recession will really cause is a desire to escape into an all-singing, all-dancing fantasy world. "The other day," says Eyre, "I was looking at an advertisement for Hunger, the Steve McQueen film [about the Republican hunger striker Bobby Sands], which I hear is magnificent. And I was thinking, 'Aren't they on a hiding to nothing?' I would love to think that people are queueing round the block for it, but I have a feeling that the Fred Astaire syndrome is coming shortly."

Which brings us to cinema, and an old statistic that is being endlessly quoted in an attempt to raise the industry's spirits. In the year that followed the Wall Street crash, US cinema audiences rose by 58%. That is not quite enough to allay worries that the more challenging end of film-making will be hit by a fall in subsidies, not to mention the drying-up of credit from the banks.

Looking into the more recent past, there may be a few causes for optimism. During the long period of crisis and uncertainty that stretched from the mid-70s into the 80s, there was an upsurge in the idea of film-making as social commentary, seen in such classic New York movies as Taxi Driver and The Warriors, and brilliant British films such as The Long Good Friday and Mike Leigh's Meantime. Critic Mark Kermode, however, points out that that this wave of "meaty films dealing with topical subjects" was accompanied by the rise of escapist blockbusters such as Star Wars and Raiders of the Lost Ark. "Think about Indiana Jones - it looks like an old B-movie. As opposed to being low-down and gritty, those films were spectacular."

Today, Harvey Weinstein is preparing a movie version of Nine, the Broadway hit set in 1960s Venice, featuring Daniel Day-Lewis, Nicole Kidman and Judi Dench. There are also reports of imminent remakes of Fame and Footloose. As Variety magazine recently put it: "It's beginning to look a lot like the 1930s: the economy is in the toilet and Hollywood studios are filling their pipelines with upbeat dance films, particularly teen hoofers."

If such news doesn't fill you with excitement, one thing has to be said: compared with some of the stuff that will boom despite the bust, films like those may well look like great art. "In terms of cinema that makes money, look at Transformers," says Kermode. "That's where we are right now: great big, infinitely stupid films about robots from outer space hitting each other. The other thing is, it's not coincidental that the Superman series has been revived, and so has Batman. Even if it's postmodern and ironic, that's going to continue, because it's what people want in times of crisis: superheroes."



Chaplin's Modern Times

Second, this from Boyd Tonkin:

A call to account: In search of a Dickens or Trollope for our times
As financial markets crash in chaos, can any of today's writers come up with a crusading saga of the morally bankrupt City and its debt-crushed victims to match those of the great Victorian novelists?
By Boyd Tonkin, The Independent, Friday, 24 October 2008

I have never met Sir Fred Goodwin, but I feel that I know him pretty well these days. Thanks to his job – which ends next month – at the head of the Royal Bank of Scotland group, the high-flying but fast-falling banker wielded control over much of my savings. Risk-averse innocents (such as me) used to think of his institution as the Edinburgh epitome of sobriety and stability. "Suckers" is the technical term, I believe. By Friday 10 October, it became clear even to the most blinkered depositor that Fred the Shred's buccaneering years at the helm had played a large part in bringing my bank to the brink of the biggest corporate failure in European history. It was like discovering that your Presbyterian maiden aunt had been running a chain of casinos.

When a stranger drives you unasked to the edge of an abyss, it's natural to seek to understand a bit about the chap. Now, I think I do. Leaving to one side the question of whether the US regulatory authorities investigating the sub-prime mortgage debacle may in due course have plans for the Paisley dynamo that involve something worse than dirty looks at the golf club, one thing struck me above all. Whether or not Sir Fred ends up in court, he should indisputably end up in print. What a novel his rise and fall, and the backdrop to his truncated career, would make. But who, among living British writers, could settle this account? Although the subject hardly has much in common with his usual beat, perhaps Irvine Welsh might have a crack at it.

Now, above all, is the time for alert and ambitious novelists to make a killing in the City; to clean up at Canary Wharf. Stripped of its mysteries, the story-arc of the past decade – of expansion and explosion – stands revealed along straightforward, almost classical lines. Nemesis has duly caught up with hubris. Pride came before the fall. And, as the binge ends in crash, the hangover will last for years – for everyone. In an interconnected world of debts and savings and mortgages and pensions that make millions of civilians share the fate of those disgraced masters of the universe, the art of fiction has a special power to join the dots, complete the picture, and do justice to the raw emotion that seethes and churns behind economic life. The challenge for novelists lies not just in showing how rogue or reckless tycoons and wheeler-dealers first boomed and then bust, but why their acts caught the spirit of an age – and sucked the rest of us up into their delirious slipstream.

With exquisite timing, Margaret Atwood has just published Payback, a series of radio talks (Canada's equivalent to the Reith Lectures) which she chose to give on "debt and the shadow side of wealth". Major writers can sometimes display a prescience that almost beggars belief. So it is with Atwood's analysis of the many ways that debts produce plots: of obligation, guilt, retribution or escape. "Any debt involves a plot line," she argues: "How you got into debt, what you did, said and thought," and then "how you got out of debt" or else "got further and further into it until you became overwhelmed."

Payback must be the first time that the toxic residue of the sub-prime mess (when "large financial institutions... put this snake-oil debt into cardboard boxes with impressive labels on them") has coincided with The Merchant of Venice, A Christmas Carol and the Eumenides of Aeschylus in a critical study of money and morality. Atwood demonstrates that the love or loss of cash carries storms of passion in its wake. For her, debt as a cultural force – and you might say the same for finance as a whole – "magnifies both voracious human desire and ferocious human fear". After heady years of the first, we have now witnessed a month of the second – with a vengeance.

Let's hope that Atwood converts her insights into art and gives us a masterwork of fiscal fiction. We could certainly do with a few more. In Britain especially, the sudden promotion of "financial services" from upper-crust character part in our national drama to above-the-title headline star has gone more or less unnoticed by most of our leading novelists. They don't do high finance and its human fall-out – or else, they do it merely as glib caricature. David Kynaston, the historian who wrote an acclaimed four-volume history of the City of London from 1815 to 2000, comments that "my beef as a general reader is a sense of disappointment that much modern British fiction has not done what it might have done". When future historians look for creative interpretations of the Great Crash of 2008, he adds, "I think it will be seen as a shortfall in the evidence."

From another, rougher kind of entrepreneurial culture, Aravind Adiga last week won the Man Booker Prize for The White Tiger: a fiction that tells the story of India's fragile economic miracle through the ascent of a charismatic go-getter out of the "darkness" of rural poverty and prejudice. Balram Halwai, the once-servile chauffeur who grows up (or down) into a swanky Bangalore Macbeth, will endure as an icon of his tradition-smashing times.

But where are his British counterparts: the wizards of the hedge fund (the Man Group's own business, after all), investment bank or private equity outfit whose sorcery on the balance sheets delivers magic or mayhem into many remote lives? Precious few, and far between. Earlier this year, former City dealer Nicola Monaghan published Starfishing: a scorching, high-octane novel of life a few years ago in the sweaty, sexist jungle of the London futures exchange. Less accomplished as fiction, but eagerly received by many of its subjects, Geraint Anderson mingled memoir and imagination in his raucous testimony of "beer and loathing" in the Square Mile, City Boy.

Far from the bonuses and the Bollinger, David Gaffney's Cumbria-set novel Never Never depicts the street-level scams and stunts that let a crooked debt-counsellor and his luckless clients take advantage of our now-burst credit bubble. Significantly, such books enlist the experience of (retired) low-level veterans to give the poor bloody infantry's view of finance red in tooth and claw. Any kind of wider panorama, seen from the glass tower's top-floor boardroom, remains vanishingly rare. Maybe we will simply have to wait.

Which British authors might find themselves best placed to alchemise crunch into creativity? Writer and critic DJ Taylor's forthcoming novel, Ask Alice, will revisit the City during the early-1930s slump. He points to the track record of Justin Cartwright, and the insider's insight behind his take on London corporate life – especially in his 1995 novel In Every Face I Meet. "That really does carry the tang of authenticity: he knows whereof he speaks." Taylor also recommends Ferdinand Mount's The Liquidator and Piers Paul Read's A Season in the West as persuasive recent fictions of life at the top of the money mountain, but warns that: "Given the fact that most financiers don't know how derivatives work, it's going to be difficult for novelists."

James Buchan, who dissected the emotional fallout from the 1987 crash in his novel High Latitudes and, as a journalist, writes incisive articles on the hidden stories of finance, looks a likely candidate. With his well-concealed business background, Welsh himself is not such an outrageous pick. Kynaston has high hopes of John Lanchester, the novelist – and banker's son – whose close-focus essays on the meaning of big money in the London Review of Books testify to his immersion in these deep waters.

Improbable though it may sound, I would love to see Sarah Waters invade this domain. With her Dickensian flair for clandestine connections and hidden affinities, her skill in dramatising the exchange between respectable public life and its secret shadow side, she commands all the necessary strokes. The downbeat 1990s aftermath of Thatcher's roller-coaster did yield some profitable fictions of financial temptation and transgression. Jonathan Coe's carnivalesque What a Carve Up!, Buchan's finely wrought High Latitudes and Taylor's elegiac Trespass were prominent among them.

During the Thatcher years themselves, however, British novelists typically fixed their dazzled eyes on the decor rather than the architecture of a newly roaring turbo-capitalism. Martin Amis's Money led (or misled) the pack. Across the Atlantic, meanwhile, Tom Wolfe seized hold of the mercenary but fearful spirit of the time with his blockbuster of a Wall Street merchant prince at bay in a feral Manhattan, The Bonfire of the Vanities, in 1987.

Famously, Wolfe put in the hours –and months –of slogging research. That makes the ebullient New Journalist turned exuberant epic novelist a rarity indeed. When it comes to working and social life, most gifted novelists write of what they know – either at first hand, or from trusted sources. So, from Kingsley Amis to Zadie Smith, post-war British fiction stitches the universities up a treat. From Michael Frayn to the younger Amis, it does the media to a turn. From Alan Sillitoe to Pat Barker, it boasts an intermittently honourable record when it comes to the working-class grind of factory and mine, warehouse and shop. And, from PD James to Ian Rankin, its mighty criminal network reliably informs on the inside story of police and justice with a professional insistence on the accuracy and credibility of the report.

With rare exceptions, account books remain closed books to novelists. During his study of its past, Kynaston "came to the conclusion that outsiders looking at the City have found it, broadly speaking, a) boring, and b) incomprehensible. That's quite a double hurdle to get over." In addition, until the global weather-systems unleashed on the Square Mile after the "Big Bang" of the 1980s, "the City was traditionally very distant from the mainstream of British life. It was absolutely its own world."

Yet in previous periods, curious and visionary novelists worked hard to crack its code. As naked entrepreneurship took off in 19th-century Europe, writers thrilled to the almost demonic energies they saw in its champions. Balzac's sweeping novels of change in post-revolutionary France crawl V C with chancers with an eye on the deal. As his Père Goriot warns: "The secret of great fortunes without apparent cause is a crime forgotten – because it was done well." That could stand as a motto to Adiga's The White Tiger.

Hyped-up railway stocks were the dotcom speculations – or sub-prime debt packages – of the Victorian age. And the suicide of one railway swindler, the financier and politician John Sadleir, on Hampstead Heath in 1856 lies behind the mystique of two of the most memorable crooked bankers in 19th-century fiction: Mr Merdle in Charles Dickens's Little Dorrit, and Augustus Melmotte in Anthony Trollope's The Way We Live Now. Neither novelist delves very deeply into the innards of fraud, but both capture the echoing repercussions of a City downfall as dark deeds in a counting-house wreck innocent and distant lives. "Numbers of men in every profession and trade were blighted by his insolvency," Dickens laments after Merdle's death and exposure; "legions of women and children would have their whole future desolated by this mighty scoundrel." When Little Dorrit reaches TV screens this weekend in Andrew Davies's new adaptation for BBC1, we might – costumes aside – mistake it for the news.

The speculative highs and lows of the last fin de siècle also left a literary mark. David Kynaston has "a soft spot" for George Gissing's 1897 novel of middle-class misadventures in the stock-market maelstrom, The Whirlpool. A decade later came EM Forster's great study of the dialectic between bourgeois and bohemian England: Howards End, where the something-in-the-City Wilcoxes come to depend on the refined Schlegels – and vice versa. John Galsworthy's Forsyte Saga sequence, which began in 1906 with The Man of Property, exposes the fissures that opened up in elite English life when City wealth sought to brush the Square Mile's dust from its frock-coat and join the landed gentry. For Kynaston, the social-realist novel of the City and its people lingers until JB Priestley's Angel Pavement in 1930, with its shabby bit-part players of Clerkenwell, doomed to life on the fringes of serious money. "The trail goes fairly cold after that."

Of course, contemporary social realism is not the only road to understanding; the house of fiction has many mansions. But look, say, at the yawning chasm between the fertility of the campus novel since the 1950s and the debility of the City novel, and you see how talented authors with a flair for institutional scrutiny have stuck to the comfort zones of their upbringing, contacts and milieux. The academy, the media, the law, the arts, the Civil Service: all home turf for the mainstream literati. Even at a time when dozens of novelists have friends and acquaintances who chose to chase the salaries offered by the banks, funds and consultancies, the daily routines of such characters tend to figure as a perfunctory litany of clichés.

One prime current example comes from a novel that (although not strictly British) ran hard in the Booker race and takes place partly in the booming City. Joseph O'Neill's Netherland lavishes tender loving care on its offbeat motif of cricket in New York. This must surely be the first novel given a rave review in The New York Times that expertly alludes to the commentating style of John Arlott. However, when it comes to the Dutch narrator's Wall Street and City career as an equities analyst for a merchant bank, evasion and euphemism rules. It's weird: a hugely perceptive novel that refuses to stint on the – for Americans – outlandish arcana of turning wickets and extra-cover drives seems embarrassed to visit the office for a spell. As banker Hans himself says, his "exotic cricketing circle... made no intersection with the circumstances of my everyday life".

Do novelists really find this material dull? Then the fault lies within. As Atwood sees, money in the modern world creates open-ended networks of exchange: debits, credits, hopes and fears. It binds the high and the low, the near and the far. It forges coherent patterns out of disparate events, creates reverberating chains of cause and effect, and – as the past few weeks of mind-stretching write-down revelations have proved – often thrives on far-fetched fictions of its own. For a writer, what's not to love – and to use?

In his 2003 novel Cosmopolis, Don DeLillo lifts the thoughts and perceptions of his young speculator-hero into an almost abstract realm – until the brutal reality of New York streets intrudes. The book deterred or disturbed many critics, but DeLillo grasped that the almost metaphysical nature of the invisible trillions that slosh around our screens – and heads – right now might require an equally spaced-out style.

Alternatively, the old tycoon's trajectory – of soaring ascent, sudden collapse and final rehabilitation – may still exert its pull. More at ease with the self-made Midas, American novelists have done better with this icon of the capitalist age. Long before Wolfe sent his real-estate magnate Charlie Croker (from A Man In Full) riding for a fall down the runways and fairways of the rich new South, his forebears had relished fictional epics of fortunes won and lost. In 1912, Theodore Dreiser introduced his stock-market virtuoso turned streetcar king turned jailbird, Frank Cowperwood, hero of The Financier and two later novels. Or rather, Dreiser adapted him from a living, breathing original named Charles Yerkes. When the real-life Yerkes saw his Chicago transit empire founder in scandal and recrimination, he started over in London. His coups on these shores included the electrified underground railways that became the Bakerloo, Piccadilly, District and Northern lines. Now, surely that's a story to send panic-stricken commuters thinking – if not quite laughing – all the way to the Bank.

'Little Dorrit' begins on Sunday at 8pm on BBC1

How to make a killing: five authors who skewered the masters of the universe

Charles Dickens

Son of a chronic debtor, Dickens often draws on the dread of ruin. Generous merchant princes do figure in his fiction, but devious and sinister financiers leave a stronger taste. None casts a deeper chill than Mr Merdle, the lionised banker of Little Dorrit, whose fraud brings innocent victims down.

Anthony Trollope

Trollope's Palliser novels expose the channels connecting high finance, parliament and aristocracy, but his definitive City novel is The Way We Live Now, with its anti-hero Augustus Melmotte: the man from nowhere who builds a fortune and a social network on the basis of an enormous American scam.

Theodore Dreiser

Dreiser's chronicles of love, wealth and disgrace became monuments of American dreams – and nightmares. His trilogy that began with The Financier in 1912 captures the reckless spirit, borrowing from the life of Charles Yerkes, a Chicago stock-market wizard who later built much of the London Tube.

Justin Cartwright

Cartwright's novels of cash-rich 1980s London blend an insider's grasp with an observer's satirical detachment. Look At It This Way merges City themes into a tragi-comic panorama, while In Every Face I Meet stages a Dickensian collision between moneyed misery and the vitality of the unruly poor.

Tom Wolfe

In 1987, Wolfe unleashed his weapon of mass derision on yuppie New York: The Bonfire of the Vanities. With the danger that can grip a "master of the universe", he aimed to show how the fates of rich and poor in the city are entwined. In A Man In Full, he went to Georgia for a rich portrait of a property tycoon.